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IRS Enrolled Agent Exam Study Guide 2016 UPDATES A comprehensive update document which highlights significant changes from 2015‐2016 testing season to 2016‐2017 testing season content

Rain Hughes

Published by Fast Forward Academy, LLC

http://fastforwardacademy.com

(888) 798‐PASS (7277)

© 2016 Fast Forward Academy, LLC.

All rights reserved. No part of this publication may be reproduced or distributed in any form or by

any means, or stored in a database or retrieval system, without the prior written permission of the

publisher.

The information provided in this publication is for educational purposes only, and does not

necessarily reflect all laws, rules, or regulations for the tax year covered. This publication is

designed to provide accurate and authoritative information concerning the subject matter covered,

but it is sold with the understanding that the publisher is not engaged in rendering legal,

accounting, or other professional services. If legal advice or other expert assistance is required, the

services of a competent professional person should be sought.

To the extent any advice relating to a Federal tax issue is contained in this communication, it was

not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax

related penalties that may be imposed on you or any other person under the Internal Revenue

Code, or (b) promoting, marketing or recommending to another person any transaction or matter

addressed in this communication.

TableofContentsAbout the IRS Special Enrollment Exam........................................................................................................ 6

How to Register for the IRS Special Enrollment Exam .............................................................................. 6

Chapter 1 Filing Information ......................................................................................................................... 7

General Requirements .............................................................................................................................. 7

Filing Requirements .................................................................................................................................. 8

Foreign Account and Asset Reporting ....................................................................................................... 9

Form 1040NR .......................................................................................................................................... 13

Personal Exemptions and Dependents ................................................................................................... 14

Chapter 4 Gains and Losses ........................................................................................................................ 15

Reporting Gains and Losses .................................................................................................................... 15

Chapter 5 Items Excluded from Gross Income ........................................................................................... 16

Items Excluded from Gross Income ........................................................................................................ 16

Private Activity Bonds ............................................................................................................................. 16

Discharge of Qualified Principal Residence Indebtedness ...................................................................... 16

Fringe Benefits ........................................................................................................................................ 16

Education‐related Benefits ..................................................................................................................... 16

Foreign Earned Income Exclusion and Foreign Housing Exclusion ......................................................... 16

Chapter 6 Adjustments to Gross Income .................................................................................................... 17

Individual Retirement Arrangements (IRAs) ........................................................................................... 17

Health Savings Accounts (HSAs) .............................................................................................................. 18

Moving Expenses .................................................................................................................................... 18

Chapter 7 Standard and Itemized Deductions ............................................................................................ 19

Standard Deduction ................................................................................................................................ 19

Itemized Deductions ............................................................................................................................... 19

Medical and Dental Expenses ................................................................................................................. 19

Miscellaneous Deductions Subject to the 2% Limit ................................................................................ 19

Chapter 8 Taxes and Credits ....................................................................................................................... 20

Tax Calculations ...................................................................................................................................... 20

Alternative Minimum Tax ....................................................................................................................... 20

Tax on Investment Income of Certain Children ...................................................................................... 20

Individual Shared Responsibility Payment .............................................................................................. 20

Child and Dependent Care Credit (Non‐refundable) .............................................................................. 22

Education Credits .................................................................................................................................... 22

Adoption Credit (Non‐refundable) .......................................................................................................... 22

Earned Income Credit (Refundable) ....................................................................................................... 23

Child Tax Credit (Non‐refundable) .......................................................................................................... 23

Saver’s credit (Non‐refundable) .............................................................................................................. 23

Chapter 9 Estate Tax and Gift Tax ............................................................................................................... 24

Gift Tax Returns (Form 709) .................................................................................................................... 24

Estate Tax Returns (Form 706) ................................................................................................................ 24

Chapter 10 Business Entities ....................................................................................................................... 25

Tax Withholding and Reporting .............................................................................................................. 25

Informational Returns ............................................................................................................................. 25

Accounting Periods ................................................................................................................................. 25

Chapter 11 Business Taxation ..................................................................................................................... 26

Employee Compensation ........................................................................................................................ 26

General Business Credit .......................................................................................................................... 26

Employer Provisions in the Affordable Care Act ..................................................................................... 26

Chapter 15 Retirement Plans ...................................................................................................................... 28

Common Terms ....................................................................................................................................... 28

SEP IRA .................................................................................................................................................... 28

SIMPLE IRA .............................................................................................................................................. 29

403(b) Plans ............................................................................................................................................ 29

Qualified Plans ........................................................................................................................................ 29

Chapter 17 Preparing Returns .................................................................................................................... 31

Avoidance vs. Evasion ............................................................................................................................. 31

The E‐File Process ................................................................................................................................... 34

Identity Theft .......................................................................................................................................... 34

Chapter 18 Practice before the IRS ............................................................................................................. 38

Practice before the IRS ............................................................................................................................ 38

Preparer Considerations ......................................................................................................................... 38

Chapter 19 Representation before the IRS ................................................................................................. 39

Audits/Examinations ............................................................................................................................... 39

Collection Process ................................................................................................................................... 39

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Update 2016 This update document summarizes the changes made to the 2015‐2016 Enrolled Agent Exam Study Guide published by Fast Forward Academy. In the interest of keeping this document brief, any outline levels that did not change have been omitted.

Example 2015 Text:

Update to 2016:

For tax year 2015, the exclusion cannot be more than the smaller of the following:

$100,800 ($201,600 MFJ and both meet the requirements)

New 2016

Example of Omitted Text:

Notice in the Update to 2016, only the last sentence of the paragraph and the first bullet point are displayed as this is the only area where content was changed.

Change of Year Please Note: All instances where the year 2014 changed to 2015 have not been documented in this text. If nothing of substance changed in a section, other than the year, you can safely assume that the year should be updated to 2015 and the surrounding content is still accurate as written.

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AbouttheIRSSpecialEnrollmentExam

Part 1 – Individuals Percent of Exam

Section 1: Preliminary Work and Taxpayer Data 20%

Section 2: Income and Assets 25%

Section 3: Deductions and Credits 25%

Section 4: Taxation and Advice 17%

Section 5: Specialized Returns for Individuals 13%

TOTAL 100%

Part 2 – Businesses Percent of Exam Section 1: Business Entities 33% Section 2: Business Financial Information 46% Section 3: Specialized Returns and Taxpayers 21%

TOTAL 100%

Part 3 – Representation, Practices, and Procedures Percent of Exam Section 1: Practices and Procedures 30% Section 2: Representation before the IRS 28% Section 3: Specific Types of Representation 22% Section 4: Completion of the Filing Process 20%

TOTAL 100%

How to Register for the IRS Special Enrollment Exam The PTIN user fee is $50.00.

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Chapter1FilingInformation

General Requirements

Tax Payments A non‐business taxpayer with tax due from a tax return can pay by check, money order, credit card or debit card. If you're an individual taxpayer, IRS Direct Pay offers you a free, electronic payment method directly from your bank account. Online payments are available at https://www.irs.gov/payments. Checks should be made payable to the “United States Treasury.”

Installments A taxpayer may request a monthly installment plan if he is unable to pay the full amount of tax owed. Before applying for any payment agreement, a taxpayer must file all required tax returns. Installment agreements generally provide up to 72 months to pay the tax. Insert the key point before the paragraph that begins “If the IRS approves a request…”

If the balance due is not more than $50,000, the taxpayer can apply online for a payment agreement instead of filing Form 9465. To do that, go to IRS.gov and enter Online Payment Agreement in the search box.

