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Monthly Newsletter for ncpeFellowship Members Vol. 7 No. 9 September 2016

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Remarks from Beanna

What ever happened to the “Off Season”? I think that is what we used to call it. A time when we recovered from the stress and strain of the filing season. Perhaps it was before all our clients found out about the automatic extension of time to file until October 15th.

Returns to prepare, Individual and Corporate deadlines loom. If there truly is no rest for the wicked, I must be the meanest woman in town.

The travel over the last two weeks has taken me to Wilmington, DE, Allentown, PA, Syracuse, NY, Cincinnati, OH and Tarrytown, NY. The attendees at the ncpe Corporate, Partnership and LLC seminars were disappointed that Mr. Jerry could not make it but were very understanding and courteous to me. I thank you and had a great time.

In fact, all of ncpe, especially Mr. Jerry and his family, thank you for the outpouring of support and prayers during the recent flooding in the Baton Rouge, LA area. Although the damage to the ncpe office and especially Mr. Jerry and Candy’s home was severe, all of ncpe is up and running and no seminars will be cancelled. Thank you for your patience and understanding at this most difficult of times.

And, a special “thank you” to Mr. Tom who kept the ncpeFellowship office running in my absence.

So back to that “off season”, Labor Day – September 5, 2016 – Monday is upon us.

Labor Day is called the “unofficial end of summer” because it marks the end of the cultural summer season (summer officially ends at the September Equinox anytime from September 21 to 24). Many take their two-weeks vacation during the two weeks ending Labor Day Weekend. Many Fall activities, such as school and sports, begin about this time.

In the United States, many school districts resume classes around the Labor Day holiday weekend (see First day of school). Most begin the week before, making Labor Day National Center for Professional Education Fellowship

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weekend the first three-day weekend of the school calendar, while others return the Tuesday following Labor Day, allowing families one final getaway before the school year begins. Many districts across the Midwest are opting to begin school after Labor Day.

In U.S. sports, Labor Day Weekend marks the beginning of many fall sports. National Collegiate Athletic Association (NCAA) teams usually play their first games that weekend and the National Football League (NFL) traditionally play their kickoff game the Thursday following Labor Day. The Southern 500 NASCAR auto race has been held on Labor Day Weekend in Darlington, South Carolina since 1950. At Indianapolis Raceway Park, the National Hot Rod Association hold their finals of the NHRA U.S. Nationals drag race that weekend. Labor Day is the middle point between weeks one and two of the U.S. Open Tennis Championships held in Flushing Meadows, New York.In fashion, Labor Day is (or was) considered the last day when it is acceptable to wear white or seersucker.

The unofficial beginning of summer is Memorial Day at the end of May.

Whether you are taking the two-week vacation or just the day – the hardest laboring individuals on the planet – Tax Professionals – take your day – you deserve it. Safe travels.

Beanna

Beanna@ncpefellowship.com or 877-403-1470

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Remarks from Beanna (1)

Tax News (5)Treasury Issues Proposed Regs to Limit Valuation Discounts for Fractional Interests (5)U.S. to Expand Tracking of Home Purchases by Shell Companies (5)Roth IRA Required Minimum Distribution (RMD) (6)2016 Tax Software Survey (8)How Annuities Can Increase Your Tax Bill (10)Rollovers of Retirement Plan and IRA Distributions (10)Automatic Revocation and Reinstatement Of Tax-Exempt Status (12)Tax Rules for Renting to A Relative (15)Net Operating Loss Rules Challenge Companies (16)How Seniors Can Cope with the Higher Post-2016 Floor Beneath Medical Expenses (16)‘Financial Adviser’ Might Not Mean What You Think (18)

Practice Management (19)Make Your Employees Your Advocates (19)

Question of the Month (19)

News from Capital Hill (20)Key House Republican to Unveil Sales Tax Plan for Purchases Across State Lines (20)

Business Promotion (21)Grow Your Practice (21)

Military Taxes (22)Military Pay (22)

Estate and Trust News (22)Gift-Tax and the IRC Sec. 529 Qualified Tuition Program (22)

People in the Tax News (23)Police Investigating After Man Killed at FW Tax Office (23)

Chiropractor Interfered with IRS Collection Efforts and Retired Firefighter Willfully Failed to File Return (24)Online Public School Founder Admits to $8M in Tax Fraud (24)Pastor Sentenced for Tax Refund Fraud (25)Prince’s Estate Wants to Sell His Houses, Great News for Homeless Millionaires Who Love Purple Furniture (25)Facebook Fails to Show Up for Seventh Tax Summons from IRS (26)

IRS News (26)Worrying About the IRS’s ‘Future State’ (26)Final Reg Reduces Preparer Tax Identification Number User Fee (27)Draft Forms Reflect Election for Small Businesses to Offset FICA Liability with Research Credit (27)IRS Works to Help Taxpayers Affected by ITIN Changes (28)IRS Tells Tax Preparers to Keep Tabs on Their PTINs (29)Big Win for Tax Whistleblowers as Pair Gets $17.8 Million (29)How to Request a Transcript or Copy of a Prior Year’s Tax Return (30)IRS Tax Levies Caused Hardship for Social Security Recipients (30)New Procedure Helps People Making IRA and Retirement Plan Rollovers (31)

Table Of Contents (page)

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Documents Indicate IRS Officials Knew of Tea Party Targeting Since 2011 (32)The Dissembling IRS (32)IRS Acquiesces to Per-taxpayer Interpretation of Mortgage Interest Deduction Limits (33)Tax Professionals: Monitor Your PTIN for Suspicious Activity (34)New Guidance for Taxpayers in the Sharing Economy on How to Meet Their Tax Responsibilities (34)Proposed Regs Increase Fees for Installment Payment Agreement & Offer Reduced Fee Online Options (35)Proposed Education Credit and Tuition Deduction Compliance Regs Implement Recent Legislation (35)CA Reverses: Conservative Nonprofit Groups May Proceed with IRS Discrimination Suit (38)IRS Responds to National Tax Advocate’s Criticism of “Future State” Plans (39)New Self-certification Procedure for Taxpayers Who Miss 60-day Rollover Deadline (41)Security Summit Partners Update Identity Theft Initiatives for 2017 (42)

Tax Pros in Trouble (43)Federal Court Bars Two Tax Preparers (43)Jupiter Attorney Pleads Guilty to Filing False Tax Returns with the IRS (43)Granite Bay Attorney Stephen Dougan Charged with Tax Fraud; Faces Up to 3 Years, $100K Penalty. (44)New York Tax Return Preparer Convicted (44)Tampa Woman Sentenced for Tax Fraud (45)Tax Return Preparer Sentenced for Filing False Tax Returns with the IRS (45)Mount Vernon Tax Preparer, 59, Convicted On 39-Count Indictment (45)Court Orders Return Preparer to Return to Her Customers the Portion of Their Refunds Diverted to Her Own Account (46)Six Tax Return Preparers Sentenced for Filing False Tax Returns with the IRS Using Stolen Identities (46)

Ragin Cagin (47)Topic 515 - Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas) (47)

Taxpayer Advocacy (48)Things We Thought We Knew – Repeat of August 1, 2016 Article (48)Las Vegas - September 7th - 9th, 2016 (49)

Foreign Taxes (49)DC Circuit: Tax Court Did Not Consider Laws of Both (49)Does Fraudulent Conduct by Someone Else Extend the Statute of Limitations Permitting the IRS to Pursue the Taxpayer? (50)

State News of Note (51)Who Needs and Does Not Need Licenses to Work in Georgia Spurs Questions (51)

Wayne’s World (53)Turning Startup Profits into 100% Tax-free (53)

Letters to the Editor (56)

Tax Jokes and Quotes (56)

Sponsors of ncpe Fellowship and our Website (56)Small Business Recordkeeping, Charlene Zack (56)CollegeInvest, Vince Sullivan (56)

Table Of Contents (page)

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Tax News

Treasury Issues Proposed Regs to Limit Valuation Discounts for Fractional Interests

The Treasury Department has moved a step closer to tightening the way family limited partnerships are valued for tax purposes. And the prospect that the tax code could be changed by the end of this year has tax planners pushing their clients to consider stepping up estate and business planning, or risk paying more taxes.

Earlier this month, the Treasury Department issued “proposed final regulations” to eliminate a provision in the tax code that effectively allows wealthy people to greatly discount the value of shares in a family limited partnership given to family members. These partnerships are able to own assets like family business, real estate and securities.

The discount, which has been allowed since the 1990s, is granted for what is considered a lack of marketability for minority shares in these partnerships. If a family member, for example, wanted to sell his or her share in a partnership that was entirely owned by other family members, the pool of buyers might well be limited to his or her relatives. They might not have the money — or desire — to buy him out.

This provision, contained in section 2704 of the Internal Revenue Code, has been abused by aggressive tax planners and lawyers who used the discount, sometimes as high as 40 percent, and applied it to partnerships that contained marketable securities or other assets that could otherwise be easily valued and sold.

Tax experts do not rule out that these new regulations, although labeled final, could be changed in the comment period. Their enactment, which is set for 30 days after they become final, could also be delayed. At the earliest they would take effect on Dec. 31.

Still, predicting when the regulations will take effect is beyond people’s control and could be risky for those who would benefit from a family partnership.

