Two Situations Where Spouses Were Not On The Same Wave Length

William Delaney, EA
Westwood, MA

When is a jointly filed income tax return not a jointly filed income tax return?  Answer:  When one signs the return and the other does not.  Sounds simple enough, but the devil is always in the details

Reg. 1.6012-1(a)(5) proscribes the way in which one spouse may sign for both and the requirement for an attachment regarding same to the tax return.  In Bradley C. & Nancy Reifler v. Comm., TC Memo 2015-199 (10/13/2015), the Reiflers had their 2000 income tax return prepared by their accountant.  It was then signed by Mr. Reifler and left somewhere for Mrs. Reifler to sign.  So far, so good.

Now comes Oct. 15th, and Mr. Reifler awakens to the fact that he needs to do something with this paper return (yes, you win a prize---he must mail it to the IRS and today’s the deadline).  So, that’s what he did.  But, what he didn’t do is get it signed by his spouse!  Believe it or not, it gets worse…

The IRS “bounced” the return because of the missing signature.  Mr. Reifler received the original return with some red marks on it and nothing else as to why the return had not been processed.  So, what’s a taxpayer to do?  In Mr. Reifler’s case, he did nothing, as if that were an option.  He just set aside the return (you can’t make up this stuff).

In 2002, the IRS sent the taxpayers a delinquency notice (where is that 2000 tax return which you did not file?), so the taxpayers (this time both of them) signed a second Form 1040 and mailed it in.  However, the IRS knew nothing about a “bounced” return, and the taxpayers did not make mention of it when sending the second return, so the IRS considered the “second” return to be the “original” return filed quite late and imposed the Sec. 6651(a) failure-to file penalty (maximum of 25% of the tax shown on the return).

But, not to worry, the taxpayers have some strong (?) arguments.  First, they argued the substantial compliance doctrine---the original return need not be perfect in order to be valid.  However, the Court held that signing (or not signing) a tax return is a different set of circumstances from substantial completion of a return.  Furthermore, an unsigned return does not start the running of the statute of limitations.

Again, not to worry.  The taxpayers have another argument.  In the White decision – Daniel Joseph White v. Comm., TC Summary Opinion 2002-101 (8/5/2002), Mr. White signed and submitted a joint income tax return which was not signed by Mrs. White.  The return “bounced” and the White’s resubmitted a signed return within the time period provided by the IRS for correcting the original return (a departure from what Mr. Reifler did not do).  The initial return was deemed to be timely filed and the late filing penalty was not imposed.  But, the Reiflers did not have a valid argument because they chose not to do what the Whites did---fix the problem.  The Reiflers did nothing until contacted by the IRS more than one year later.  There was no evidence that the taxpayers attempted to consult with or inquire of anyone when their tax return “bounced.”

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In Mark A. Williams v. Comm., TC Memo 2015-198 (10/17/2015) we have some very clever tax planning.  Let’s suppose that your employer tells you that he will stop writing paychecks and deducting all of those taxes.  Instead, he will write a check for your gross pay and deposit it in a bank account for you each week.  It won’t appear on payroll (i.e. won’t be reported anywhere) and you can take the money each week tax-free and use it as you will.  (Now, why didn’t my accountant tell me about this great deal?).  Anyhow, the employee (Mrs. Williams) discussed it with her husband, and he told her not to do it, and she didn’t for two years (while other people apparently were not so fussy and enjoying their no-tax windfall).  However, the husband eventually gave in and agreed to it when the employer assured him that it was legal (free legal advice is only worth what you pay for it, didn’t he know?).  The paychecks stopped; the tax-free money commenced, and all was happiness until a few years later when the scheme imploded and the taxpayers pleaded guilty to willfully filing false tax returns which omitted Mrs. Williams’ income.