Filing a Claim for Refund

You made estimated tax payments of $1,000 and got an automatic extension of time from April 15, 2016, to October 15, 2016, to file your 2015 income tax return. When filing your return on that date, you pay an additional $200 tax. Three years later, on October 15, 2019, you file an amended return and claim a refund of $700. Because you filed within 3 years after filing your return, you could get a refund of any tax paid after April 15, 2016.

The situation is the same as in the prior example, except that you file your return on October 31, 2016, after the extension period ends. You paid an additional $200 on that date. Three years later, on October 27, 2019, you file an amended return and claim a refund of $700. Although you filed your claim within 3 years from the date you filed your original return, the refund is limited to $200. The estimated tax of $1,000 was paid before the 3 years plus the 6‐month extension period.

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Filing Requirements

Individuals Table 1‐1. 2015 Filing Requirements for Most Taxpayers IF filing status is... AND at the end of 2015, the taxpayer

was ... THEN file a return if the gross income was at least ...

Single younger than 65 $10,300

65 or older $11,850 Married Filing Jointly younger than 65 (both spouses) $20,600 65 or older (one spouse) $21,850 65 or older (both spouses) $23,100 Married Filing Separately any age $4,000 Head of Household younger than 65 $13,250

65 or older $14,800 Qualifying Widow(er) younger than 65 $16,600

with Dependent Child 65 or older $17,850

Dependents Table 1‐2. 2015 Filing Requirements for Single Dependents

Single dependents – Were you either age 65, older, or blind?

□ No. You must file a return if any of the following apply.

• Your unearned income was more than $1,050. • Your earned income was more than $6,300. • Your gross income was more than the larger of:

‐ $1,050, or ‐ Your earned income (up to $5,950) plus $350. □ Yes. You must file a return if any of the following apply.

• Your unearned income was more than $2,600 ($4,150 if 65 or older and blind). • Your earned income was more than $7,850 ($9,400 if 65 or older and blind). • Your gross income was more than the larger of:

‐ $2,600 ($4,150 if 65 or older and blind), or

‐ Your earned income (up to $5,950) plus $1,900 ($3,450 if 65 or older and blind).

Certain Children Younger than 19 Years of Age or Full‐Time Students The child must meet the following conditions to qualify:

Must have gross income of less than $10,500

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Insertion:

Foreign Account and Asset Reporting

FATCA Requirements The Foreign Account Tax Compliance Act (FATCA) is a tax law addressing tax non‐compliance by U.S. taxpayers with foreign accounts by focusing on reporting by U.S. taxpayers and foreign financial institutions. In general, federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax returns. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and generally requires U.S. citizens to report the country in which each account is located. In addition, certain taxpayers may also have to complete and attach to their return Form 8938 Statement of Special Foreign Financial Assets.

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad).

The FATCA Form 8938 requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR Form 114.

FBAR Requirements FBAR refers to Form 114, Report of Foreign Bank and Financial Accounts, that must be filed with the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the Treasury Department. FinCEN Form 114 is used to report a financial interest in or signature authority over a foreign financial account. The FBAR must be received by the Department of the Treasury on or before June 30th of the year immediately following the calendar year being reported.

A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

General FBAR Definition Financial Account – A financial account includes, but is not limited to, securities, brokerage, savings,

demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions).

Joint Account – A financial account type listed above owned jointly by two or more persons.

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Foreign Financial Account – A foreign financial account is a financial account located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account.

Financial Interest – A United States person has a financial interest in a foreign financial account for which: 1) the United States person is the owner of record or holder of legal title, regardless of whether

the account is maintained for the benefit of the United States person or for the benefit of another person; or

2) the owner of record or holder of legal title is one of the following: A. An agent, nominee, attorney, or a person acting in some other capacity on behalf of the

United States person with respect to the account; B. A corporation in which the United States person owns directly or indirectly: (i) more than 50

percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;

C. A partnership in which the United States person owns directly or indirectly: (i) an interest in more than 50 percent of the partnership's profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or (ii) an interest in more than 50 percent of the partnership capital;

D. A trust of which the United States person: (i) is the trust grantor and (ii) has an ownership interest in the trust for United States federal tax purposes. See 26 U.S.C. sections 671‐679 to determine if a grantor has an ownership interest in a trust;

E. A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or

F. Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.

Person – A person means an individual (including a minor child) and legal entities including, but not limited to, a limited liability company, corporation, partnership, trust, and estate.

Generally, a child is responsible for filing his or her own FBAR report. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child. Signing the child's FBAR. If the child cannot sign his or her FBAR, a parent or guardian must electronically sign the child's FBAR.

Signature Authority – Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account. Certain exceptions apply.

United States – For FBAR purposes, the United States includes the States, the District of Columbia, all United States territories and possessions (e.g., American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, Guam, and the United States Virgin Islands), and the Indian lands as defined in the Indian Gaming Regulatory Act. References to the laws of the United States include the laws of the United States federal government and the laws of all places listed in this definition.

United States Person – United States person means United States citizens (including minor children); United States residents; entities, including but not limited to, corporations, partnerships,

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or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

The federal tax treatment of an entity does not determine whether the entity has an FBAR filing requirement. For example, an entity that is disregarded for purposes of Title 26 of the United States Code must file an FBAR, if otherwise required to do so. Similarly, a trust for which the trust income, deductions, or credits are taken into account by another person for purposes of Title 26 of the United States Code must file an FBAR, if otherwise required to do so.

FBAR Filing Considerations The FBAR is an annual report and must be filed on or before June 30th of the year following the calendar year being reported. The FBAR must be filed electronically through FinCEN’s BSA E‐Filing System.

There is no extension of time available for filing an FBAR. Extensions of time to file federal tax returns do NOT extend the time for filing an FBAR.

Persons required to file an FBAR must retain records that contain the name in which each account is maintained, the number or other designation of the account, the name and address of the foreign financial institution that maintains the account, the type of account, and the maximum account value of each account during the reporting period.

The records must be retained for a period of 5 years from June 30th of the year following the calendar year reported and must be available for inspection as provided by law.

An officer or employee who files an FBAR to report signature authority over an employer's foreign financial account is not required to personally retain records regarding these accounts.

Exceptions to FBAR Filing Certain Accounts Jointly Owned by Spouses – The spouse of an individual who files an FBAR is not

required to file a separate FBAR if the following conditions are met: (1) all the financial accounts that the non‐filing spouse is required to report are jointly owned with the filing spouse; 2) the filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed; and (3) the filers have completed and signed Form 114a, Record of Authorization to Electronically File FBAR’s (maintained with the filers’ records). Otherwise, both spouses are required to file separate FBARs, and each spouse must report the entire value of the jointly owned accounts.

Consolidated FBAR – If a United States person that is an entity is named in a consolidated FBAR filed by a greater than 50 percent owner, such entity is not required to file a separate FBAR.

Correspondent/Nostro Account – Correspondent or nostro accounts (which are maintained by banks and used solely for bank‐to‐bank settlements) are not required to be reported.

Governmental Entity – A foreign financial account of any governmental entity of the United States (as defined above) is not required to be reported by any person. For purposes of this form, governmental entity includes a college or university that is an agency of, an instrumentality of, owned by, or operated by a governmental entity. For purposes of this Form 114, governmental entity also includes an employee retirement or welfare benefit plan of a governmental entity.

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International Financial Institution – A foreign financial account of any international financial institution (if the United States government is a member) is not required to be reported by any person.

IRA Owners and Beneficiaries – An owner or beneficiary of an IRA is not required to report a foreign financial account held in the IRA.