“There is no mulligan,” said Mark Parthemer, senior fiduciary counsel at Bessemer Trust. “If a family is considering doing some tax planning and they’re putting it off to next year, they can’t go back in time and take advantage of the discounts.”

Some planners are drawing parallels to the fourth quarter of 2012, when wealthy people scrambled to make gifts under what was then a $5.12 million exemption for individuals. The rush was generated by the fear that the Obama administration would abolish or greatly reduce the exemption in 2013. Instead, the government kept it in place, with an annual increase for inflation.

For the very wealthy, there is good reason to set up a family limited partnership by the end of the year. The discounting, for example, can turn a $10 million gift into $6.5 million for tax purposes.

Ronald Aucutt, an estate-tax lawyer with McGuireWoods LLP in Washington, says that in some cases families simply wait until three years after the original owner’s estate-tax return is filed and the statute of limitations for an audit expires. Then they dissolve the holding company and divide up the assets, having bypassed tax on a large chunk of market value. “This drives the IRS crazy,” he says.

The proposed changes in the rules would allow the IRS to ignore many discounts in entities where they currently apply and collect far more estate or gift tax. In addition, the IRS could disallow even more discounts if a taxpayer dies within three years after making certain gifts. Mr. Aucutt thinks the Treasury Department and IRS have the authority to make such changes.

Critics of the changes call them far too broad. “This is an example of Treasury overstepping its bounds,” says John Porter, an attorney with Baker Botts in Houston, who has won landmark court cases involving discounts.

Mr. Porter points out that the proposed changes apply to nearly all family-controlled entities, even those holding operating businesses. “If these rules go through in current form, business owners are going to be taxed on value they may not have, or have access to,” he says. He expects a court challenge unless there are substantial revisions to the rules.

Experts say it is unclear whether revisions are likely, or what they might be. The Treasury and the IRS are accepting comments on the proposals, and a hearing is scheduled for Dec. 1. Some think the administration will push to finish them before a new president takes office.

There is a window of opportunity for people who have or want to have entities with valuation discounts, because the most important changes won’t take effect until 30 days after the rules are made final.

Editor’s Note: ncpeFellowship Member Larry Pon first brought this proposed regulation to our attention (now posted on the Fellowship Web Site for your review). Larry very astutely brought it to our attention that tax professionals should make their taxpayers aware of the short window of time they may make their clients aware of this – don’t fail to make them aware – we have potential for liability here. Mr. Jerry has taughtof the benefits of the Family Limited Partnership using the“valuation discount” referenced in this proposed regulation.

U.S. to Expand Tracking of Home Purchases by Shell Companies

Multimillion-dollar mansions are spreading in Los Angeles and their international owners are hidden by shell companies.

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More than a quarter of the all-cash luxury home purchases made using shell companies in Manhattan and Miami were flagged as suspicious in a new effort to unearth money laundering in real estate, the Treasury Department said. As a result, officials said they would expand the program to other areas across the country.

The expansion of the effort to identify and track the people behind shell companies, begun in March, means that there will now be increased scrutiny of luxury real estate purchases made in cash in all five boroughs of New York City, counties north of Miami, Los Angeles County, San Diego County, the three counties around San Francisco and the county that includes San Antonio.

The examination, known as a geographic targeting order, is part of a broad effort by the federal government to crack down on money laundering and secretive shell companies.

“The information we have obtained from our initial G.T.O.s suggests that we are on the right track,” Jamal El-Hindi, the acting director of the Financial Crimes Enforcement Network within the Treasury, said in a department news release. “By expanding the G.T.O.s to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”

Among the suspicious transactions that the Treasury Department found tied to sales in New York or Miami this year were a $16 million cash withdrawal, a person involved in counterfeit checks and someone involved in moving $7 million around in shell companies associated with South America, Treasury officials said.

The areas being added to the order are places where buyers frequently purchase luxury real estate using shell companies, the officials said. The dollar values involved purchases of more than $500,000 or more in Bexar County, which includes San Antonio; $1 million in Florida; $2 million in California; $3 million in Manhattan; and $1.5 million in the other boroughs of New York City. Title insurance companies, which are involved in virtually all real estate transactions, are charged with carrying out the order.

Treasury officials have said that their real estate tracking

program was inspired in part by a series last year in The New York Times that examined the rising use of shell companies. The investigation found that real estate professionals, especially in the luxury market, often do not know much about buyers, and it uncovered numerous buyers of high-end real estate who had been subject to government investigations around the world.

Roth IRA Required Minimum Distribution (RMD)

At some point, all IRAs must have their balances distributed. The rules which govern those distributions are known as Required Minimum Distributions. The Required Minimum Distributions rules are incredibly complex. This article deals with how these rules operate and how they apply to Traditional IRAs and Roth IRAs. Why are the Minimum Distributions prefaced by the word Required? Simply put, there is a 50% penalty for the amount of Required Minimum Distributions that are not distributed as required.

Are Roth IRAs Subject to the Required Minimum Distributions Rules?

You may sometimes hear or see the statement that Roth IRAs are not subject to Required Minimum Distributions. That is not really accurate. Roth IRAs are not subject to Required Minimum Distributions during the owner’s lifetime, but are subject to Required Minimum Distributions after the death of the owner However, Traditional IRAs are generally subject to Required Minimum Distributions beginning at age 70½. One of the great advantages of Roth IRAs is that they are not subject to these lifetime Required Minimum Distributions rules. This advantage may be the single most valuable attribute of a Roth IRA.

If Roth IRAs are not subject to Required Minimum Distributions rules during the lifetime of the owner, do you need to be concerned about them? The answer is that if you have a Traditional IRA or if you are considering converting a Traditional IRA to a Roth IRA, you will still need to be concerned about the Required Minimum Distributions rules. You cannot do a valid comparison between a Traditional IRA and a Roth IRA without taking into account the Required Minimum Distributions rules. After all, the major advantage of a Traditional IRA is the tax-deferred aspect of such an account. If you are forced to distribute assets out of such an account, you lose that tax-deferral on the amount distributed. So, to the extent that the Required Minimum Distributions rules require you to take money out of the IRA that you did not want or need to take out, you are being hurt financially by those rules.

To What Types of Pensions Do the Lifetime Required Minimum Distributions Rules Apply?

The lifetime Required Minimum Distributions rules generally apply to the following types of pension plans:

• Corporate and self-employed pension, profit sharingand stock bonus plans qualified under IRC Sec. 401(a)(includes Keogh or H.R. 10 plans, 401(k) plans, and

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employee stock ownership plans or ESOPs)• Individual Retirement Accounts (IRAs) under IRC Sec.408(a)• Simplified Employee Plans (SEPs) under IRC Sec.408(k)• Tax-sheltered annuities (except for account balancesexisting on 12/31/86 if kept separate for accountingpurposes) under IRC Sec. 403(b)

What is the Significance of the Age 70½ Year?

Generally (which means there are some exceptions), you must make a Required Minimum Distribution for the year in which you turn age 70½. The Required Minimum Distribution is the result of a simple calculation: you divide the IRA balance from December 31st of the preceding year by a Life Expectancy. The main complexity of the Required Minimum Distributions rules derive from the determination of that life expectancy. The IRA distribution rules also depend on whether the owner of the Traditional IRA has reached what is known as the Required Beginning Date. The Required Beginning Date is April 1st of the calendar year following the year in which the owner reaches age 70½. If the owner dies before the Required Beginning Date, the distribution rules are different than if he dies on or after the Required Beginning Date. The discussion here will focus primarily on what happens if the owner lives at least until his Required Beginning Date.

What are the Required Minimum Distributions for Roth IRAs?Roth IRAs are not subject to the lifetime Required Minimum Distribution rules since no distributions are required during the lifetime of the owner. However, Roth IRAs are subject to Required Minimum Distributions rules after the death of the owner of the Roth IRA with a 50% penalty if such distributions are not made. The IRS released its interpretation of the Roth IRA Required Minimum Distributions rules in Article V of IRS Form 5305-R (Roth Individual Retirement Trust Account). That form is a model trust agreement that most financial institutions are likely to use (or to incorporate in their own agreements).

The model agreement from the IRS provides for an automatic spousal rollover if the spouse is the sole beneficiary of the IRA. That means the surviving spouse automatically would become the new owner of the Roth IRA upon the death of the original owner. Note: The surviving spouse would need to name their beneficiary as soon as possible after the death of the original owner in order for the rollover to be beneficial. If a Roth IRA Agreement does not provide for a spousal rollover, a surviving spouse would still have the option to elect to rollover the Roth IRA to become the new owner. Why would you want to accomplish a spousal rollover after the death of the original owner? If the surviving spouse becomes the new owner, there will no requirement for distributions to be made during the life of the surviving spouse! That will result in additional tax-free growth of the account during the surviving spouse’s lifetime. A surviving spouse could take distributions as a beneficiary, but there would rarely be any benefit to doing so.

