IRS Releases Proposed Revenue Procedure to Deal with Accounting Method Change Requests Related to FASB Revenue Recognition Standard

One of the key developments keeping those CPAs who specialize on the “accounting and auditing” (or A&A as we tend to refer to it) side of the profession jumping has been the soon to be implemented standard titled “Revenue from Contracts with Customers” FASB Accounting Standards Update 2014-09, which makes significant changes to revenue recognition, particularly the timing of such recognition of revenue. 

Of course, for those of us working in the tax arena, when you start talking about timing of recognition you realize that if any of this either does flow onto a tax return or a taxpayer reasonably would like to have it do so to keep tax and book the same in this area you realize you are dealing with an “accounting method” which would require IRS permission to change under IRC §446.  And we also realize the timing of the inclusion of an item of income is governed under the IRC by IRC §451.

The IRS has been aware of this potential problem as well, and now has released a proposed Revenue Procedure to allow for certain automatic changes in accounting methods.  This proposed procedure, on which the IRS is seeking comments, is found in IRS Notice 2017-17.

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Corporation Does Not Have Access to Economic Hardship Relief to Avoid Imposition of Levy

Can a corporation suffer economic hardship that would justify relief from an IRS levy under IRC §6343(a)(1)(D), or does the nature of economic hardship limit its application to individuals?  The IRS’s view, implicit in Reg. §301.6343-1(b)(4)(i), is that only individuals should be treated as being able to suffer economic hardship as the section refers to it.  The taxpayer in the case of Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 TC No. 9 argued the law did not allow for such a limited view..

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Small Business/Self-Employed Taxpayer Fast Track Settlement Program Made Permanent

The IRS has established a new Fast-Track Settlement program for small businesses in Revenue Procedure 2017-25.  The program, referred to as the Small Business/Self Employed Fast Track Settlement program (SB/SE FTS), had previously been a pilot program, initially established by Announcement 2006-61, later extended and modified by Announcements 2008-110 and 2011-5.  The program deals with taxpayers under the authority of the Small Business/Self Employed (SB/SE) division of the IRS.

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IRS Details Revised Rules for Obtaining Employee Consents for FICA/RRTA Tax Refunds

In Revenue Procedure 2017-28 the IRS clarified rules related to obtaining employee consents when an employer request a refund of overpaid FICA and RRTA taxes.  The procedure makes minor changes to the draft ruling issued along with Notice 2015-15.

The new procedure applies to consents requested on or after June 5, 2017.  Employers who have already issued requests for consents prior to that date will not need to send out new consent requests and it will not affect the validity of any consents received after that date that were requested prior to June 5.  Employers may still rely on the proposed revenue procedure found in Notice 2015-15 for consent request issued prior to June 5, 2017.

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OPR Has No Authority Over Tax Preparation or Opinion Services Offered by Disbarred Attorney

The case of Sexton v. Hawkins, US DC Nevada, Case No. 2:13-cv-00893 asked the question of whether the IRS Office of Professional Responsibility had jurisdiction over a disbarred attorney who was suspended from practice before the IRS for actions related to return preparation and writing a tax memorandum that took place during his suspension period.  The disbarment and suspension took place after Mr. Sexton plead guilty to four counts of mail fraud and one count of money laundering.

Despite being disbarred and suspended, the plaintiff in the case continued to offer tax services.  In particular, he offered services to a Ms. Kern for whom he assisted in preparing her 2010 and 2011 income tax returns and whom he offered to send a written memorandum analyzing her tax options. 

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Taxpayer Discovers the Dangers of Relying on a Postage Meter Applied Postmark

The question of a taxpayer being able to establish timely mailing of a document when a private postage meter is used was considered in the case of Grimm v. Commissioner, TC Memo 2017-44.