Now comes Mr. Williams asking for relief under the Innocent Spouse provision of the Code, specifically Sec. 6015(f) – Equitable Relief.  There are multiple factors set out in Rev. Proc. 2013-34 for consideration in such circumstances.  For most of them, the analysis was neutral---neither favorable nor unfavorable to Mr. Williams.  What cooked his goose, however, was the “knowledge or reason to know” test.  Why are you not surprised?  He was not an uninvolved and uninformed person.  He checked it out, if you recall.  Not only that, he signed a Form 4549 for each year (that’s the form which sets out the audit adjustments) and agreed that he was liable for a fraud penalty.  He did not dispute that he was aware of the omissions from income at the time that they occurred.

And, finally, it was shown that Mrs. Williams did not sign-up for the tax avoidance scheme until Mr. Williams said that it was OK to do so (remember he initially said no and she remained outside looking in).  So, Mr. Williams was a “contributing cause” of the income omissions on the tax returns.

IRS Increases Safe Harbor Amount for Materials and Supplies

Notice 2015-82 released November 24th increases the $500 safe harbor amount to $2,500. This provision is effective for taxable years beginning on or after January 1, 2016.  However if the taxpayer’s use of this $2,500 safe harbor amount is an issue under consideration in examination, appeals, or before the U.S. Tax Court in a taxable year that begins after December 31, 2011, and ends before January 1, 2016, the issue relates to the qualification under the safe harbor of an amount that does not exceed $2,500 per invoice (or per item), AND the taxpayer otherwise satisfies the requirements of the election, then IRS will not further pursue the issue.  [We find it interesting that fiscal taxable years that begin in 2015 and end after January 1, 2016, aren’t covered under the “won’t pursue” provision.  We’re sure this was just an oversight in the wording.]

Review of the rules as adjusted by this Notice.
** $200 – The definition of “materials and supplies” includes property that has an acquisition or production cost of $200 or less.  This $200 is per item.  If the per item breakout is not available, then the $200 test is applied per invoice.   This is an all or nothing provision.  If the item, including all adjustments such as sales tax, cost $201, then the item does NOT fit this provision.

** $,2500 (formerly $500) – The $200 amount above is increased to $2.500 IF:
1) The taxpayer does not have an “applicable financial statement”,
2)  The taxpayer has at the beginning of the taxable year an accounting procedures treating these items as an expense for non-tax purposes,
3) The taxpayer treats the amount paid for the property as an expense on its books and records in according with these accounting procedures, and
4) The amount paid for the property does not exceed $500 per invoice (or per item as substantiated by the invoice).

** $5,000 – The $2,500 amount is increased to $5,000:
1) The taxpayer has an “applicable financial statement”,
2)  The taxpayer has at the beginning of the taxable year WRITTEN accounting procedures treating these items as an expense for non-tax purposes,
3) The taxpayer treats the amount paid for the property as an expense on its books and records in according with its written accounting procedures, and
4) The amount paid for the property does not exceed $5,000 per invoice (or per item as substantiated by the invoice).

An “applicable financial statement” for this purpose is:
1) A financial statement required to be filed with the Securities and Exchange Commission (SEC) (the 10-K or the Annual Statement to Shareholders),
2) A certified audited financial statement that is accompanied by the report of an independent CPA (or in the case of a foreign entity, by the report of a similarly qualified independent professionals) that is used for:
-- a) Credit purposes;
-- b) Reporting to shareholders, partners, or similar persons; or
-- c) Any other substantial non-tax purpose; or
3) A financial statement (other than a tax return) required to be provided to the federal or a statement government or any federal or state agency (other than the SEC or IRS).

ELECTION PROCEDURES
A taxpayer who wants to use the $2,500 or $5,000 safe harbor amounts must attach a statement to a timely filed return (due date plus extensions).  The statement must be titled “Section 1.263(a)-1(f) de minimis safe harbor election” and include the taxpayer's name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimis safe harbor election under §1.263(a)-1(f).