Let’s assume the owner (whether the original owner or the surviving spouse who has accomplished a spousal rollover)

of the Roth IRA has died and that a beneficiary who is not the spouse is now subject to Required Minimum Distributions rules. The beneficiary will have to take out the entire balance by December 31st of the year containing the fifth anniversary of the owner’s death or the beneficiary will have to start taking distributions over the beneficiary’s life expectancy starting no later the December 31st of the year following the year of the owner’s death. If distributions to the beneficiary do not start by December 31st following the year of the owner’s death, the rule requiring a complete distribution of the plan balance within five years will become effective. So it is very important to properly start distributions in the year after the owner’s death if one wants to be able to take best advantage of the Roth IRA. Generally, a written election to this effect should be filed with the plan administrator as soon as possible.

A beneficiary would be well-advised to try take advantage of the ability to take withdrawals from the inherited Roth IRA over their life expectancy. The funds in the Roth IRA will continue to grow and compound tax-free while still part of the Roth IRA and the distributions from the Roth IRA will be tax-free as well. Imagine having an account that grows tax-free during your lifetime and pays you tax-free amounts on a yearly basis! That is what a Roth IRA can be to your heirs, such as your children and grandchildren. This after-death tax-free growth is sometimes referred to as the stretchout IRA concept. It is generally considered to be one of the two most valuable aspects of a Roth (the other being the post-70½ tax-free compounding). While Traditional IRAs also have a stretchout aspect, their tax-deferred stretchout is considerably less valuable than the tax-free stretchout offered by the Roth IRA.

How are Required Minimum Distributions calculated for the beneficiary of a Roth IRA? Let’s assume a Roth IRA owner who was born on January 1st dies at the age of 90 and leaves the Roth IRA to a child who becomes 60 years old during that year. The child would have to take their first distribution in the year after the owner’s death or in a year when they would be 61. The single life expectancy from the IRS tables for a 61 year old is 19.2 years. So in that year they would have to withdraw an amount equal to the preceding year’s December 31st balance divided by 19.2. The next year, they would reduce the life expectancy value by 1 to 18.2 and then by 1 to 17.2 in the following year and so on. This is the same Term Certain Method referred to earlier.

The Term Certain Method is the only method available to a beneficiary who is not the spouse. One attribute of this method is that it does not depend on the beneficiary’s actual life expectancy. If one lives long enough, the entire balance will have been distributed. If one dies before the end of the payment period (effectively a 20 year payout period in the example), the payment stream could continue if the funds are not fully withdrawn earlier. Note: Some IRA Agreements require a full distribution after the death of the beneficiary.

Summary

The Roth IRA Required Minimum Distributions rules are considerably easier than the incredibly convoluted distribution

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practice.

Get a group of CPA tax preparers together, especially while their memories of tax season are fresh, and their talk soon will turn to their tax preparation software and how it might have made the ordeal easier. So The Tax Adviser and the Journal of Accountancy are thankful to the thousands of AICPA member tax preparers each year who similarly but on a large scale “talk shop” through this survey. This year, to be exact, 3,851 of them returned a response indicating they prepared 2015 tax returns for a fee.

Products Covered and Profile of Respondents

Eight of the 15 software products the survey named had significant numbers of users, in proportions that have shown only temporary fluctuations in recent years: UltraTax CS, a Thomson Reuters product (23% of respondents); CCH’s ProSystem fx (21%); Lacerte, by Intuit (17%); ProSeries, also by Intuit (12%); Drake Software’s Drake Tax Software (11%); CCH Small Firm Services offering ATX (5%); CCH Axcess Tax (2.5%); and GoSystem Tax RS, another Thomson Reuters product (2%). Thus, four companies continue to effectively dominate the CPA tax software market, as reflected by the survey. Other products of the 15 were each used by less than 2% of respondents and are not included in the exhibits accompanying this article. Use of Lacerte was down slightly from 20% in 2015. Shares of the rest were within a couple of percentage points from the 2015 survey, with UltraTax CS and CCH Axcess Tax slightly higher than last year and ATX, Drake, and ProSeries slightly lower.

Choice of tax software tends to correlate with the size of the respondent’s firm, and the respondents skewed slightly toward midsize firms from sole practitioners this year, which might account in part for an increase in share of products that are more likely to be used by midsize and larger firms. This year, sole practitioners were 30% of respondents, compared with 36% last year. Thirty-six percent were in firms of between two and five preparers (same as last year), and 22% in firms of six to 20 (up from 19% in 2015). As previously, 7% worked in firms of between 21 and 100 preparers, and less than 4% in still larger firms. Seventy-six percent of CPAs surveyed prepared more returns for individuals than for businesses, although nearly all respondents prepared some business returns. For 89% of them, business returns represented up to half of their volume. Users of ATX, Drake, and ProSeries were most likely to have a lower ratio of business to individual returns.

General Performance Ratings

Levels of general satisfaction with tax return preparation software were virtually unchanged from last year. UltraTax CS and Drake continued for at least the third consecutive year to receive the highest overall rating of 4.5 out of 5 (see Exhibit 1 below). As previously, Drake users gave it the highest ratings of any product for ease of installation and updates, and updates during tax season (both 4.8). Drake, Lacerte, ATX, and UltraTax CS all received favorable ratings for ease of use. Also, as previously, the overall rating for GoSystem Tax RS

rules for Traditional IRAs. The possibility of making mistakes is lessened considerably thus reducing the chances of expensive mistakes. And longer periods of tax-free compounding will generally occur with the Roth IRA. The biggest problem with the Roth IRA Required Minimum Distribution rules is that the beneficiaries may not be aware of their requirement to make such distributions. Anyone who starts a Roth IRA would be well advised to inform the beneficiaries that they must make distributions after the death of the owner or be prepared to pay a 50% penalty on amounts that should have been distributed. Of course, beneficiaries of Traditional IRAs have the same concerns with the addition of much more complexity. As far as the distribution rules are concerned, the Roth IRA is an easy winner when compared to a Traditional IRA.

Editor’s Note: A huge “thank you” out to Fellowship Member Melissa Simmons for contributing to our knowledge about ROTH IRAs.

2016 Tax Software Survey

• As in previous years, Drake and UltraTax CS tiedfor the highest overall rating of performance, with UltraTax CS the most widely used product. Drake users also gave its product support good marks. Those two and six other products continued to be the ones most used by CPAs, as reflected in the survey responses.

• Generally, the software products surveyed handleddeterminations and calculations related to health careprovisions enacted by the Patient Protection and AffordableCare Act reasonably well, according to respondents.

• Among aspects of their software respondents mostdisliked, price continued to evoke a strong negativeresponse, although slightly less pronounced than in previousyears. Price also was a leading reason respondents gavefor switching from another product after 2015 to the onethey used this year. However, most CPAs said they plannedto continue using the same software next year.

• Users of Drake and ATX were the most likely torecommend their software to someone starting a new

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was the lowest (3.6) among the eight major products, with CCH Axcess Tax (3.7) next lowest. It may be worth noting in that regard, and with correlation again to firm size, that GoSystem Tax RS also had by far the highest percentage of respondents who had no input into the decision to use it (53%), with CCH Axcess Tax the next highest at 29%. ATX, Drake, and ProSeries were most likely to have been chosen by the respondent, at 95%, 91%, and 89%, respectively. For all eight major products combined, 64% said they solely chose the software, with another 24% having input into the decision.

Electronic filing generally was considered easy for all products, although GoSystem Tax RS registered a below-average 3.7. All eight products got lower ratings for importing data and integration with accounting and other software, with average ratings of 3.6 and 3.5, respectively. UltraTax CS appeared to have an edge in this regard, scoring 3.9 on both questions.

Asked if their software provided all needed forms, 16% of all respondents answering the question said it did not. The highest percentage of negatives for this question were for ProSeries and GoSystem Tax RS (both 34%), and the lowest were for ATX and UltraTax CS (both 7%).

Affordable Care Act Calculations

For a second year, the survey asked how well software navigated a tortuous and still relatively new set of considerations affecting a broad swath of taxpayers—those related to the requirement enacted by the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, of employers to provide, and individuals to maintain, qualifying health care coverage. With another year’s experience by users and software designers, one might expect reported improvements, but the overall rating for PPACA calculations was unchanged at 4.2 out of 5, and each product’s rating was not much different than before.

Likes and Dislikes

For a second year, the survey allowed up to three responses to questions on what features users liked best and liked least, rather than forcing them to choose a single feature for each question. As with the overall ratings, these assessments were largely consistent with previous ones. For features liked best (see Exhibit 2 below), ease of use was chosen by users of ProSeries and Lacerte (28% and 27%, respectively), well above the average of less than 20% of all respondents. Although as mentioned above, when asked if their software contained all needed forms, GoSystem Tax RS users were more likely to say it did not, paradoxically, more of them than for other major products chose “number of forms/comprehensiveness” as a feature they liked (32%). ProSystem fx also registered its second-highest percentage of likes (26%) for this attribute (the highest was accuracy, at 27.5%).

Drake shone in its users’ appreciation of its support (24.5%), well above the average for all major products of 14%. Despite their overall enthusiasm for the product, however, Drake users were unhappy about its integration, or lack of it, with other software (18%), and tax research not being included in

the package (22%) (see Exhibit 3 below). Users of GoSystem Tax RS apparently did not find it particularly easy to use (20% dislike for “ease of use”).

The Price Divide

Likes and dislikes tend to break most pronouncedly on price. Most CPAs, it is no secret, feel they pay too much for their tax software—for some products more than others. Those who registered price as a “like” were more likely to be users of the more budget-conscious products, i.e., Drake, 32% of whom liked its price, and ATX (26%) (see Exhibit 2).