IRC §7502 is what many professionals refer to as the “timely mailing equals timely filing” rule, but the rule isn’t quite so simple.  Rather, under IRC §7502(a) a document is deemed filed timely if the postmark applied by the United States Postal Service shows a date on or before the deadline for filing.  If a postmark is not applied by the U.S. Postal Service then the IRS is granted the authority to write regulations outlining whether and if such other postmark may be treated as evidence of timely filing

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Students Participating in State Department Summer Work Program Denied Travel Deductions Despite Limitations Contained in Visas

The Tax Court considered the arguments that the unique circumstances of participants in a State Department sponsored summer work travel program show allow them to claim a deduction for their expenses for travel to and from the United States.  The Tax Court decided, in the case of Liljeberg, et al v. Commissioner, 148 TC No. 6, that these circumstances did not justify allowing the deduction, instead applying the regular limitation that a taxpayer can only deduct travel to and from his/her tax home under U.S. tax law.

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Racing Team May Treat Individual Auto Parts, Rather Than Entire Racing Car, as Unit of Property for Disposition Purposes

As a tax professional if a client has a car that is acquired by the business, you’d probably automatically consider that car a single unit of property for purposes of the capitalization rules under Regs. §§1.263(a)-1 to 3 and for purposes of determining a disposition of property.  But in PLR 201710006 the IRS, faced with a unique situation, allowed the car to be broken down so that each part became a separate unit of property.

The unique fact was that the taxpayer in question was an organization that built a championship racing car entry and assembled a racing crew to compete in a racing series.  In this racing circuit the team doesn’t generally look at their asset as a single finished automobile.

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Receiver Barred from Claim of Right Deduction Due to Fraudulent Conduct of Those Who Originally Obtained Funds

The First Circuit Court of Appeals determined that a District Court went beyond the law in attempting to mitigate an unfair result in the case of Robb Evans & Associates, LLC v. United States, CA1, Case Nos. 15-2540 & 15-2552.

The case involved the always confusing concept of a claim of right under IRC §1341.  This rule provides that if a taxpayer included an item in gross income in a prior year because it appeared the taxpayer had an unrestricted right to the item that is more than $3,000, and the amount is repaid in a later year, the taxpayer can, on the return for the year of repayment, either take a deduction for the amount repaid or claim a credit for the amount of additional tax paid when the item was originally included in income.

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Ways and Means Committee to Begin Mark Up of American Health Care Act

Added March 11 - Link to Ways and Means Copy of the Bill.

The House Ways and Means Committee has released the markup version of the American Health Care Act, the proposed replacement for the Affordable Care Act.  The committee will meet on March 8 to begin the mark up process.

The bill in its present form is merely a starting point for the process of the modification, repeal and/or replacement of various provisions that were enacted in 2010 as part of the Patient Protection and Affordable Care Act and the Healthcare Reconciliation Act.

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Medical Deduction Allowed for Treatments Not Generally Recognized as a Conventional Treatment

The fact that a medical treatment may not be recognized as a proper treatment by medical authorities does not mean that federal tax law will deny the taxpayer a deduction for such expenses.  In a bench opinion, the Tax Court in the case of Malev v. Commissioner, Tax Court Case No. 1282-165 held that the taxpayer would be allowed a deduction for such expenses even though the only diagnosis she cited as evidence of her condition took place after the treatments in question, calling into question her belief that her unusual treatment had cured her.

The Court noted that the treatments the taxpayer sought to deduct related to her spinal conditions were outside the norm, noting:

Concerned that conventional treatments for her condition posed too much risk, or were or would be ineffective, Petitioner subscribed to various forms of treatment from four individuals, none of whom would be commonly recognized as a conventional medical caregiver. And to be sure, none of the methods utilized by these individuals would commonly be recognized as a conventional medical treatment. The methods Petitioner subscribed to might be termed “alternative medicine” by the polite, but we expect the less tolerant would characterize the treatments in other than legitimate or complimentary terms.

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Doctrine of Substantial Compliance Did Not Apply to Taxpayer Who Failed to Meet Documentation Requirements for Donation of Used Airplane

The case of Izen v. Commissioner, 145 TC No. 5 involved the question of whether a taxpayer had complied with the requirements of IRC §170(f)(12) for his donation of his interest in an aircraft to a museum in Houston.

