In Chief Counsel Email 201846005 the IRS discusses the potential issues with imposing the due diligence penalty under IRC §6695(g) against the 25% owner of an S corporation.  The issue related to the risk of hazards of litigation in such a pursuit.  But the email gives information on the application of this penalty.

Under IRC §6695(g), a tax preparer may be penalized for failing to exercise due diligence in his/her preparation of returns if certain information is not obtained for taxpayers claiming certain benefits.  Originally the penalty was limited to claims for the earned income tax credit, but Congress has expanded the penalty to cover claims for the child tax credit, additional child tax credit and American opportunity tax credit.  In the Tax Cuts and Jobs Act Congress branched out beyond credits to impose the requirements on preparers of a return where the taxpayer claims head of household filing status.

A taxpayer who filed her petition in Tax Court asking for innocent spouse relief under IRC §6015 discovered that the Tax Court could not offer her relief because there, in fact, had not been a joint return filed.  In the case of Abdelhadi v. Commissioner, TC Memo 2018-183, the Tax Court ruled that because she had filed a petition for redetermination of the deficiency, the Court could only rule whether she was entitled to §6015 style relief—and, not having actually filed a joint return, there was no such relief available.

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The IRS announced in Notice 2018-83 the inflation adjusted limitations imposed on qualified plans for 2019.

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In the case of Felton v. Commissioner, TC Memo 2018-168, the Tax Court was faced with a minister who claimed that $200,000 given to him by parishioners in addition to their regular offers were gifts and not compensation.

The issue has its beginnings in a tradition for some evangelical churches that Reverend Felton discovered as he began his career in the ministry.  As the opinion notes:

Reverend Felton found his vocation at Tuskegee University, where he assisted the dean of the school’s chapel while still a student. He also first learned about “shake-hand” money at that chapel — the custom in some evangelical churches of handing donations to the pastor on the way out of the church. Reverend Felton didn’t like the way the chapel handled these donations and silently resolved to do things differently if he ever had a church of his own to run.

The church Reverend Felton presided over used envelopes to allow members of the congregation to designate what their contributions would be used for, including a line that allowed for pastoral contributions.  Contributions made with such envelopes would be accounted for by the church, with the donors given statements regarding their contributions. 

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In Information Letter INFO 2018-0030 the IRS has given limited additional information on the clarification the agency issued on September 5 regarding the state tax deduction workaround proposed regulations on August 23 (REG-112176-18).

The proposed regulations would require taxpayers to reduce charitable contribution deductions by the amounts of any state tax credits received for contributing if the credit exceeds 15% of the amount of the contribution.  In the later clarification, the IRS and Treasury stated that this regulation did not change the treatment of amounts paid that might be deductible under IRC §162(a) as an ordinary and necessary business expense.

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A 120-page revision to the Employee Plans Compliance Resolution System (EPCRS) has been issued by the IRS in Revenue Procedure 2018-52.  This system involves three distinct programs that deal with compliance issues arising in qualified retirement programs.  These programs are:

• Self Correction Program (SCP)

• Voluntary Correction Program with IRS Approval (VCP)

• Audit Closing Agreement Program (Audit CAP)

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In Notice 2018-80 the IRS stated that the agency plans to release proposed regulations that will provide market discount will not be deemed includable in income pursuant to new IRC §451(b) added to the law by the Tax Cuts and Jobs Act.

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The IRS in Notice 2018-77 provided updated special per diem effective for the period from October 1, 2018 to September 30, 2019.  These special rates include the rate for the special transportation industry meals and incidental expenses (M&IE) rate, the rate for the incidentals-only deduction and the rates and list of high-cost localities for purposes of the high-low substantiation method.

The special transportation industry rates for 2018-2019 are $66 for any locality of travel in the continental United States and $71 for any locality of travel outside the continental United States.  These rates are the same as applied in the prior year.  The general rules for qualifying to use these rates and how to use them are found in Section 4.04 of Revenue Procedure 2011-47.

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An IRS agent was found to be qualified for innocent spouse relief in the case of Merlo v. Commissioner, TC Summary Opinion 2018-47.  That was true even though the IRS agent had prepared the tax return in question as the couple was in the midst of divorcing.

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