Among the 30% of all respondents who looked askance on their software’s price tag, the 40% of Lacerte users who least liked its price figured most prominently (see Exhibit 3). Not far behind in their price antipathy were users of UltraTax CS (39%) and ProSystem fx (37%). However, both the latter products registered a slightly smaller price discomfort than in 2015, when they registered 41% and 42%, respectively.

Product Switching

Only 207 respondents said they had switched from one of the eight major products after last year, which makes it difficult to draw definitive conclusions about why they switched (see Exhibit 4). Also, note the relatively high number of “other” responses, many of which did not speak clearly to a product’s merit or desirability (e.g., one write-in entry read, simply, “corporate decision”). Unsurprisingly, price led the reasons for having switched, given notably by former users of ProSeries (63%) and UltraTax CS (50%). Most of the former ProSeries users switched to UltraTax CS or Drake, and a significant number of former Lacerte users switched to UltraTax CS (17 of 43). A significant number of switchers from ProSystem fx were now using CCH Axcess Tax or UltraTax CS (28 and 26, respectively, of 79 total).

The survey also asked whether respondents expected to stick with the same software next year; only 2.7% of users of the major products said they would not, a lower percentage than in years past. Of those future likely switchers, the highest percentage was 7% of GoSystem Tax RS users, followed by 5% of those now with CCH Axcess Tax.

Best for a New Practice

For several years, the survey has asked which product is best for a new practice. As in past years, users of Drake were most likely to recommend their software for that purpose at 93%, with ATX close behind at 91% (see Exhibit 1). Eighty-one percent of ProSeries users recommended it, slightly higher than last year, while 74% for UltraTax CS was slightly lower. Lacerte also rose in this category to 74% of users from 69% last year.

Training, Technology, and Support

Obtaining software technical support appears important to having a successful tax season; as in past years, most

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respondents report having needed some assistance (81%) (see Exhibit 5 below). The results by product also appear to have changed little this year, with the most appeals for help made this year by users of GoSystem Tax RS and CCH Axcess Tax (93% and 90%, respectively). Drake users also had a relatively high need for support (89%), but they reported both the highest average level of ease in getting it and highest quality of the support obtained (4.8 and 4.5, respectively). This appears consistent with many of them naming support as a best-liked feature of Drake, as mentioned previously. Similarly, Drake users who received training from the software’s provider gave that training the highest marks among users of all eight major products who reported receiving training (4.5 out of 5). About 42% of Drake users and one-third of users of all major products reported they received training. Training was rated below the average of 4 points for CCH Axcess Tax and GoSystem Tax RS (both 3.4) and ATX (3.8).

The telephone remains, if anything, an even more preferred method of obtaining support over email, live chat, and other media than in past years (used by 94% of all major product users needing support). Thirty-eight percent of Pro¬Series users took advantage of live chat or instant messaging for support, the highest use of that option, with CCH Axcess Tax and Lacerte close at 35% and 33%, respectively, but no others above the average of 23%.

Cloud-computing options figured in a few instances of “other” write-in likes, and the lack of them among dislikes and reasons for switching software. However, of the eight major products’ users, most (87%) reported that the program resided on their own hard drive or network, with 13% saying it was on the vendor’s server. These percentages have shifted only slightly since 2012, when they were 90% and 10%, respectively. Cloud operation was highest for GoSystem Tax RS (90%) and CCH Axcess Tax (which advertises itself as cloud-based, although only 87% of users so identified it), with UltraTax CS (24%) being the only other product above single-digit percentages.

Results and Methodology

The survey was conducted from May 12 through June 3, 2016, and received 3,851 responses from CPAs who indicated that they prepared 2015 tax returns for a fee. The exhibits accompanying this article show answers for the eight most-used products of the 15 asked about in the survey (and respondents could write in others).

How Annuities Can Increase Your Tax Bill

It is not hard to find criticisms of annuity contracts, usually for high fees. Sometimes overlooked is the tax treatment of these contracts which if not understood can cost more than the fees that get all the attention.

“Tax efficient” usually means something that does not generate a lot of income taxable at ordinary income rates. Here is one example of how a tax efficient investment can be much more tax friendly than an annuity.

Contrast that to a $15,000 purchase of a stock or a mutual fund that invests in stocks that appreciates to $29,000. If he wanted $10,000, he’d sell shares and incur a capital gain. The gain is proportional to the earnings - $14,000/$29,000 times $10,000 equals $4,827.59 in capital gains.

If he owned it for more than a year, that $4,827.59 is taxed as long term capital gains. No matter what his tax bracket, the rate on long term capital gains is lower than the rate for ordinary income. For taxpayers in the 15% bracket or lower the long term capital gains rate is zero. So even for investors in low tax brackets, paying attention to tax efficiency can be helpful.

Rollovers of Retirement Plan and IRA Distributions

Most pre-retirement payments you receive from a retirement plan or IRA can be “rolled over” by depositing the payment in another retirement plan or IRA within 60 days. You can also have your financial institution or plan directly transfer the payment to another plan or IRA.

The Rollover Chart summarizes allowable rollover transactions.

Why roll over?

When you roll over a retirement plan distribution, you generally don’t pay tax on it until you withdraw it from the new plan. By rolling over, you’re saving for your future and your money continues to grow tax-deferred.

If you don’t roll over your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) and you may also be subject to additional tax unless you’re eligible for one of the exceptions to the 10% additional tax on early distributions.

How do I complete a rollover?

1. Direct rollover – If you’re getting a distribution froma retirement plan, you can ask your plan administrator tomake the payment directly to another retirement plan orto an IRA. Contact your plan administrator for instructions.The administrator may issue your distribution in the form ofa check made payable to your new account. No taxes willbe withheld from your transfer amount.

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2. Trustee-to-trustee transfer – If you’re getting adistribution from an IRA, you can ask the financial institutionholding your IRA to make the payment directly from yourIRA to another IRA or to a retirement plan. No taxes will bewithheld from your transfer amount.

3. 60-day rollover – If a distribution from an IRA or aretirement plan is paid directly to you, you can deposit all ora portion of it in an IRA or a retirement plan within 60 days.Taxes will be withheld from a distribution from a retirementplan (see below), so you’ll have to use other funds to rollover the full amount of the distribution.

When should I roll over?

You have 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. The IRS may waive the 60-day rollover requirement in certain situations if you missed the deadline because of circumstances beyond your control.

IRA one-rollover-per-year rule

You generally cannot make more than one rollover from the same IRA within a 1-year period. You also cannot make a rollover during this 1-year period from the IRA to which the distribution was rolled over.

Beginning after January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own.The one-per year limit does not apply to:

• rollovers from traditional IRAs to Roth IRAs(conversions)• trustee-to-trustee transfers to another IRA• IRA-to-plan rollovers• plan-to-IRA rollovers• plan-to-plan rolloversOnce this rule takes effect, the tax consequences are:• you must include in gross income any previouslyuntaxed amounts distributed from an IRA if you made anIRA-to-IRA rollover (other than a rollover from a traditionalIRA to a Roth IRA) in the preceding 12 months, and• you may be subject to the 10% early withdrawal tax onthe amount you include in gross income.

See IRA One-Rollover-Per-Year Rule for more on this limit.Which types of distributions can I roll over?

IRAs: You can roll over all or part of any distribution from your IRA except:

1. A required minimum distribution or

2. A distribution of excess contributions and relatedearnings.

Retirement plans: You can roll over all or part of any distribution of your retirement plan account except:

1. Required minimum distributions,2. Loans treated as a distribution,3. Hardship distributions,4. Distributions of excess contributions and relatedearnings,5. A distribution that is one of a series of substantiallyequal payments,6. Withdrawals electing out of automatic contributionarrangements,7. Distributions to pay for accident, health or life insurance,8. Dividends on employer securities, or9. S corporation allocations treated as deemeddistributions.

Distributions that can be rolled over are called “eligible rollover distributions.” Of course, to get a distribution from a retirement plan, you have to meet the plan’s conditions for a distribution, such as termination of employment.

Will taxes be withheld from my distribution?

• IRAs: An IRA distribution paid to you is subject to 10%withholding unless you elect out of withholding or choose tohave a different amount withheld. You can avoid withholdingtaxes if you choose to do a trustee-to-trustee transfer toanother IRA.

• Retirement plans: A retirement plan distribution paid toyou is subject to mandatory withholding of 20%, even ifyou intend to roll it over later. Withholding does not applyif you roll over the amount directly to another retirementplan or to an IRA. A distribution sent to you in the form of acheck payable to the receiving plan or IRA is not subject towithholding.How much can I roll over if taxes were withheld from mydistribution?

If you have not elected a direct rollover, in the case of a distribution from a retirement plan, or you have not elected out of withholding in the case of a distribution from an IRA, your plan administrator or IRA trustee will withhold taxes from your distribution. If you later roll the distribution over within 60 days, you must use other funds to make up for the amount withheld.

Example: Jordan, age 42, received a $10,000 eligible rollover distribution from her 401(k) plan. Her employer withheld $2,000 from her distribution.

