Just What We Need - One More Day of Tax Season

You probably finished off your final returns, went home, relaxed and breathed a sigh of relief that one more tax season is over.

Except, it turns out, it isn't.  Due to the IRS's major computer system meltdown during most of deadline day, the IRS has announced we now have one more day to file returns and pay taxes, per News Release IR-2018-100, released about 7:00 pm EDT on April 17.

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Fiscal Year Corporations to Pay Blended Rate for First Year of TCJA

Sometimes the tax law seems to say something clearly—only we find elsewhere in the Internal Revenue Code that clarity is overridden.  In News Release IR-2018-99 the IRS explains how a rate that, per the Tax Cuts and Jobs Act, took effect for tax years beginning in 2018 actually affects most years beginning any time after January 1, 2017.

The New Release outlines the rate that will be paid by fiscal year corporations for the corporation’s year that includes January 1, 2018.  Act Section 13001(a) of Pub. L 115-97 (the law generally referred to as the Tax Cuts and Jobs Act) provides that the 21% flat rate version of IRC §11 takes effect “for tax years beginning after December 31, 2017.”

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Two Additional States Poised with Tattletale Sales Tax Bills

Two more states have passed "tattletale" statutes for out of state sellers, both of which have been sent on for signatures by each state's governor. Both are based roughly on the Colorado law that the Tenth Circuit panel which included Neil Gorsuch found acceptable under federal law and which SCOTUS refused to hear an appeal related to.

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IRS Issues Fact Sheet on When to File Form 14039 and FTC Offers Electronic Filing of the Form

The Federal Trade Commission and IRS have provided a method for taxpayers to file Form 14039 electronically at IdentityTheft.gov, per an FTC news release.  But at the same time the IRS posted a fact sheet (FS-2018-6) that outlines when taxpayers need to file the Form 14039.  The IRS fact sheet notes that most taxpayers who are victims of tax-related identity theft don’t need to file it since the IRS today most often makes the taxpayer aware of the theft.

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Accountant by Day, Game Winning Goaltender By Night

This time of year, those of us in tax often dream of doing something else.  For one accountant (though, it appears, not a tax accountant) that dream came true in an unexpected manner.  Scott Foster, a 36-year-old accountant, was pressed into service as the goaltender for the Chicago Blackhawks on March 29.

Foster’s way into the hockey and accounting lore can be taken in at, among other places, this story on the NPR website:

36-Year-Old Accountant Called In As Emergency NHL Goalie — And He Crushed It

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Exams and Phone Wait Times Down per IRS 2017 Data Book

The IRS released 2017 IRS Data Book, an 86 page compendium of various statistics related to the IRS’s operations.

One of the key facts that has created a lot of discussion in the tax press is the fact that the audit rate in 2017 dropped to its lowest level since 2003.  Less than 1,000,000 examinations took place in 2017. 

The report also noted that collection activities were also down in 2017.  Levies were down by 32% and liens dropped by 5% over the prior year levels.

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IRS Reminds Taxpayers About Agency's Position on Taxation of Virtual Currencies Published in 2014

In News Release IR-2018-71 the IRS reminded taxpayers that transactions in crypto-currency are taxable transactions and have to be reported on their income tax returns for the years involved.

In Notice 2014-21 the IRS had issued specific guidance on the taxation of crypto-currency.  However, the crypto-currency environment experienced a boom in the latter half of 2017 that likely created a significant number of taxable gains as taxpayers got into the market as it was hot.  A key holding of that notice was that virtual currencies are treated as property and not currency.

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Grain Glitch Fixed and Partnership Audit Rules Modified in Consolidated Appropriations Act, 2018

Congress passed and the President has signed the Consolidated Appropriations Act, 2018 which contained the much discussed fix the for “grain glitch,” technical corrections related to the consolidated partnership audit regime and various other technical corrections in its 2,232 pages.

For those who don’t want to read the entire thing, the tax provisions begin on page 2,033, the technical corrections begin at page 2,057 and the corrections to the partnership audit rules begin at page 2,089.

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IRS Notes Increase in Data Breaches from Tax Professional's Offices

In News Release IR-2018-68 the IRS warned tax professionals that this year a larger number than in the past have had their systems compromised.  The guidance warns professionals about the need to take steps to avoid having their own systems compromised.

The IRS describes a scam that I and many other CPAs I know have seen—the “New Client” scam, which appears to be ramping up once again as we hit the end of tax season.  As most of us are aware, these emails come with attachments purporting to be tax documents, but which are loaded up in various forms to deliver malware to the CPA’s systems if they are opened.

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Business 8453 Series Forms Must Be Manually Signed

In Program Manager Technical Advice PMTA 2018-008 the IRS discusses what are acceptable signatures for the business versions of Form 8453 (such as Form 8453C, 8453S, etc.).

In Notice 2007-79 the IRS allowed electronic return originators (EROs) to sign Form 8453, Form 8878, U.S. Individual Income Tax Declaration for an IRS e-file Return, Form 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350; and Form 8879, IRS e-file Signature Authorization by specified alternative means.  These means were:

  • Rubber stamp,
  • Mechanical device (such as signature pen), or
  • Computer software program.

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Government Must Show Intent to Obstruct Specific IRS Actions Beyond Return Processing

Under IRC §7212(a) it is a felony for an individual to “corruptly or by force” to “endeavo[r] to obstruct or imped[e] the due administration of this title.”   The United States Supreme Court in the case of Marinello v. United States, Docket No. 16-1144 was to rule on how broadly the “due administration” of the IRC applied—did such administration cover all acts of the government, or was it only applicable to a more limited set of acts.