Participants in and Beneficiaries of Tax‐Qualified Retirement Plans – A participant in or beneficiary of a retirement plan described in Internal Revenue Code section 401(a), 403(a), or 403(b) is not required to report a foreign financial account held by or on behalf of the retirement plan.

Signature Authority – An individual who has signature authority over, but no financial interest in, a foreign financial account is not required to report the account in the following situations: 1) An officer or employee of a bank that is examined by the Office of the Comptroller of the

Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration is not required to report signature authority over a foreign financial account owned or maintained by the bank.

2) An officer or employee of a financial institution that is registered with and examined by the Securities and Exchange Commission or Commodity Futures Trading Commission is not required to report signature authority over a foreign financial account owned or maintained by the financial institution.

3) An officer or employee of an Authorized Service Provider is not required to report signature authority over a foreign financial account that is owned or maintained by an investment company that is registered with the Securities and Exchange Commission. Authorized Service Provider means an entity that is registered with and examined by the Securities and Exchange Commission and provides services to an investment company registered under the Investment Company Act of 1940.

4) An officer or employee of an entity that has a class of equity securities listed (or American depository receipts listed) on any United States national securities exchange is not required to report signature authority over a foreign financial account of such entity.

5) An officer or employee of a United States subsidiary is not required to report signature authority over a foreign financial account of the subsidiary if its United States parent has a class of equity securities listed on any United States national securities exchange and the subsidiary is included in a consolidated FBAR report of the United States parent.

6) An officer or employee of an entity that has a class of equity securities registered (or American depository receipts in respect of equity securities registered) under section 12(g) of the Securities Exchange Act is not required to report signature authority over a foreign financial account of such entity.

Trust Beneficiaries – A trust beneficiary with a financial interest described in section (2)(e) of the financial interest definition is not required to report the trust's foreign financial accounts on an FBAR if the trust, trustee of the trust, or agent of the trust: (1) is a United States person and (2) files an FBAR disclosing the trust's foreign financial accounts.

United States Military Banking Facility – A financial account maintained with a financial institution located on a United States military installation is not required to be reported, even if that military installation is outside of the United States.

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Table 1‐3. FATCA vs. FBAR

Form 8938, Statement of Specified Foreign Financial Assets

FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

Who Must File? Specified individuals, which include U.S citizens, resident aliens, and certain non‐resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold

U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold

Does the United States include U.S. territories?

No Yes, resident aliens of U.S territories and U.S. territory entities are subject to FBAR reporting

Reporting Threshold (Total Value of Assets)

$50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad)

$10,000 at any time during the calendar year

When do you have an interest in an account or asset?

If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return

Financial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title. Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.

What is Reported? Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non‐account investment assets

Maximum value of financial accounts maintained by a financial institution physically located in a foreign country

When Due? By due date, including extension, if any, for income tax return

Received by June 30 (no extensions of time granted)

Where to File? File with income tax return pursuant to instructions for filing the return

File electronically through FinCEN’s BSA E‐Filing System. The FBAR is not filed with a federal tax return.

Penalties Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non‐filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply

If non‐willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply

Form 1040NR

Who Must File A nonresident alien does not need to file Form 1040NR in 2015 if:

The only U.S. trade or business was the performance of personal services; and

1) Wages were less than $4,000; and

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Personal Exemptions and Dependents The personal exemption amount increases to $4,000 for 2015.

A taxpayer may lose part of the deduction for exemptions if adjusted gross income (AGI) is more than the following:

$154,950 for a married individual filing a separate return

$258,250 for a single individual

$284,050 for a head of household, and

$309,900 for married individuals filing jointly or a qualifying widow(er).

Exemptions for Dependents Qualifying Relative

3) Gross Income Test – The person’s gross income for the year must be less than $4,000.

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Chapter4GainsandLosses

Reporting Gains and Losses

Section 1202 Exclusion A taxpayer selling QSB stock held for more than five years can exclude up to 50% of the eligible gain from income (100% for stock acquired during certain periods in 2010 and thereafter).

For stock acquired after September 27, 2010, the §1202 exclusion is 100% of eligible gains. Congress made the 100% exclusion permanent in the PATH Act of 2015. The amount of gain eligible for the exclusion is limited to the greater of $10,000,000 or 10 times the adjusted bases of disposed QSB stock.

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Chapter5ItemsExcludedfromGrossIncome

Items Excluded from Gross Income • Foreign earned income exclusion – Up to $100,800 of foreign earnings per qualifying person in

2015.

Private Activity Bonds

Interest listed on the 1099 as private activity bond interest is from qualified private activity bonds. Qualified private activity bond interest is listed separately on the 1099 because it is a tax preference item for AMT. Interest from nonqualified private activity bonds is simply added into the taxable interest on the 1099 and not separately stated. This is likely to appear on the exam (i.e., Which of the following items is a preference or adjustment for AMT?), with qualified private activity bond interest being one of the items on a list.

Discharge of Qualified Principal Residence Indebtedness Amount eligible for the exclusion – The exclusion applies only to debt discharged after 2006

and before 2017.

Fringe Benefits Adoption assistance – For 2015, an employee may exclude up to $13,400 of expenses incurred

by an employer for qualified adoption expenses in connection with the adoption of an eligible child.

Education‐related Benefits

Education Savings Bond Program Modified adjusted gross income limit – The interest exclusion is limited if 2014 modified adjusted

gross income (MAGI) is as follows:

1) $77,200 to $92,200 for taxpayers filing single or head of household

2) $115,750 to $145,750 for married taxpayers filing jointly or for a qualifying widow(er) with dependent child

Foreign Earned Income Exclusion and Foreign Housing Exclusion For tax year 2015, the exclusion cannot be more than the smaller of the following:

$100,800 ($201,600 MFJ and both meet the requirements)

A calendar year taxpayer with $100,800 or less of foreign earned income in a 12‐month period can use Form 2555‐EZ to claim the earned income exclusion.

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Chapter6AdjustmentstoGrossIncome

Individual Retirement Arrangements (IRAs)

Deduction Limits Table 6‐1. Effect of MAGI on Deduction if Taxpayer Is Covered by a Retirement Plan at Work – 2015

IF your filing status is AND your modified AGI is THEN you can take

single or head of household

$61,000 or less a full deduction

between $61,000 – $71,000 a partial deduction

$71,000 or more no deduction

married filing jointly or qualifying widow(er)




married filing separately less than $10,000 a partial deduction


Table 6‐2. Effect of MAGI on Deduction if Taxpayer Is NOT Covered by a Retirement Plan at Work – 2015

IF your filing status is AND your modified AGI is THEN you can take

single, head of household, or qualifying widow(er)

any amount a full deduction

married filing jointly or separately and spouse is not covered by a plan at work

any amount a full deduction

married filing jointly and spouse is covered by a plan at work




married filing separately with a spouse who is covered by a plan at work

less than $10,000 a partial deduction


If MAGI is between the base amounts, a partial deduction amount is determined by subtracting MAGI from the upper base amount and multiplying it by a percentage, according to filing status:

1) Married Filing Jointly/Qualifying Widow(er) and you are covered by an employer plan – The

total IRA deduction is 27.5% (32.5% if 50 or older) of the difference between MAGI and the upper base amount.

Qualified Charitable Distribution Replace the last two sentences of this section with the following:

The PATH Act of 2015 made this deduction permanent.