1. If Jordan later decides to roll over the $8,000, but notthe $2,000 withheld, she will report $2,000 as taxableincome, $8,000 as a nontaxable rollover, and $2,000 astaxes paid. Jordan must also pay the 10% additional tax onearly distributions on the $2,000 unless she qualifies for anexception.

2. If Jordan decides to roll over the full $10,000, she mustcontribute $2,000 from other sources. Jordan will report$10,000 as a nontaxable rollover and $2,000 as taxes paid.

If you roll over the full amount of any eligible rollover distribution

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6033(a) (i.e., Form 990) for three consecutive years will result in the revocation of its tax-exempt status on and after the date that the IRS has set for filing the third annual return or submitting the third annual notice. Also pursuant to Code section 6033(j)(1), the same rule applies to a tax-exempt organization that fails to submit the notice required under Code section 6033(i) (i.e., Form 990-N) for three consecutive years.

A 2011 study by the Urban Institute’s Center on Nonprofits and Philanthropy identified that following the enactment of the Pension Protection Act of 2006, which mandated that nonprofits with less than $25,000 in annual gross receipts file a new e-Postcard, and which also imposed certain mandatory revocation rules, over 275,000 nonprofits lost their tax-exempt status. Of these, 31 percent were human services organizations, 28 percent were public and societal benefit organizations, and 10 percent were arts organizations. Over 60 percent of organizations that were created before 1950 had their status revoked. However, organizations that had registered in the past 20 years accounted for over half of the total revocations. On average, 15 percent of organizations in each state were revoked, with the District of Columbia having 23 percent of its non-profits lose their tax-exempt status, the highest percentage in the country. Next was Utah with 20 percent. Iowa had the lowest percentage of revocations, at 9 percent.

II. List of Organizations

The IRS no longer publishes a discrete list of organizations whose tax-exempt status was automatically revoked because of failure to file a required annual information return or notice for three consecutive years

This list, formerly contained in IRS Publication 78, gave the name, employer identification number (EIN), organization type, last known address the organization provided to the IRS, effective date of revocation, and the date the organization was added to the list. For organizations that applied for and received reinstatement, the list gave the date of reinstatement. Presently, a list of exempt organizations, together with the automatic revocation list containing the aforementioned information, as well as the e-Postcard filing list, is contained in the Exempt Organizations Select Check combined database (“Select Check”). Select Check is updated monthly.

III. Consequences of Revocation

If an organization’s tax-exempt status is automatically revoked, it is no longer exempt from federal income tax. Consequently, it may be required to file one of the following federal income tax returns and pay applicable income taxes: (1) Form 1120 - U.S. Corporation Income Tax Return, due by the 15th day of the 3rd month after the end of the organization’s taxable year; or (2) Form 1041 - U.S. Income Tax Return for Estates and Trusts, due by the 15th day of the 4th month after the end of the organization’s taxable year.

Failing to file the Forms 990 required under Code section 6033(a)(1) for three consecutive years may result in imposition

you receive (the actual amount received plus the 20% that was withheld - $10,000 in the example above):

• Your entire distribution would be tax-free, and

• You would avoid the 10% additional tax on earlydistributions.

What happens if I don’t make any election regarding my retirement plan distribution?

The plan administrator must give you a written explanation of your rollover options for the distribution, including your right to have the distribution transferred directly to another retirement plan or to an IRA.

If you’re no longer employed by the employer maintaining your retirement plan and your plan account is between $1,000 and $5,000, the plan administrator may deposit the money into an IRA in your name if you don’t elect to receive the money or roll it over. If your plan account is $1,000 or less, the plan administrator may pay it to you, less, in most cases, 20% income tax withholding, without your consent. You can still roll over the distribution within 60 days.

Which retirement accounts can accept rollovers?

You can roll your money into almost any type of retirement plan or IRA. See the Rollover Chart for options.

Is my retirement plan required to allow transfer of any amounts eligible for a distribution?

If you receive an eligible rollover distribution from your plan of $200 or more, your plan administrator must provide you with a notice informing you of your rights to roll over or transfer the distribution and must facilitate a direct transfer to another plan or IRA.

Is my retirement plan required to accept rollover contributions?Your retirement plan is not required to accept rollover contributions. Check with your new plan administrator to find out if they are allowed and, if so, what type of contributions are accepted.

Automatic Revocation and Reinstatement Of Tax-Exempt Status

I. Background

Most tax-exempt organizations other than churches and certain church-related organizations are required to file an annual information return or notice (Form 990, 990-EZ, 990-PF, or 990-N (e-Postcard)) with the Internal Revenue Service (the “IRS”). Organizations that do not file for three consecutive years automatically lose their tax-exempt status.

Pursuant to section 6033(j)(1) of the Internal Revenue Code of 1986, as amended (the “Code”), an exempt organization’s failure to file the information return required by Code section

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of the monetary penalty under Code section 6652(c)(1) for failure to timely file. Small exempt organizations that are not required to file returns under Code section 6033(a)(1) but instead are required to submit the annual notice required under Code section 6033(i) are not subject to a monetary penalty for failure to submit the notice. Code section 6652(c)(1)(E).

In addition, if an organization fails to meet its obligations to the IRS for three consecutive years in cases where the organization is subject to the requirement to submit a notice under Code section 6033(i) in one or more years during a three-year period and is also subject to the information return requirement for one or more years during the same three-year period, the organization’s tax-exempt status will be revoked. Joint Comm. Staff, Tech Expln of the Pension Protection Act of 2006 (JCX-38-06), 8/3/2006, p. 326.

The IRS is required to timely publicize any revocation penalties for failure to file the information return required by Code section 6033(a)(1) and to submit the Code section 6033(i) notice for three consecutive years. Section 1223(e)(2), P.L. 109-280, 8/17/2006. Incidentally, no such revocation penaltyhas to date been publicized by the IRS, and this provisionis likely a consequence of Congress reacting to constituentcitizen groups complaining that their organization lost its tax-exempt status, something that they never considered was apossibility.

The IRS is also required to timely inform organizations of the revocation of their tax-exempt status and their concomitant removal from Select Check.

Donors can deduct contributions made on dates before an organization’s tax-exempt status appears as revoked on Select Check. State and local laws may also affect an organization that loses its tax-exempt status. For example, these organizations may not be entitled to exemptions from real property, sales, or other taxes, or they may be required to provide state authorities or the public with information concerning their changed federal tax status.

Finally, upon revocation of its tax-exempt status, an organization will become liable for all income, excise, or other taxes and penalties that may have been owed at the time it was automatically revoked. It will also be responsible for any future tax liabilities that accrue as a result of the organization’s loss of tax-exempt status.

IV. Reinstating Tax-Exempt Status

The IRS does not provide an appeal process for those organizations whose tax-exempt status is automatically revoked because they did not file the required 990 series returns or notices for three consecutive years. Instead, these organizations must apply for reinstatement of their tax-exempt status, even if the organization was not originally required to file an application for exemption. Code section 6033(j)(2).

If the IRS determines that the organization meets the

requirements for tax-exempt status, it will issue a new determination letter and reinstate the organization’s tax-exempt status, generally effective from the date of revocation. Code section 6033(j)(3). The IRS will also include the reinstated organization in its next update of Select Check. Donors and others may rely upon the new IRS determination letter as of its stated effective date, and on the updated Select Check listing.

V. Revenue Procedure 2014-11

On January 2, 2014, the IRS issued an advance copy of Revenue Procedure 2014-11, 2014-3 I.R.B. 411. In it, the IRS explains the processes that various types of tax-exempt organizations whose status has been automatically revoked for failure to file required annual returns or notices for 3 consecutive years may use to apply for reinstatement. Completing the applicable process, which includes filing a new Form 1023 or Form 1024, results in reinstatement of tax-exempt status, retroactive to the revocation date. Note that pursuant to the subsequently issued Revenue Procedure 2014-40, 2014-30 I.R.B. 229, the IRS made clear that applications for retroactivereinstatement may be submitted on Form 1023 or, by eligibleorganizations, on Form 1023-EZ. References below to Form1023 also encompass Form 1023-EZ, as may be applicableto the described organization.

(a) Small First Offenders

Revenue Procedure 2014-11 allows certain organizations to regain their tax-exempt status as of the date of revocation under a simplified process called the Streamlined Retroactive Reinstatement Process. Organizations eligible to use this simplified process are those (1) that were eligible to file either Form 990-EZ or Form 990-N for each of the three consecutive years they failed to file; (2) that apply for retroactive reinstatement on Form 1023 or Form 1024 within 15 months of the date of revocation (the later of the day the organization received a letter notifying them of the revocation from the IRS, or the date that the organization appeared on Select Check); and (3) that have had their tax-exempt status revoked for the first time.

An organization eligible for this Streamlined Retroactive Reinstatement Process is not required to file a prior year Form 990-EZ or Form 990-N for any year in which the organizationwas eligible to file such forms. It must simply re-submit a Form1023 or submit a Form 1024, if applicable, with the phrase“Revenue Procedure 2014-11, Streamlined RetroactiveReinstatement” written at the top, and mail the application andthe $850 user fee (subject to certain exceptions) to:

Internal Revenue ServiceP.O. Box 12192Covington, KY 41012-0192

If the organization’s application is approved, the organization will be deemed to have reasonable cause for its failures to file Forms 990-EZ or 990-N, as applicable, for three consecutive years and it will be reinstated retroactively to the revocation

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date (i.e., the date set for the filing of the third annual return or notice). This rule applies to applications submitted before the date that the IRS revises the Form 1023 and Form 1024 to permit organizations that otherwise qualify for retroactive reinstatement in this category to demonstrate reasonable cause by attesting that the organization’s failure to file was not intentional and that it has put in place procedures to file in the future. After such date, reasonable cause may be demonstrated through that attestation.