SIDE NOTE – Just because an item falls into the “materials and supplies” expense category does NOT mean it is currently deductible.  It still must meet the incidental v nonincidental tests.  If a cash basis taxpayer pays for an expense that is incidental, such as a book of 20 postage stamps, it is deductible when paid.  If a cash basis taxpayer pays for an expense that is nonincidental, it is deductible when used or consumed in the same manner as Prepaid Supplies.

For example, Taxpayer bought a book of 20 postage stamps in December for $9.80.  Taxpayer used 5 stamps in December and 15 stamps in January.  This is an incidental expense and the entire $9.80 is deductible in December.

An example in the IRS regulations considers toner cartridges to be a nonincidental expense.  In this example a taxpayer purchases a case of 10 toner cartridges for $500 ($50 per cartridge) and installs 8 in printers in the year of purchase and leaves the remaining 2 cartridges on the shelf for the next year’s use.  The example requires the taxpayer to treat the 2 unused cartridges as nonincidental supplies and does not permit a deduction for those until the 2nd year.

Happy Thanksgiving from MA/RI NATP Chapter

Medicare B Premiums for 2016

The base Medicare Part B monthly premiums increase to $121.80/per month for 2016.

Approximately 75% of taxpayers on Medicare B will NOT experience this increase.  There is a provision that does not permit a taxpayer’s Social Security check to decrease as a result of an increase in the base Medicare Part B premiums.

Taxpayers who will pay these higher premiums are taxpayers who:
1) First sign up for Medicare in 2016,
2) Are paying Medicare Part B premiums from a method OTHER than directly from their Social Security check, or
3) Have the higher income that requires paying extra to the Medicare fund, and

The higher premiums some taxpayers have to pay vary depending on the taxpayers’ income as shown on their income tax returns and their filing status increased slightly, although the income levels did not change.

This information can be found on Medicare’s web site at www.medicare.gov.


This text has been shared with you courtesy of: David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (fax 920-496-9111).

Out With The Old (MA From CA-6); In With The New Amended Return Concept For MA Business Tax Type Returns

William Delaney, EA
Westwood, MA

The MA Department of Revenue has issued TIR 15-13 (11/17/2015) which outlines (effective 11/30/2015) the new way to amend business tax type returns (income, withholding, sales, etc. on behalf of business taxpayers).  While form CA-6 is still in place for individual tax type returns, it will be discontinued for “business” returns.

What brings this about is MassTaxConnect, which will be introduced by the DOR as of the end of November.  According to the TIR, “the amended return process will be automated, and in most cases will be separated from the abatement application process.”  How will it work?

Filing an amended return will now mean referring to the original return, making any necessary changes or corrections, and filing it as an “amended” return.  This would also include a no-change situation, for example a correction to a capital loss carryover.  You would do it by “log on to MassTaxConnect, adjust the amounts shown on the taxpayer’s prior return, and submit the amended return by following the instructions provided…”
“Any taxpayer amending a return using a paper form will manually complete the same tax form as used for the original or prior amended return and check the box indicating that the return is an amended return.”

What is left unsaid in the TIR is how do you actually access the tax return which you wish to amend.  My “guess” is that you must be established as the Professional Tax Preparer identified with the taxpayer; otherwise, how could you access a taxpayer’s records?  So, if you are not the PTP for the business type, you will first need to go through that process before MassTaxConnect will allow you to do anything.

The Department of Revenue has also published a “Hey Business Taxpayers!” one page colored brochure and mailed it to business taxpayers.  According to the brochure, amendments are just three easy steps---log in; select an existing return; submit!  RESULT:  New process and internal streamlining means faster processing and response time.  It’s so easy---why should a client expect us to send them a bill for a simple three-step process?  

For those of you who may have doubts (or fear the unknown), the brochure explains that:  “You will be able to continue to file amendments to corporate excise returns through third party tax preparation software, the same way you file original returns (i.e. “Corp. eFile”).”  The TIR also explains that:  “Taxpayers using a third party software provider will adjust the information using the amended return process specific to the software they are using.”  Apparently there will be a check the box option to indicate that you are filing an amended return.