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Roth IRAs

If modified AGI is above a certain amount, the contribution limit is reduced as indicated below:

1) Modified AGI minus the following:

A) $183,000 if filing a joint return (MFJ)or qualifying widow(er)(QW)

B) $‐0‐ if married filing a separate return (MFS) and the taxpayer lived with his spouse at any time during the year

C) $116,000 for all other individuals

Sam is 40 years old files jointly with his spouse. He contributes $5,500 to his Roth IRA on July 1, 2015, which grows to $7,000 and his MAGI for 2015 is $190,000. He does not contribute to any other retirement plans. He has excess income of $7,000 ($190,000 ‐ $183,000) and must reduce his contribution and any earnings by 70% ($7,000 / $10,000). He must remove $4,900 from the account by the due date for his return or he is liable for the 6% excise tax.

Table 6‐3. Effect of MAGI on Roth IRA Contributions – 2015 IF your filing status is AND your modified AGI is THEN you can make

married filing jointly or qualifying widow(er) $183,000 or less a full contribution

between $183,000 – $193,000 a partial contribution

$193,000 or more no contribution

married filing separately and live with spouse

$0 a full contribution

between $0 – $10,000 a partial contribution


All others

$116,000 or less a full contribution

between $116,000 – $131,000 a partial contribution


Health Savings Accounts (HSAs) For 2015, taxpayers who have self‐only HDHP coverage can contribute up to $3,350. For family HDHP coverage, the maximum contribution is up to $6,650

Table 6‐4. HDHP Requirements

Type of Coverage

Minimum Annual Deductible Maximum Annual Deductible and Other Out‐of‐pocket Expenses

2014 2015 2014 2015

Self‐only $1,250 $1,300 $6,350 $6,450

Family $2,500 $2,600 $12,700 $12,900

Moving Expenses

Deductible Moving Expenses Traveling to a new home, consisting of:

2) An alternative is to use the 2015 standard mileage rate of 23 cents per mile.

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Chapter7StandardandItemizedDeductions

Standard Deduction

Standard Deduction Amount The 2015 standard deduction amount depends on filing status:

$6,300 if filing as single (S) or married filing separately (MFS)

$9,250 if filing as head of household (HH)

$12,600 is filing as married filing jointly (MFJ) or qualifying widow(er) (QW) The standard deduction is higher for taxpayers who are 65 or older at the end of the year and/or blind (less than 20/200 vision). This extra deduction applies to both the taxpayer AND to a spouse if married.

$1,250 if MFJ, MFS or QW

A blind taxpayer and spouse who are not blind, both age 66, may add $3,750 ($1,250 x 3) to the basic standard deduction of $12,600 for a total deduction of $16,350.

Standard Deduction for Dependents The basic standard deduction for an individual for whom an exemption can be claimed on another person’s tax return (dependent) is generally limited to the greater of:

$1,050

Itemized Deductions

Phase‐out of Itemized Deductions In 2015, certain taxpayers are once again subject to a limit on itemized deductions. The limit applies if gross income is more than:

$258,250 if single

$284,050 if head of household

$309,900 if married filing jointly or qualifying widow(er)

$154,950 if married filing separately)

Medical and Dental Expenses

Deductible Medical Expenses Car expenses ‐ If preferred, the taxpayer may use the 2015 standard mileage rate of 23 cents

per mile instead of actual expenses incurred.

Miscellaneous Deductions Subject to the 2% Limit

Unreimbursed Employee Local Transportation and Lodging Use one of the two following methods to figure deductible car expenses:

1) Standard mileage rate – For 2015, the rate is 57.5 cents per mile on business miles driven.

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Chapter8TaxesandCredits

Tax Calculations However, there are special methods if income includes any of the following items:

Investment income more than $2,100 for certain children

Alternative Minimum Tax AMT liability exists if taxable income for regular tax purposes, combined with adjustments and tax preference items, is more than the 2015 AMT exemption amount as follows:

$83,400 if filing status is MFJ or QW

$53,600 if filing status is single or HOH

$41,700 if filing status is MFS The exemption amounts above reduce by 25% of AMTI in excess of the following:

$158,900 if filing status is MFJ or QW

$119,200 if filing status is single or HOH

$79,450 if filing status is MFS The exemption reduces AMTI; apply a flat tax rate of 26% (up to $185,400, 28% thereafter) to arrive at the tentative minimum tax.

Tax on Investment Income of Certain Children

When a child has more than $2,100 in income from interest, dividends, or other investments, part of that income may be taxed at the parent’s tax rate instead of the child’s tax rate. If the child’s interest and dividend income (including capital gain distributions) is less than $10,500, the parent may elect to include that income on the parent’s return rather than file a return for the child.

The parent can make that election on Form 8814 only if all the following conditions are met:

The child’s gross income was less than $10,500.

Insert the following section after the Reporting heading under Taxes for Household Employees

Individual Shared Responsibility Payment The individual shared responsibility provision of the Affordable Care Act requires everyone on the individual income tax return to have qualifying health care coverage for each month of the year or have a coverage exemption. Otherwise, the IRS may require the taxpayer to make an individual shared responsibility payment.

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The payment amount for 2015 is the greater of 2 percent of the household income above the taxpayer’s filing threshold, or $325 per adult plus $162.50 per child (limited to a family maximum of $975). This payment payment amount is capped at the cost of the national average premium for a bronze level health plan available through the Marketplace.

Depending upon the circumstances, the Health Insurance Marketplace, health coverage providers, and certain employers may provide information forms to the taxpayer and the IRS.

Form 1095‐A, Health Insurance Marketplace Statement – The Health Insurance Marketplace sends this form to individuals who enrolled in coverage there, with information about the coverage, who was covered, and when. The deadline for the Marketplace to provide Form 1095‐A is February 1, 2016

Form 1095‐B, Health Coverage – Health insurance providers send this new form to individuals they cover, with information about who was covered and when. The deadline for coverage providers to provide Form 1095‐B is March 31, 2016.

Form 1095‐C, Employer‐Provided Health Insurance Offer and Coverage – Certain employers send this new form to certain employees, with information about what coverage the employer offered. The deadline for employers to provide Form 1095‐C is March 31, 2016.

Some taxpayers may not receive a Form 1095‐B or Form 1095‐C by the time they are ready to file their tax return. It is not necessary to wait for Forms 1095‐B or 1095‐C in order to file. Taxpayers may instead rely on other information about their health coverage to prepare their returns. These new forms should not be attached to the income tax return.

Health Coverage Exemptions A taxpayer can claim most exemptions using Form 8965, Health Coverage Exemptions, when filing his income tax return. This form is required if the taxpayer or dependent qualifies for a coverage exemption on the tax return. The taxpayer does not need to call the IRS to qualify for the coverage exemption in advance.

A taxpayer who is not required to file a federal income tax return for a year because gross income is below the return filing threshold is automatically exempt from the shared responsibility provision for that year and does not need to take any further action to secure an exemption. It is not necessary to to file a return solely to report coverage or to claim a coverage exemption.

Certain exemptions must be granted by the Health Insurance Marketplace in advance. This includes exemptions for certain hardship situations and for members of certain religious sects. A taxpayer that can claim the coverage exemption on his tax return does not need to apply for a Marketplace‐granted exemption. If the Marketplace grants a coverage exemption, they send a unique Exemption Certificate Number (ECN). The taxpayer enters the ECN on Form 8965 when claiming a coverage exemption.