The IRS will not impose the Code section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated and files proper paper Forms 990-EZ for all such taxable years under this section 4 of Revenue Procedure 2014-11. For any year for which the organization was eligible to file a Form 990-N, the organization is not required to file a prior year Form 990-N or Form 990-EZ to avoid penalties. The organization should write “Retroactive Reinstatement” on the Forms 990-EZ and mail them to:

Department of the TreasuryInternal Revenue ServiceOgden, UT 84201-0027

(b) Large, Timely Offenders

Organizations that cannot use the Streamlined Retroactive Reinstatement Process (such as those that were required to file Form 990 or Form 990-PF for any of the three years that caused revocation or those that were previously auto-revoked) may have their tax-exempt status retroactively reinstated to the date of revocation if they (1) apply on Form 1023 or Form 1024 for retroactive reinstatement with the appropriate user fee no later than 15 months after the later of the date on the organization’s revocation letter (CP-120A) or the date the organization appeared on Select Check; (2) include with the application a statement establishing that the organization had reasonable cause for its failure to file a required annual return for at least one of the three consecutive years in which it failed to file; (3) include with the application a statement confirming that it has filed required returns for those three years and for any other taxable years after such period and before the post-mark date of the application for which required returns were due and not filed; and (4) file properly completed and executed paper annual returns for the three consecutive years that caused the revocation and any following years. The organization should write “Retroactive Reinstatement” on these returns and mail them to:

Department of the TreasuryInternal Revenue Service CenterOgden, UT 84201-0027

These organizations should write on the top of the Form 1023 or Form 1024, “Revenue Procedure 2014-11, Retroactive Reinstatement,” and mail the application and $850 user fee (subject to certain exceptions) to:

Internal Revenue ServiceP.O. Box 12192Covington, KY 41012-0192

In addition, the Service will not impose the Code section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated under this section 5 of Revenue Procedure 2014-11.

(c) All Other Offenders

Organizations that apply for reinstatement more than 15 months after the later of the date on the organization’s revocation letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website may have their tax-exempt status retroactively reinstated to the date of revocation if they satisfy all of the requirements described under the Large, Timely Offenders section, above, except that the reasonable cause statement the organization includes with its application must establish reasonable cause for its failure to file a required annual return for all three consecutive years in which it failed to file.

In addition, the IRS will not impose the Code section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated under this section 6 of Revenue Procedure 2014-11.

(d) Post-Mark Date Reinstatement

An organization may apply for reinstatement of its tax-exempt status effective from the “Post-Mark Date” (i.e., a reinstatement as of the date the organization filed for reinstatement of its tax-exempt status) by completing the requisite application form (e.g., Form 1023) and including the appropriate user fee with that application form. To facilitate processing, the organization should write “Revenue Procedure 2014-11, Reinstatement Post-Mark Date” on the top of the application form and mail it to the address specified in the instructions to that application form. Importantly, the IRS does not state that it will waive the Code section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked for those organizations requesting a Post-Mark Date Reinstatement under this section 7 of Revenue Procedure 2014-11.

(e) Transition Relief

Revenue Procedure 2014-11 is effective for applications submitted after January 2, 2014. To the extent that the rules in Revenue Procedure 2014-11 benefit an organization’s ability to have its tax-exempt status reinstated, the IRS will apply Revenue Procedure 2014-11 to pending applications.

An organization that applied for and received a reinstatement effective from the Post-Mark Date prior to the effective date of Revenue Procedure 2014-11, and that would have satisfied the Streamlined Retroactive Reinstatement Process requirements

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(described in Part V (a), supra), will be reinstated effective from the revocation date. Such an organization needs to keep its reinstatement determination letter together with a copy of Revenue Procedure 2014-11 in its books and records.

(f) Establishing Reasonable Cause

A reasonable cause statement establishes that an organization exercised ordinary business care and prudence in determining and attempting to comply with its annual reporting requirement. The statement should have a detailed description of all the facts and circumstances about why the organization failed to file, how it discovered the failure, and the steps it has taken or will take to avoid or mitigate future failures.

Revenue Procedure 2014-11 identifies four factors that weigh in favor of finding reasonable cause (with no single factor being either necessary or determinative): (1) the failure was due to reasonable, good faith reliance on erroneous written information from the IRS; (2) the failure arose from events beyond the organization’s control that made filing impossible; (3) the organization undertook significant steps to avoid ormitigate the failure to file; and (4) the organization has anestablished history of complying with Code section 6033 andother applicable requirements.

The reasonable cause statement must include an original declaration, dated and signed under penalties of perjury by an officer, director, trustee, or other authorized official, in the following form:

“I, (Name), (Title) declare, under penalties of perjury, that I am authorized to sign this request for retroactive reinstatement on behalf of (Name of Organization), and I further declare that I have examined this request for retroactive reinstatement, including the written explanation of all the facts of the claim for reasonable cause, and to the best of my knowledge and belief, this request is true, correct, and complete.”

(g) Subsequent Revocation

An organization can be automatically revoked again if it fails to file required returns for three consecutive years beginning with the year in which the IRS approves the application for reinstatement. Organizations seeking reinstatement of tax-exempt status after a subsequent revocation are not eligible to use the Streamlined Retroactive Reinstatement Process.

Tax Rules for Renting to A Relative

AARP calls young adults moving back in with their parents “the new normal.” Although the U.S. economy has come a long way since the financial crisis, more young adults in this country are living with their parents than at any time since 1940. Some return home after being on their own for a while, some never left at all.

Recently, I met with clients who were in just such a situation. Their adult daughter returned to the family home after college. She is employed, but her job doesn’t pay enough to afford

the life she’s enjoying in her parents’ home. Rather than downgrade to something in her price range, she wanted to stay put.

Her parents had a better idea. Financially stable with a paid-off mortgage, they would purchase a home for dear daughter to live in. The daughter could rent from her parents at a reduced rate, and the parents could deduct expenses of the rental property their tax return. Win/win?

Possibly not, since special rules apply when renting property to family members. Anyone unaware of these rules can find themselves taking a double tax hit when their rental deductions are disallowed while rental income is taxed.

To deduct the costs associated with a rental property, you first have to determine how the IRS will classify the property in light of Section 280A. The house may be considered a rental property, a vacation home, or a personal residence.

Rental Property

A rental property is rented during the year and used by the owner for personal purposes less than the greater of 14 days or 10% of the number of days during the tax year that the unit was rented at fair rental value.

If a home qualifies as a rental property, expenses including mortgage interest, real estate taxes, homeowner association dues, utilities, and maintenance expenses can be used to offset rental income. If total expenses exceed rental income, the expenses may even generate a net loss.

Vacation Home

When a home is mixed-use, it may be rented and used by the owner for personal purposes for more than the greater of 14 days or 10% of the number of days during the tax year that the unit is rented at fair rental value.

When a vacation home is rented, expenses such as mortgage interest, real estate taxes, etc. are allocated between rental and personal use. Rental expenses may only be deducted to the extent of rental income generated by the property. In other words, they can reduce your taxable rental income to zero, but never generate a loss.

Personal Residence

When a home is rented for fewer than 14 days during the tax year, the home is considered a personal residence. Mortgage interest and real estate taxes may be deducted as itemized deductions on Schedule A, and the owner is not required to report rental income.

When you rent a home to a relative, such as a spouse, child, grandchild, parent, grandparent, or sibling, any day rented at less than the fair rental price is considered a personal use day. To avoid having the rental days considered personal days, the property must be rented at fair market rates and be

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the renter’s principal residence.

The issue, in this case, is that the parents want to offer dear daughter a bargain, charging her less than fair rental value. If they go this route, they will have to allocate expenses between personal and rental expenses. All of the days the home is rented to the daughter at less than fair rental value are considered personal days, so the rental portion is zero. They would have to include all of the rental income received from their daughter in taxable income, but none of the rental expenses would be deductible, other than mortgage interest and real estate taxes, which would be deductible as itemized deductions on Schedule A.

Is Rent-Free Better?

What if these parents wanted to be really generous and allow their daughter to live in the home rent-free? The parents could still deduct mortgage interest and real estate taxes on Schedule A, but they might run into gift tax issues.

If the daughter lives in the residence rent-free, the parents could be treated as having made a gift to their daughter equal to the fair rental value of the home. For 2016, the annual gift exclusion is $14,000. If the fair rental value of the home is greater than $1,167 per month, or the parents give any other gifts to their daughter they should file a return. In some parts of the country, this may not be an issue, but this client is located in Scottsdale, Arizona where the average one-bedroom apartment rents for $1,225 a month.

In the end, if these parents want to help their daughter out, they should charge a fair market rate of rent, determined by looking at comparable rentals in the area. That determination of fair market rate should be documented in case they are ever audited by the IRS.