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Mansion Property Was Never Actually Used in a Rental Activity, Loss Was Capital

The question of whether real estate was or was not a capital asset in the hands of the taxpayer became an issue in the case of Keefe v. Commissioner, TC Memo 2018-28.  While the issue can arise with other assets, real estate investments are generally large enough that the question of whether a gain or loss on sale is capital, §1231 or ordinary is often a very significant issue, with high stakes involved.

In this case, the taxpayer was looking at a seven-figure loss on the sale of a historic waterfront mansion they had acquired to restore and attempt to rent in Newport, Rhode Island.  The restoration ended up taking much longer than anticipated and was far costlier.  Although they talked with a real estate agent about renting out the property to wealthy individuals who were expected to pay $75,000 a month for the property during peak season, it was never actually rented out.

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Tax Court Resolves a "Kind of Conundrum Only Tax Lawyers Love" in Sale of Rental

In the case of Simonsen v. Commissioner, 150 TC No. 8, the Tax Court reaffirmed its previously stated position regarding a short sale when a nonrecourse debt is involved.  As well, for the first time the Court also addressed the reportable gain/loss on a property converted to rental use that was sold for less than its original cost but more than its date of conversion fair market value.

The couple in question had purchased a townhouse in San Jose in 2005 for $695,000.  They lived in that home for five years, during which the real estate crisis hit.  In 2010 they relocated to Southern California and began renting the townhouse.  At the time it was converted to a rental the fair value had declined to $495,000.

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Set of Questions and Answers Released on Reporting and Paying Section 965 Transition Tax for 2017

The IRS announced the publication of a set of questions and answers related to the tax imposed under IRC §965 under changes made by the Tax Cuts and Jobs Act in News Release IR-2018-53.  The questions and answers are published in the form of a frequently asked question document (FAQ) on the IRS website at:

https://www.irs.gov/newsroom/questions-and-answers-about-reporting-related-to-section-965-on-2017-tax-returns

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Offshore Voluntary Disclosure Program to End on September 28, 2018

The Offshore Voluntarily Disclosure Program (OVDP) will end on September 28, 2018 the IRS announced in News Release IR-2018-52.  The program offers an option for taxpayers with undisclosed foreign assets to report those assets with a reduced penalty.

The IRS has offered three OVDP programs since 2009, though the program has become less generous following the revisions in 2011 and 2014.  Over that time the agency reported that 56,000 taxpayers used one of the programs and that the programs collected over $11.1 billion in back taxes, interest and penalties.

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Employees Wages Included Fees Charged by International CPA Firm to Prepare U.S. and Foreign Tax Returns

How much should an employee recognize as income when his/her employer provides the employee with tax preparation services?  That was the question addressed by Chief Counsel Advice 201810007.

The employer in this case had U.S. citizens that were given work assignments in various other countries, with employees also being relocated from time to time.  As is often the case in such situations, the employer decided to provide a “tax equalization” program.  Under such a program, the employer agrees to compensation employees in such a fashion that their after-tax income will not fluctuate as they move from taxing regime to taxing regime.

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Tax Court Rejects Taxpayer's Reconstruction of Real Estate Hours

When taxpayers attempt to reconstruct their hours in activities from memory when they receive an exam notice to sustain their burden of proving qualification as a real estate professional, the result is rarely a successful defense of that assertion.  Many of the problems are illustrated in the case of Pourmirzaie v. Commissioner, TC Memo 2018-26.

The taxpayers did have several rental properties.  The Court listed them as follows:

  • A four-unit residential property in San Jose, California (San Jose property);
  • A single-family condominium in San Diego, California, in which petitioners owned a partial interest (San Diego property);
  • A single-family residence in Tucson, Arizona (Tucson property);
  • A single-family condominium in Bremerton, Washington (Bremerton property); and
  • A single-family residence in Discovery Bay, California (Discovery Bay property).

The taxpayers did not maintain any sort of log or calendar of the work performed on these properties during the years in question.  Nevertheless, on their tax returns for the year in question they took the position that Mrs. Pourmirzaie was a real estate professional. 

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Tenants' Inability to Handle Trash Matters Helped Architect Qualify as Real Estate Professional

His tenants’ inability to deal with taking out the trash appears to have been a key factor in allowing the taxpayer in Franco v. Commissioner, TC Summary Opinion 2018-9 to qualify as a real estate professional.

Jose Franco is a licensed architect and he ran a small architectural business for the year in question.  Normally this would create a significant issue for Mr. Franco to be classified as a real estate professional, since Mr. Franco was not contending that his architectural work was a real property trade or business. 

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Tax Court Rules Roth IRA Did Not Actually Own the Stock of FSC

The Tax Court took a different approach in their attempt to dismantle a Roth IRA based tax shelter in the case of Mazzei v. Commissioner, 150 TC No. 7 than the approach the Sixth Circuit turned thumbs down on in the case of Summa Holdings Inc. v. Commissioner, 848 F.3d 779 (6th Cir. 2017).

In this case the taxpayers’ Roth IRAs had formed a Foreign Sales Corporation (FSC), a mechanism that Congress created for a period of time to attempt to give a tax break to taxpayers selling products overseas.  Under the provisions of the law applicable to FSCs, it could receive commissions from a manufacturer exporting goods even if it performed no services.  These commissions were subject to a significantly lower rate of tax than applied on regular corporations.

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