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Child and Dependent Care Credit (Non‐refundable)

Qualifying Person Test

An individual living with a taxpayer for more than half of a year who is physically or mentally unable to care for himself, if he is:

3) Would have been a dependent except for one of the following:

A) He received gross income of $4,000 or more

Education Credits

Lifetime Learning Credit (Non‐refundable) The amount of the Lifetime Learning credit phases out (gradually declines) if modified adjusted gross income (MAGI) is between $55,000 and $65,000 ($110,000 and $130,000 MFJ). No credits are available when (MAGI) exceeds $65,000 ($130,000 MFJ).

Table 8‐1. 2015 Education Credits American Opportunity Credit Lifetime Learning Credit

Maximum credit $2,500 credit per eligible student $2,000 credit per return

Limit on (MAGI) $180,000 MFJ, $90,000 S, HH, or QW $130,000 if MFJ, $65,000 if S, HH, or QW

Refundable 40% refundable Non‐refundable credit limited to the

amount of tax liability.

Availability Available ONLY for the first 4 years. Available ALL years AND for courses to

acquire or improve job skills

Number of tax years’ credit available

Available ONLY for 4 tax years per eligible student

Available for an UNLIMITED number of years

Type of degree required

Student must be pursuing an undergraduate degree or other recognized education

credential

Student does not need to be pursuing a degree or other recognized education

credential

Number of courses Student enrolled at least half time for at least one academic period beginning in the tax year

Available for one or more courses

Felony drug conviction

No felony drug convictions on student’s records

Felony drug convictions permitted

Qualified expenses Books, supplies, and equipment do not need to be purchased from the institution in order to

qualify.

Tuition and required enrollment fees, including required amounts paid to the institution for course‐related books,

supplies, and equipment.

Adoption Credit (Non‐refundable) For 2015, the maximum adoption credit is $13,400 per child (minus any qualified adoption expenses claimed for the same child in a prior year). The full credit may be allowed for the adoption of a child with special needs even if there are no qualified expenses. For 2015, the adoption credit phases out ratably for taxpayers with MAGI between $201,010 and $241,010. Because the adoption credit is not refundable in 2015, a taxpayer may carry forward any unused credit amounts to future tax years.

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Earned Income Credit (Refundable) The earned income tax credit (EITC) is a tax credit for certain people who work and have earned income under $53,267. For 2015, the maximum credit is 40% (45% if three or more children) of the first $13,870 of earned income.

Who May Claim the EITC To claim the EITC, taxpayers must meet all of the following rules:

Investment income must be $3,400 or less for the year.

Taxpayer must have earned income; however, earned income and AGI cannot be more than:

1) $47,747 ($53,267 MFJ) with three or more qualifying children

2) $44,454 ($49,974 MFJ) with two qualifying children

3) $39,131 ($44,651 MFJ) with one qualifying child

4) $14,820 ($20,330 MFJ) with no qualifying children

Child Tax Credit (Non‐refundable)

Limits on the Credit

The “child tax credit” is not refundable. If a taxpayer cannot claim the full amount of the child taxcredit, a refundable additional child tax credit may be available. For 2015, the portion refundable as the additional child tax credit is up to 15% of earned income (including tax‐free combat pay) that exceeds $3,000. To claim this credit, the taxpayer must attach Form 8812 to his tax return. Beginning in 2015, a taxpayer filing Form 2555 or 2555‐EZ (both relating to foreign earned income), cannot claim the additional child tax credit.

Saver’s credit (Non‐refundable) A taxpayer may not take the credit if one of the following is true:

1) Year 2015 AGI is more than $30,500 ($45,750 HH, $61,000 MFJ).

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Chapter9EstateTaxandGiftTax

Unified Credit (Applicable Exclusion Amount)

For estates of decedents dying in 2015 the top estate tax rate is 40%. There is a $5.43 million applicable exclusion amount in 2015, and beneficiaries receive a stepped‐up basis. The unified credit for taxable gifts is $2,117,800, exempting $5.43 million from tax in 2015. The unified credit for estate tax increases during the same period.

Table 9‐1. Unified Credit for Gift & Estate Tax Purposes:

Year Unified Credit Applicable Exclusion Amount

2014 $2,081,800 $5,340,000

2015 $2,117,800 $5,430,000

Gift Tax Returns (Form 709)

Generation Skipping Transfer Tax For 2015, the effective GST exemption is $5.43 million, on lifetime transfers or distributions (directly or in trust) to grandchildren.

Estate Tax Returns (Form 706) A taxable estate in excess of the applicable exclusion ($5.43 million for 2015) may be subject to the estate tax.

Filing an Estate Tax Return For 2015, a return is not necessary if the taxable estate is less than $5.43 million.

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Chapter10BusinessEntities

Tax Withholding and Reporting

Self‐employment Tax In 2015, a tax rate of 15.3% applies to the first $118,500 of income from self‐employment.

Payroll Taxes FICA taxes – The social security wage base limit to which tax applies is $118,500 for 2015.

Estimated Taxes Corporations – Generally, a corporation must make estimated tax payments (via EFTPS or Form

1120‐W) if expecting to owe tax of $500 or more when filing a return.

Informational Returns Add a row to the top of the table: Table 10‐1. Certain Informational Returns Form Title What to Report Amounts to Report Due Date to IRS Due

Date to Recipient

1095‐C Employer‐Provided Health Insurance Offer and Coverage

Offers of health coverage and enrollment in health coverage for employees.

See form instructions February 28* January 31

Revise 1099‐C as follows: 1099‐C Cancellation of Debt Cancellation of a debt owed to the Federal

Government or any organization having a significant trade or business of lending money.

$600 or more February 28* January 31

Accounting Periods

52‐53‐week Tax Year Whatever date this same day of the week occurs that is closest to the last day of the calendar month. For example, if the taxpayer elects a tax year that always ends on the last Monday in February, the 2015 taxable year will end on February 29, 2016

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Chapter11BusinessTaxation

Employee Compensation

Employee Business Expense Reimbursements Per diem or other fixed allowance. The standard mileage rate for 2015 is 57.5 cents per mile.

Awards A highly compensated employee for 2015 is an employee who meets either of the following tests:

The employee received more than $120,000 in pay for the preceding year.

General Business Credit Energy efficient home credit – This credit is available for eligible contractors of certain homes

sold for use as a residence. The allowable credit is $2,000 for each home meeting the 50% energy efficient standard, and for those that meet the 30% energy efficient standard, the allowable credit is $1,000. The credit expires after 2016.

Mine rescue team training credit ‐ This credit applies to training program costs paid or incurred for qualified mine rescue team employees for tax years beginning before January 1, 2016.

Work opportunity credit** ‐ replace the last line of the description with: The Protecting Americans from Tax Hikes (PATH) Act of 2015 extends the Work Opportunity Tax Credit (WOTC) for hiring certain workers through 2019.

Add to the end of Chapter 11:

Employer Provisions in the Affordable Care Act

Important Terms

Applicable Large Employer (ALE) – An ALE is, for a particular calendar year, any single employer, or group of employers treated as an Aggregated ALE Group, that employed an average of at least 50 full‐time employees (including full‐time equivalent employees) on business days during the preceding calendar year. All types of employers can be ALEs, including tax‐exempt organizations and government entities.

Full‐time Employee – An employee who is employed an average of at least 30 hours of service per week with the employer for a calendar month. For this purpose, 130 service hours in a calendar month is treated as the monthly equivalent of at least 30 hours per week.

Full‐time employee equivalent (FTE) – Add up the total hours of service for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee), and divide that amount by 2,080. If the result is not a whole number, round to the next lowest whole number. (If the result is less than one, however, round up to one FTE.)