Ideally, the parents should also formalize the agreement by signing a lease detailing the terms of the agreement including rent amount, when rent is due, and any other rules they want to be followed on their property. In a perfect world, renting a home to a family member would be seen as a blessing and their daughter will be respectful of the property. However, not everyone, even dear daughter, is an ideal tenant.

Net Operating Loss Rules Challenge Companies

The rules for claiming net operating losses to offset income tax liabilities can vary from state to state and are proving to be a big challenge for many companies, especially as both the economy and corporate profitability improve.

Bloomberg BNA recently released a study for which it surveyed 100 finance executives at C corporations in the U.S. in a range of industries. The survey found 88 percent of the finance executives anticipate their companies will move into profitable years in the near future. However, 39 percent of the survey respondents cited “state carryback/forward rules” as the biggest challenge they face when managing state NOLs. Coming in at a close second, at 33 percent, was “keeping up

with state NOL tax law changes,” followed in third place, at 30 percent, by “state limitations.”

Spreadsheets and databases continue to be the main way for companies to manage state net operating losses. The survey found that 68 percent of the tax executives polled said they continue to use manual spreadsheets for managing and tracking state NOLs, despite their perceived risk, while 33 percent use databases such as Access. Over half (52 percent) of the survey respondents said they need to spend one to four weeks annually on spreadsheet and database maintenance

Companies can automate the process beyond spreadsheets and databases to alleviate those concerns, for example, by using the Bloomberg BNA State Tax Analyzer system, which includes an NOL Manager feature. Over one-third (37 percent) of the survey respondents ranked “risk of last minute changes” as their top NOL concern, followed by “data integrity” and “business continuity” (which tied at 32 percent). In addition, 29 percent of the respondents cited “the inability to forecast the burn-down rate of an NOL asset.”

After a certain time, net operating losses can no longer be carried forward or back. The federal Tax Code allows up to 20 years of NOL carryforwards and two of NOL carrybacks, but the rules can differ across the states. While 24 states have no carryback timeframe, 19 states have two-year carrybacks and three have three-year carrybacks. And while 27 states have 20-year carryforwards, eight have 15-year carryforwards,four have five-year carryforwards, one state allows a 12-yearcarryforward and another permits a seven-year carryforward.

How Seniors Can Cope with the Higher Post-2016 Floor Beneath Medical Expenses

With summer almost behind us, it’s time for older taxpayers—those age 65 and above—to consider how they will be affected by the higher post-2016 floor beneath medical expenses. Some may lose their medical expense deduction next year, while others may even be forced to take the standard deduction for the first time as a result of the raised floor. The first line of defense for older taxpayers is to make sure they aren’t missing any medical deduction dollars. Then, it may pay to employ a bunching strategy for 2016-2017 expenses to make sure such taxpayers make the best use of their medical expense deductions.

Unwelcome Change on the Way for Seniors

For decades, medical expenses for all taxpayers that itemized were deductible to the extent they cumulatively exceeded 7.5% of adjusted gross income (AGI). However, in 2010, the Affordable Care Act (ACA) raised this floor. For tax years beginning after Dec. 31, 2012, the floor beneath the itemized deduction for medical expenses was increased from 7.5% of AGI to 10% of AGI. (Code Sec. 213(a), as amended by Health Care Act Sec. 9013(a))

To abate the outcry from older Americans, many of whom have more medical problems than the young, and therefore have

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heftier medical expenses, the ACA postponed raising the floor for seniors only. For tax years beginning after Dec. 31, 2012 and ending before Jan. 1, 2017—i.e., for 2013, 2014, 2015, and 2016—the 7.5% floor applies if the taxpayer or his or her spouse has reached age 65 before the close of the tax year. (Code Sec. 213(f)) But the postponement ends this year and the 10% floor will take effect for seniors for tax years ending after Dec. 31, 2016.

Effect on seniors. The higher floor could mean a sharp reduction in itemized deductions for those taxpayers likeliest to incur the heaviest medical bills.

Coping With the Raised Medical Expense Deduction FloorA taxpayer’s first step to coping with the upcoming hike in the medical expense deduction floor is to make sure he or she is claiming or will be able to claim all legitimate medical expenses.

Deductible medical expenses are unreimbursed payments for the diagnosis, mitigation, treatment, prevention of disease or for the purpose of affecting the body’s structure or function (Code Sec. 213(d)(1)), and the costs of nursing services (Reg. § 1.213-1(e)(1)(ii)) and related insurance payments and transportation expenses.

The following is a non-exclusive list of deductible medical costs:

• . . . Advance payments for lifetime care or “founder’sfee” paid either monthly or as a lump sum under anagreement with a retirement home, but only for the part ofthe payment that’s properly allocable to medical care. Theagreement must require the taxpayer to pay a specific feeas a condition for the home’s promise to provide lifetimecare that includes medical care. (Rev Rul 75-302, 1975-2CB 86, IRS Pub. 505 (2015), p. 10) The deductible portionmay be determined on the basis of the facility’s ownexperience or that of a comparable facility.

• . . . Attending a medical conference on a chronic diseasesuffered by an individual, his spouse, or dependent (butnot meal and lodging costs). (Rev Rul 2000-24, 2000-1 CB963)

• . . . Capital improvements to the home (e.g., an elevator)to a taxpayer’s property (including capital expenditures toaccommodate a residence to a physically handicappedindividual) may be deductible medical expenses if theprimary purpose of the improvements is the medical careof taxpayer, his spouse, or dependents. Generally, themedical deduction is limited to that part of the expenses thatexceeds the amount by which the improvement increasesthe value of taxpayer’s property. (Reg. § 1.213-1(e)(1)(iii)) But some expenses incurred by or for a physicallyhandicapped individual to remove structural barriers in hisresidence to accommodate his physical condition (e.g.,constructing access ramps, widening doorways, installingsupport bars, moving or modifying electrical outlets andfixtures) are presumed not to increase the value of the

residence and may be deductible in full. (Reg. § 1.213-1(e)(1)(iii))

• . . . Contact lenses (as well as the cost of equipment andmaterials required for using them, such as saline solutionand enzyme cleaner). (IRS Pub. 505 (2015), p. 7) Contactlens insurance also is deductible. (Rev Rul 74-429, 1974-2CB 83)

• . . . Cosmetic surgery or similar procedure, but onlyif necessary to ameliorate a deformity arising from, ordirectly related to, a congenital abnormality, a personalinjury resulting from an accident or trauma or a disfiguringdisease (Code Sec. 213(d)(9))—e.g., breast reconstructionsurgery after cancer mastectomy.

• . . . Diagnostic tests aiding in the detection of heartattack, diabetes, cancer, and other diseases (but not thecollection and storage of DNA, absent a showing of how theDNA will be used for medical diagnosis). (Rev Rul 2007-72,2007-50 IRB 1154, PLR 200140017)

• . . . Dental treatment, including fillings, x-rays, fluoridetreatment, cleanings, etc. (IRS Pub. 505 (2015), p. 7)

• . . . Eyeglasses, artificial teeth or limbs, braces, elasticstockings, special shoes, wheelchairs, hearing aids, andsimilar items. (Reg. § 1.213-1(e)(1)(ii))

• . . . Eye surgery to correct defective vision, includinglaser procedures (e.g., LASIK). (Rev Rul 2003-57, 2003-22IRB 959)

• . . . Health insurance (including dental insurance) planpremiums, but premiums paid by an employer-sponsoredhealth insurance plan aren’t deductible unless the amountspaid are taxed to the employee (included in taxablecompensation box 1 of Form W-2). (IRS Pub. 505 (2015),page 5)

• COBRA continuation coverage for the under-age-65spouse of a retired worker is deductible as a medicalexpense; so is the spouse’s cost of health care coverageafter COBRA ends but before he or she attains age 65.Retired taxpayers may tend to overlook this deduction sincethey were used to not deducting health plan premiumsduring their employment.

• . . . Legal expenses paid to authorize treatment formental illness. (Rev Rul 71-28, 1971-2 CB 165)

• . . . Medical Part B (supplementary medical insurancebenefits for the aged and disabled) voluntary premiums,and voluntary premiums (e.g., paid by those not coveredby social security) under Medicare Part A (basic Medicare)(Code Sec. 213(d)(1)(D)), plus Medicare Part D (voluntaryprescription drug insurance) premiums. But mandatoryemployment or self-employment taxes paid for basiccoverage under Medicare A are not deductible. (Reg. §1.213-1(e)(4)(i)(a))

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• . . . Nonlicensed healthcare providers that providephysician-ordered assistance and supervision to a patientsuffering from dementia. (Estate of Lillian Baral, (2011) 137TC 1)

• . . . Nursing services (need not be performed by aregistered or trained nurse). (Reg. § 1.213-1(e)(1)(ii))Amounts for such services include room and board, aswell as social security taxes, medical insurance andunemployment taxes paid with respect to the serviceprovider. However, if the service provider also performspersonal and household services, amounts paid must bedivided between the time spent performing household andpersonal services (nondeductible) and the time spent fornursing services (deductible). (IRS Pub. 505 (2015), p. 12)

• . . . Payments to providers of medical services,including: psychologists, physicians, surgeons, specialistsor other medical practitioners, chiropractors, dentists,optometrists, osteopaths, psychiatrists, and ChristianScience practitioners.