IRC §170(f)(12) was enacted to impose additional substantiation requirements for taxpayers claiming donations of used motor vehicles, boats and airplanes.

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Morgan Stanley Discloses It Has Discovered Errors in Basis Reported to IRS from 2011 to 2016 in Customer Information Returns

Morgan Stanley, in a Form 10-K filed with the Securities and Exchange Commission on February 27, disclosed that it had discovered errors in information reporting forms provided to the IRS for the years from 2011-2016. The erroneous data related to cost basis information reported to the IRS and retail brokerage clients.

Since 2011 brokers have been required to report to the IRS, as part of the Form 1099-B reporting, basis on securities sold during the year that were acquired after various dates depending on the type of security.

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IRS Delays Deadline for Required Notices for Employers Offering Reimbursement for Individual Insurance Policies

The IRS has yet again bailed out the Congress after a new law imposed a deadline for taking action that was simply unworkable (in this case, for calendar year plans 90 days after the law was enacted).  In Notice 2017-20 the IRS has granted relief from notices that were required to be given to employees eligible to be covered by a qualified small employer health reimbursement arrangement (QSEHRA), a requirement added by the 21st Century Cures Act that enacted December 13, 2016.

An employer with fewer than 50 employees who does not offer group plan to any employees is eligible to establish a qualified small employer health reimbursement arrangement. [IRC §9831(d)]  However, an employer establishing such an arrangement is required to give written notice to all eligible employees at least 90 days before the beginning of a year for which a QSEHRA is provided.  [IRC §9831(d)(4)]

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IRS Releases Letter to Be Sent to Taxpayers Assigned to Collection Agency

The IRS has released a copy of the letter that they will send when accounts are sent to an outside collection agency.  The new letter, Notice CP40, will be used when the IRS forwards accounts to a collection agency in the cases Congress required that step to be taken when it passed the Fixing America’s Surface Transportation Act in December of 2015.

The form will assign the taxpayer a “Taxpayer authentication number” which will be found in the upper right section of the first page of the notice. The first five digits of that number will need to be provided to the collection agency before the collection agency will be able to assist the taxpayer. This will serve to confirm to the agency that the person on the phone is the taxpayer.  The agency will then recite the final five digits of the taxpayer authentication number to allow the taxpayer to confirm that the collection agency is the party calling.

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Court Rejects Valuation of Painting That Was Only 20% of What Painting Sold for 3 ½ Years Later

The IRS and the taxpayer in the case of Estate of Kollsman v. Commissioner, TC Memo 2017-40 had wildly different values that each ascribed to two paintings.  In the view of the estate the paintings in question were valued at $500,000 and $100,000 respectively.  But the IRS position was that the paintings were far more valuable, arguing at trial that the proper values were $2,100,000 and $500,000 respectively.

One reason the IRS was skeptical of the estate’s value was the that the more valuable of the two paintings was sold 3 ½ years later for a $2,100,000 hammer price and a full price paid by the buyer of $2,434,500, well above the estimated $500,000 value.

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IRS Makes List of Organizations Granted Exemption via Form 1023-EZ Available for Download Online

The IRS announced in News Release IR-2017-41 that it has now made available lists of approved exemption applications that were obtained using Form 1023-EZ, Streamlined Application for Recognition of Exemption.

The information, provided in the form of an Excel spreadsheet, provides approved applications by year beginning with mid-2014 when the streamlined form was first released.  The IRS will release updated information quarterly.

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No Deduction Allowed for Payment to Related Entity When Reasonableness of Payment Not Demonstrated

Whenever taxpayers are paying for services between related entities the same interests control, the IRS is known to be skeptical of the reality of the arrangement.  The IRS questioned just such an arrangement in the case of Kauffman v. Commissioner, TC Memo 2017-38.

The taxpayer in this case was a realtor and cinematographer who operated several single member LLCs (all of which were treated as disregarded entities) and a C corporation.  The IRS was questioning payments made from one of the LLCs to the C corporation of $191, 000 for “consulting fees” and $75,000 in “commissions and fees.”

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