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Employer Shared Responsibility Provision Under the Affordable Care Act’s employer shared responsibility provisions, certain employers (called applicable large employers or ALEs) must either offer minimum essential coverage that is “affordable” and that provides “minimum value” to their full‐time employees (and their dependents), or potentially make an employer shared responsibility payment to the IRS. The employer shared responsibility provisions are sometimes referred to as “the employer mandate” or “the pay or play provisions.”

The vast majority of employers fall below the ALE threshold of 50 full‐time employees and are not subject to the employer shared responsibility provisions.

An ALE member may choose either to offer affordable minimum essential coverage that provides minimum value to its full‐time employees (and their dependents) or potentially owe an employer shared responsibility payment to the IRS. Depending on its decisions about offering minimum essential coverage to its full‐time employees and their dependents, an ALE member may be subject to one of two potential employer shared responsibility payments, but not both, and the two types of payments are calculated differently:

ALE does not offer minimum essential coverage to at least 95 percent of its full‐time employees (and their dependents) – On an annual basis, this payment is equal to $2,000 (indexed for future years) for each full‐time employee, with the first 30 employees excluded from the calculation. This calculation is based on all full‐time employees (minus 30), including full‐time employees who have minimum essential coverage under the employer’s plan or from another source.

ALE does offer minimum essential coverage to at least 95 percent of its full‐time employees (and their dependents) – On an annual basis, this payment is equal to $3,000 (indexed for future years) but only for each full‐time employee who receives the premium tax credit. The total payment in this instance cannot exceed the amount the employer would have owed had the employer not offered minimum essential coverage to at least 95 percent of its full‐time employees (and their dependents).

For either type of employer shared responsibility payment to apply to an ALE member, at least one full‐time employee must receive the premium tax credit for purchasing coverage through the Marketplace.

Annual Reporting Requirement ALEs must report to the IRS information about the health care coverage, if any, they offered to full‐time employees. ALEs also must furnish to employees a statement that includes the same information provided to the IRS. Employees may use this information to determine whether, for each month of the calendar year, they may claim the premium tax credit on their individual income tax returns.

Form 1095‐C, Employer‐Provided Health Insurance Offer and Coverage – Form 1095‐C is filed and furnished to any employee of an ALE member who is a full‐time employee for one or more months of the calendar. ALE Members must report that information for all twelve months of the calendar year for each employee.

Generally, you must file Forms 1094‐C and 1095‐C by February 28 if filing on paper (or March 31 if filing electronically) of the year following the calendar year to which the return relates. Anyone required to file 250 or more information returns, must file them electronically. This requirement applies separately for each type of return and separately to each type of corrected return.

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Chapter15RetirementPlans

Common Terms

• Highly compensated employees – For 2015, a highly compensated employee is one who:

o For the preceding year, received compensation from the employer of more than $120,000, and if the employer so chooses, was in the top 20% of employees when ranked by compensation

• Annual compensation limit ‐ The maximum amount of compensation the employer may consider when determining contributions and benefits for an employee is $265,000 for 2015.

• Catch‐up contribution – A plan can permit participants who are age 50 or older at the end of the calendar year to make catch‐up contributions in addition to elective deferrals and SIMPLE plan salary reduction contributions.

o The catch‐up contribution limitation for defined contribution plans other than SIMPLE plans is $6,000 in 2015.

o The catch‐up contribution limitation for SIMPLE plans is $3,000 for 2015.

SEP IRA

Eligible Employees Employee has received at least $600 in compensation from employer in 2015.

Annual Contribution Limit

Contributions made by employer for 2015 to a common‐law employee’s SEP‐IRA cannot exceed the lower of 25% of the employee’s compensation or $53,000. Compensation generally does not include the employer’s contributions to the SEP.

Employer/Employee Contribution Limits An employer cannot consider the part of an employee’s compensation above the annual compensation limit ($265,000) when figuring the contribution limit for an employee. However, $53,000 is the maximum contribution for an eligible employee under §415(c)(1)(A). Excess contributions are included in the employee’s income for the year and are treated as contributions by the employee to his SEP‐IRA. SEP contributions are not included on an employee’s Form W‐2 unless contributions were made under a salary reduction arrangement. Additionally, if the employer maintains another defined contribution plan for employees, the annual additions to an account are limited to the lesser of $53,000 or 100% of the participant’s compensation.

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SIMPLE IRA

Employer/Employee Contribution Limits

Salary reduction contributions – Employees may contribute to the SIMPLE IRA through salary reductions up to $12,500 for 2015. These contributions must be expressed as a percentage of the employee’s compensation unless the employer permits the employee to express them as a specific dollar amount. Employers cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $12,500 limit. The maximum percentage an employee may contribute is 100% of his compensation up to the dollar limit.

Catch‐up contribution – The catch‐up contribution limitation for SIMPLE plans is $3,000 for 2015.

403(b) Plans Generally, the maximum amount contributable (MAC) to a 403(b) account is limited to the lesser of:

• The annual additions limit – For 2015 the limit is $53,000 or 100% of compensation for the most recent year, whichever is less.

• The elective deferral limit – In general, an employee may not contribute more than $18,000 for 2015. There is a special rule for those with at least 15 years of service giving them the potential to contribute up to $3,000 more. Additionally, individuals older than 50 are eligible for a catch‐up contribution of up to $6,000 for 2015.

Qualified Plans

Defined benefit plan – For 2015, the annual benefit for a participant under §415(b)(1)(A) for a

defined benefit plan cannot exceed the lesser of the following amounts:

1) 100% of the participant’s average compensation for his highest three consecutive calendar years

2) $210,000

Defined contribution plan – For 2015, under§415(c)(1)(A) a defined contribution plan’s annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts:

1) 100% of the participant’s compensation

2) $53,000

Employer Deduction Limits Defined contribution plans –

3) The maximum compensation taken into account for each employee in 2015 is $265,000.

401(k) Plan Elective Deferrals For 2015, the basic limit of §402(g)(1) on elective deferrals is $18,000, plus the catch‐up contribution amount if the employee is old than age 50.

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Table 15‐1. Key Retirement Plan Rules for 2015

Type of Plan Last Date for Contribution Maximum Contribution Maximum Deduction

When to Set Up Plan

SEP Due date of employer’s return (including extensions)

Smaller of $53,000 or 25% of participant’s compensation

25% of all participants’ compensation

Any time up to the due date of employer’s return (including extensions)

SIMPLE IRA and SIMPLE 401(k)

Salary reduction contributions:30 days after the end of the month for which the contributions are to be made Matching or nonelective contributions: Due date of employer’s return (including extensions)

Employee contribution: Salary reduction contribution up to $12,500, $15,500 if age 50 or older Employer contribution: Either dollar‐for‐dollar matching contributions, up to 3% of employee’s compensation, or fixed non‐elective contributions of 2% of compensation

Same as maximum contribution

Any time between 1/1 and 10/1 of the calendar year For a new employer coming into existence after 10/1, as soon as administratively feasible

Qualified Plan: Defined Contribution Plan

Elective deferral: Due date of employee’s return (including extensions) Employer contribution: Money Purchase or Profit‐Sharing: Due date of employer’s return (including extensions)

Employee contribution: Elective deferral up to $18,000, $24,000 if age 50 or older Employer contribution: Money Purchase: Smaller of $53,000 or 100% of participant’s compensation Profit‐Sharing: Smaller of $53,000 or 100% of participant’s compensation.

25% of all participants’ compensation, plus amount of elective deferrals made

By the end of the tax year

Qualified Plan: Defined Benefit Plan

Contributions must be paid in quarterly installments depending on the plan year, due 15 days after the end of each quarter.

Amount needed to provide an annual benefit no larger than the smaller of $210,000 or 100% of the participant’s average compensation for his highest three consecutive calendar years

Based on actuarial assumptions and computations

By the end of the tax year

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Chapter17PreparingReturns

Add the following section after the Penalties section and before Understatement of Liability §6694

Avoidance vs. Evasion

Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. One who avoids tax does not conceal or misrepresent, but shapes and preplans events to reduce or eliminate tax liability within the parameters of the law.

Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts are deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are. Common evasion schemes include:

1) Intentional understatement or omission of income

2) Claiming fictitious or improper deductions

3) False allocation of income

4) Improper claims, credits, or exemptions

5) Concealment of assets

Indicators of Fraud Affirmative acts of fraud are actions taken by the taxpayer, return preparer and/or promoter to deceive or defraud. Signs of fraud, known as first indicators (or badges) of fraud:

Income

1) Omitting specific items where similar items are included.

2) Omitting entire sources of income.

3) Failing to report or explain substantial amounts of income identified as received.

4) Inability to explain substantial increases in net worth, especially over a period of years.

5) Substantial personal expenditures exceeding reported resources.

6) Inability to explain sources of bank deposits substantially exceeding reported income.

7) Concealing bank accounts, brokerage accounts, and other property.

8) Inadequately explaining dealings in large sums of currency, or the unexplained expenditure of currency.

9) Consistent concealment of unexplained currency, especially in a business not routinely requiring large cash transactions.

10) Failing to deposit receipts in a business account, contrary to established practices.

11) Failing to file a tax return, especially for a period of several years, despite evidence of receipt of substantial amounts of taxable income.

12) Cashing checks, representing income, at check cashing services and at banks where the taxpayer does not maintain an account.

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13) Concealing sources of receipts by false description of the source(s) of disclosed income, and/or nontaxable receipts.

Expenses or Deductions

1) Claiming fictitious or substantially overstated deductions.

2) Claiming substantial business expense deductions for personal expenditures.

3) Claiming dependency exemptions for nonexistent, deceased, or self‐supporting persons. Providing false or altered documents, such as birth certificates, lease documents, school/medical records, for the purpose of claiming the education credit, additional child tax credit, earned income tax credit (EITC), or other refundable credits.

4) Disguising trust fund loans as expenses or deductions.

Books and Records

1) Multiple sets of books or no records.

2) Failure to keep adequate records, concealment of records, or refusal to make records available.

3) False entries, or alterations made on the books and records; back‐dated or post‐dated documents; false invoices, false applications, false statements, or other false documents or applications.

4) Invoices are irregularly numbered, unnumbered or altered.

5) Checks made payable to third parties that are endorsed back to the taxpayer. Checks made payable to vendors and other business payees that are cashed by the taxpayer.

6) Variances between treatment of questionable items as reflected on the tax return, and representations within the books.

7) Intentional under‐ or over‐footing of columns in journal or ledger.

8) Amounts on tax return not in agreement with amounts in books.

9) Amounts posted to ledger accounts not in agreement with source books or records.

10) Journalizing questionable items out of correct account.

11) Recording income items in suspense or asset accounts.

12) False receipts to donors by exempt organizations.

Allocations of Income

1) Distribution of profits to fictitious partners.

2) Inclusion of income or deductions in the tax return of a related taxpayer, when tax rate differences are a factor.

Conduct of Taxpayer

1) False statement about a material fact pertaining to the examination.

2) Attempt to hinder or obstruct the examination. For example, failure to answer questions; repeated cancelled or rescheduled appointments; refusal to provide records; threatening potential witnesses, including the examiner; or assaulting the examiner.

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3) Failure to follow the advice of accountant, attorney or return preparer.

4) Failure to make full disclosure of relevant facts to the accountant, attorney or return preparer.

5) The taxpayer’s knowledge of taxes and business practices where numerous questionable items appear on the tax returns.

6) Testimony of employees concerning irregular business practices by the taxpayer.

7) Destruction of books and records, especially if just after examination was started.

8) Transfer of assets for purposes of concealment, or diversion of funds and/or assets by officials or trustees.

9) Pattern of consistent failure over several years to report income fully.

10) Proof that the tax return was incorrect to such an extent and in respect to items of such magnitude and character as to compel the conclusion that the falsity was known and deliberate.

11) Payment of improper expenses by or for officials or trustees.

12) Willful and intentional failure to execute pension plan amendments

13) Backdated applications and related documents.

14) False statements on Tax Exempt/Government Entity (TE/GE) determination letter applications.

15) Use of false social security numbers.

16) Submission of false Form W–4.

17) Submission of a false affidavit.

18) Attempt to bribe the examiner.

19) Submission of tax returns with false claims of withholding (Form 1099‐OID, Form W‐2) or refundable credits (Form 4136, Form 2439) resulting in a substantial refund.

20) Intentional submission of a bad check resulting in erroneous refunds and releases of liens.

21) Submission of false Form W‐7 information to secure Individual Taxpayer Identification Number (ITIN) for self and dependents.

Methods of Concealment

1) Inadequacy of consideration.

2) Insolvency of transferor.

3) Asset ownership placed in other names.

4) Transfer of all or nearly all of debtor's property.

5) Close relationship between parties to the transfer.

6) Transfer made in anticipation of a tax assessment or while the investigation of a deficiency is pending.

7) Reservation of any interest in the property transferred.

8) Transaction not in the usual course of business.

9) Retention of possession or continued use of asset.

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10) Transactions surrounded by secrecy.

11) False entries in books of transferor or transferee.

12) Unusual disposition of the consideration received for the property.

13) Use of secret bank accounts for income.

14) Deposits into bank accounts under nominee names.

15) Conduct of business transactions in false names.

Failures under §6695 §6695(f) Negotiation of check – Any tax return preparer who endorses or otherwise negotiates

(directly or through an agent) a refund check (including an electronic version of a check) issued to a taxpayer (other than the preparer), shall pay a penalty of $500 with respect to each check. The penalty does not vary based on how much compensation the preparer receives from the taxpayer, the amount of the refund check, or the direct deposit. The penalty applies to a tax return preparer who directs the IRS to deposit a taxpayer's refund into a bank account in the preparer's name or into a bank account under the preparer's control. The preparer may not endorse or negotiate a check for a taxpayer even though the preparer was designated as the taxpayer's representative on a Form 2848, Power of Attorney.

A tax return preparer will not be considered to have endorsed or otherwise negotiated a check as a result of having affixed the taxpayer’s name to a refund check for the purpose of depositing the check into an account in the name of the taxpayer or in the joint names of the taxpayer and one or more other persons (excluding the tax return preparer). See Treas. Reg. 1.6695‐1(f)(1).

Taxpayers sometimes request that their refunds be direct deposited into a bank account in the preparer’s name or into a bank account under the preparer’s control when taxpayers do not have their own bank account. Even if a taxpayer has requested the direct deposit to be made in this manner, the preparer is still subject to the IRC 6695(f) penalty for complying with the request.

The E‐File Process

Returns Not Eligible for IRS E‐File

• Returns with tax years ending prior to December 31, 2013 Add this content at the end of the chapter:

Identity Theft Tax preparers play a critical role in assisting clients, both individuals and businesses, who are victims of tax‐related identity theft. The IRS is working hard to prevent and detect identity theft as well as reduce the time it takes to resolve these cases. Tax‐related identity theft occurs when someone uses a stolen social security number to file a tax return claiming a fraudulent refund. Thieves may also use a stolen EIN from a business client to create false Forms W‐2 to support refund fraud schemes.

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The IRS doesn't initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS does not call taxpayers with threats of lawsuits or arrests.

Signs of Tax‐Related Identity Theft

More than one tax return was filed using your client’s SSN,

Your client has a balance due, refund offset or a collection action taken for a year in which your client did not file a tax return,

IRS records indicate your client received wages from an unknown employer,

A business client may receive an IRS letter about an amended tax return, fictitious employees or about a defunct, closed or dormant business.

What to Do if Your Identity is Stolen The Federal Trade Commission (FTC), lead federal agency on general identity theft issues, has recommended steps identity theft victims should take to protect their credit. See identitytheft.gov for general recommendations for your clients. The FTC recommends these steps for victims of identity theft:

File a complaint with the FTC at identitytheft.gov.

Contact financial institutions, and close any financial or credit accounts opened without permission or tampered with by identity thieves.

Contact one of the three major credit bureaus to place a fraud alert on your credit records:

Equifax www.Equifax.com, 1‐800‐766‐0008 Experian www.Experian.com, 1‐888‐397‐3742 TransUnion TransUnion.com, 1‐800‐680‐7289

If your client’s SSN has been compromised, whether from a data breach, computer hack or stolen wallet, and they have reason to believe they are at risk for tax‐related identity theft, you should take these steps:

If your client received an IRS notice, respond immediately to the telephone number provided.

Complete Form 14039, Identity Theft Affidavit. Fax or mail to the IRS according to the instructions.

To inquire about a specific client’s return information, you must have a power of attorney on file, and you must authenticate your identity with the IRS customer service representative.

A victim of identity theft or a person authorized to obtain the identity theft victim’s tax information may request a redacted copy (one with some information blacked‐out) of a fraudulent return that was filed and accepted by the IRS using the identity theft victim’s name and SSN. Due to federal privacy laws, the victim’s name and SSN must be listed as either the primary or secondary taxpayer on the fraudulent return; otherwise the IRS cannot disclose the return information. For this reason, the IRS cannot disclose return information to any person listed only as a dependent. Visit irs.gov for more information on how to make this request.

Business Identity Theft Business identity theft happens when someone creates, uses or attempts to use the identifying information of a business, without authority, to obtain tax benefits. Business identity thieves file

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fraudulent business returns to receive refundable business credits or to perpetuate individual identity theft. Sometimes the identity theft incident is related to tax administration and sometimes it’s not. The incident may surface in different ways. Signs of Identity Theft Related to Tax Administration Business identity theft is more complex than individual identity theft. Many of the same indicators that signify simple filing or processing errors also hint at business identity theft. While on the surface these occurrences may appear to indicate business identity theft, they may also stem from something as simple as transposed numbers.

Your client receives IRS notices about fictitious employees.

Your client notices activity related to or receives IRS notices regarding a defunct, closed or dormant business after all account balances have been paid.

Your client’s return is accepted as an amended return, but the taxpayer has not filed a return for that year.

If these things occur, the IRS and the taxpayer will need to do some research before determining the incident is a result of identity theft. Identity theft not related to tax administration should be reported to the Federal Trade Commission. Signs of Identity Theft Not Related to Tax Administration

Receive bills for business lines of credit or credit cards they do not have.

Notice that a credit report indicates credit or other open accounts they did not authorize.

See unexplained bank account withdrawals.

Don’t get their bills or other mail.

Find unfamiliar accounts or charges on their credit report.

Get a notice that information was compromised by a data breach at a company where they do business or have an account.

Protective actions to take if business information is compromised Respond immediately to any notices from the IRS. If there is reason to believe someone fraudulently used the business Employer Identification Number, notify the IRS immediately using the contact information on the notice or letter.

File a police report with the local police department.

Carefully review and reconcile account statements as soon as they receive them.

Regularly review business registration information online (for all active and closed businesses).

Monitor credit reports for suspicious activity every 12 months.

Close any accounts that have been tampered with or opened without their permission.

File a complaint with the Federal Trade Commission.

Update virus, malware, and other security software programs on their computers.

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Remain vigilant and be alert for suspicious or unusual activity.

Place a fraud alert on credit reports by contacting any one of the four nationwide credit reporting companies:

Dun & Bradstreet www.smallbusiness.dnb.com 800‐234‐3867 Equifax www.equifax.com 800‐525‐6285 Experian www.experian.com 888‐397‐3742 Trans Union www.transunion.com 800‐916‐8800

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Chapter18PracticebeforetheIRS

Practice before the IRS

Who May Practice

• IRS Annual Filing Season Program (AFSP) – A non‐credentialed preparer that has a record of completion for the IRS Annual Filing Season Program has limited representation rights. Representation is limited to examinations of the taxable period covered by the tax return they prepared and signed.

Preparer Considerations

Un‐enrolled Tax Return Preparer

Add to the end of the paragraph:

The unenrolled return preparer designation includes individuals who passed the IRS registered tax return preparer competency test that was offered between November 2011 and January 2013. Unenrolled return preparers may only represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the Internal Revenue Service. Unenrolled return preparers cannot represent taxpayers, regardless of the circumstances requiring representation, before appeals officers, revenue officers, attorneys from the Office of Chief Counsel, or similar officers or employees of the Internal Revenue Service or the Department of Treasury. Unenrolled return preparers cannot execute closing agreements, extend the statutory period for tax assessments or collection of tax, execute waivers, execute claims for refund, or sign any document on behalf of a taxpayer.

Those Who May Not Practice

A valid PTIN does not provide any representation rights. The IRS will not grant limited representation rights to an unenrolled preparer without an AFSP Record of Completion for the tax year of any tax return he prepares and signs after December 31, 2015. Attorneys, CPAs, and enrolled agents will continue to have unlimited representation rights and can represent clients before any office of the IRS.

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Chapter19RepresentationbeforetheIRS

Audits/Examinations

Examinations in Person The examiner will try to schedule a time and place convenient for the taxpayer (or representative) that is reasonable under the circumstances considering both the convenience of the taxpayer and the requirements of sound and efficient tax administration. During an opening conference, the revenue agent explains the audit plan and the reason the taxpayer has been selected for examination.

The IRS generally conducts a field examination where the books and records are located. The IRS will consider a written request to transfer an audit to another location, including an IRS office, on a case‐by‐case basis. Treasury Regulation 301.7605‐1(e) indicates the IRS will take into account the location of the taxpayer's current residence or principal place of business, and other factors that indicate that conducting the examination at a particular location could pose undue inconvenience to the taxpayer. The IRS also considers the most efficient location for the examination, and the IRS resources available at the location to which the taxpayer has requested a transfer.

Collection Process

Installments

Installment agreements generally provide up to 72 months to pay the tax. In certain circumstances, the payment period could be longer or the amount agreed to could be less than the amount of tax owed. Before applying for any payment agreement, a taxpayer must file all required tax returns. An installment plan is not valid unless accepted by the IRS.

Add the following Key Point to this section: An installment agreement generally requires equal monthly payments, and the taxpayer must fully pay all of the tax owed within the time left in the 10‐year period during which the IRS can collect the tax. If a taxpayer cannot pay in full by the end of the collection period, but can pay some of the tax owed, he may qualify for a partial payment installment agreement. To request an installment agreement a taxpayer can attach Form 9465 Installment Agreement Request to the front of his tax return, or–in cases where the return is already filed–mail it directly to the IRS.

If the balance due is not more than $50,000, the taxpayer can apply online for a payment agreement instead of filing Form 9465. To do that, go to IRS.gov and enter Online Payment Agreement in the search box.

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