• . . . Prescription drugs (e.g., not aspirin) and insulin,if legally procured. (Code Sec. 213(b), Code Sec. 213(d)(3)) A controlled substance (such as marijuana) obtainedfor medical purposes, in violation of the federal ControlledSubstances Act, isn’t legally procured and is nondeductible,even if state law permits its doctor-prescribed use. (RevRul 97-9, 1997-1 CB 77)

• . . . Qualified long-term care services (unless providedby a relative who isn’t a licensed professional, or by a relatedcorporation or partnership). (Code Sec. 213(d)(1)(C),Code Sec. 213(d)(11)) These services include necessarydiagnostic, preventive, therapeutic, curing, treating,mitigating, and rehabilitative services, and maintenance orpersonal care services, which are required by a chronicallyill individual and provided under a plan of care prescribedby a licensed health care practitioner. (Code Sec. 7702B(c)(1))

• . . . Qualified long-term care (LTC) insurance premiums,up to annual inflation-indexed limits. For 2016, the limitsare as follows for an individual who attained the indicatedage before the close of the tax year: age 40 or less, $390;more than 40 but not more than 50, $730; more than50 but not more than 60, $1,460; more than 60 but notmore than 70, $3,900; and more than 70, $4,870. (CodeSec. 213(d)(10)) Qualified LTC insurance contracts mustprovide only coverage of qualified LTC services, must notpay or reimburse expenses to the extent the expensesare reimbursable under Medicare (or would be but for adeductible or coinsurance amount), must be guaranteedrenewable, and must meet other detailed requirements.(Code Sec. 7702B(b))

• . . . Service animals used in mental health therapy.(Information Letter 2010-0129)

• . . . Smoking cessation programs and prescribed drugsdesigned to alleviate nicotine withdrawal, but not non-prescription nicotine gum and nicotine patches. (Rev Rul99-28, 1999-1 CB 1269)• . . . Transportation expenses primarily for and essentialto medical care. (Code Sec. 213(d)(1)(B)) This includesfood and lodging expenses while en route to the place ofmedical treatment (Reg. § 1.213-1(e)(1)(iv)), as well as taxi,car train, plane, and bus fares and the cost of ambulanceservices. Taxpayers also may deduct as a medical expenseamounts paid for lodging (not food) while away from home,that’s primarily for and essential to medical care in a hospitalor equivalent, up to $50 per night for each individual. (CodeSec. 213(d)(2))

• . . . Weight-loss program for treatment of a specificdisease (e.g., obesity, hypertension), but not the cost ofdiet food. (Rev Rul 2002-19, 2002-16 IRB 778)

Timing Considerations

An itemizer may be certain that he will exceed the medical-expense-deduction floor for 2016, but may be uncertain about exceeding the floor for 2017. A taxpayer in this situation should consider putting plans in motion now to take care of discretionary or elective medical expenses this year rather than next. Such expenses may include dental implants or bridgework, or expensive eyewear (e.g., variable focus lenses), as well as certain types of surgeries that might safely be postponed or accelerated, such as LASIK surgery, cataract surgery, or knee replacement surgery.

Taking care of any unpaid medical or dental bills before the end of the year would have the same effect as discretionary or elective medical expenses.

Where deferral may make sense. A taxpayer may be fairly certain that he will not exceed the medical-expense-deduction floor for 2016, but believes it possible that he will exceed next year’s floor, even though it will be higher. This may be the case where the taxpayer or the taxpayer’s spouse has been newly diagnosed with a degenerative disease, or where qualified LTC expenses or expensive nursing services are likely to be incurred next year. In such cases, the taxpayer should consider deferring discretionary or elective medical expenses until next year.

Deferring such expenses also may be appropriate where a taxpayer is likely to claim the standard deduction this year, but knows he will itemize deductions next year on account of a non-medical-expense reason. This may include, for example, if the taxpayer plans to purchase a residence or make large charitable contributions.

‘Financial Adviser’ Might Not Mean What You Think

If you’re looking for some help managing your money, you might turn to a financial adviser.

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That’s someone who advises you on your finances ... right?

Sort of. “’Financial adviser’ is a generic term with no precise industry definition, and many different types of financial professionals fall into this general category,” Investopedia explains.

“Stockbrokers, insurance agents, tax preparers, investment managers and financial planners are all members of this group. Estate planners and bankers may also fall under this umbrella.”

“It’s unbelievable the scope or range of people that can consider themselves financial advisers or financial planners,” Bob Gavlak, CFP and wealth adviser with Strategic Wealth Partners in Columbus, Ohio, told Business Insider. “The majority of time, if somebody calls themselves a financial adviser, usually all that means is that they’re investment advisers — all they do is investment management.”

Gavlak says a financial adviser might not have the training to help you with taxes, insurance, investments, and estate planning.

On the other hand, you have the Certified Financial Planner (CFP). While it sounds similar to “financial adviser,” it’s not quite the same. “A lot of times people will look at financial advisers and certified financial planners and they think that they’re all the same, but that would be like looking at a restaurant and saying McDonald’s is the same as some really fancy steakhouse,” says Gavlak.

Certified financial planners have to be certified by the Certified Financial Planner Board of Standards, Inc., which is why you’ll often see a registered mark after their designation (CFP®).

To become certified, they have to complete what the board calls the four Es: education, examination, experience, and ethics. These planners are certified to advise on everything from taxes to insurance to estate planning, and are required to complete ongoing continued education requirements. One of the hallmarks of a CFP is that they have fiduciary responsibility when working on financial planning, which means they have to act in their clients’ best interest.

The CFP board keeps track of everyone certified through its program, which makes it simple to do a little homework on a professional before signing on the dotted line.

This isn’t at all to say that a financial adviser wouldn’t be able to help with your money. Instead, as a prospective client, it would be smart to identify what you need from your financial adviser before you sign on. Is it insurance? Is it a financial plan? Is it solely investment advice?

No matter their title, ask about your prospective adviser’s expertise and experience up front to make sure their specialty aligns with your needs.

Practice ManagementMake Your Employees Your Advocates

Many firms share a common problem; they need to get staff, especially younger staff, involved in business development. It often feels like an unending uphill battle with the question, are on the right hill?

Employee Advocacy

Many firms expect employees to promote the company, but employee advocacy goes beyond overt promotion. It requires a genuine belief in the content produced by the firm. Only then will your staff see out discussions on social networks with others who share similar interests or concerns.

The root of Success

Why are employee advocacy programs so successful at instigating growth? It boils down to the simple fact that the world has changed.

The workforce has also changed. With Baby Boomers leaving the workforce and Millennials rising through the ranks, it makes sense that social media advocacy is catching on.

Here is a set of strategies that have been proven to generate advocacy from junior staff:

1. Recognize that business development has changed.2. Consider Business Development a team sport.3. Start with research.4. Add social media.5. Get everyone writing.6. Encourage speaking engagements at educationalevents.

It is time to train a new generation in business development, but it also may be time for them to teach you new techniques.

Question of the MonthQuestion:

How does a deceased taxpayer elect “portability” to allow the surviving spouse to receive the unused portion of the estate exemption?

Answer:

Portability is elective, rather than automatic. In order for a surviving spouse to be allowed to use the DSUE (Deceased Spousal Unused Exemption) amount of a predeceased spouse, an election must be made on a timely filed federal estate tax return (Form 706) (including extensions) filed for the estate of the predeceased.

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passed, Maryland could require the Ohio pants seller to collect Maryland sales taxes from the buyer.

The Senate passed such a proposal, backed by many retailers and states, with a bipartisan 69-27 vote in 2013.

That bill has been stalled in the House for more than three years, in part because of objections from Mr. Goodlatte, whose committee has jurisdiction. He released an earlier draft in 2015.

The debate has split the retailing industry with companies such as eBay Inc. opposing the Senate-passed bill—and large, predominantly brick-and-mortar companies such as Wal-Mart Stores Inc. favoring the measure. Amazon.com Inc., the largest online retailer, has expanded its distribution network and now collects sales taxes on purchases in most states. The company has said it supports a uniform national solution to the question.

Mr. Goodlatte’s proposal comes with little time left on the congressional calendar. It isn’t clear yet whether he would push for a vote in the Judiciary Committee or how much support it would get among House Republicans, who are wary of anything that looks like a tax increase. Retailers and state governments have been skeptical about Mr. Goodlatte’s previous efforts on the issue.

Meanwhile, states such as South Dakota and Alabama are forging their own path, pushing cases through the court system in an attempt to get the Supreme Court to overrule the 1992 decision that set the physical presence standard.

Those efforts in the states have made the status quo shaky, said Andrew Moylan, executive director of the R Street Institute, a free-market think tank. In Mr. Moylan’s view, Mr. Goodlatte’s proposal avoids the problems of the Senate-passed bill in that it wouldn’t have states auditing companies outside their borders.

“People have dug into positions for literally years now,” said Brandon Arnold, executive vice president of the conservative National Taxpayers Union. “I think this strikes a pretty reasonable balance.”

Mr. Goodlatte’s proposal “is the best approach we have seen to definitively put to rest sales tax collection issues for remote sellers,” said Hamilton Davison, president and executive director of the American Catalog Mailers Association. “Every other alternative is not workable.”

Editor’s Note: Little reported action out of the House or Senate this month due to the August recess where Congress returns to their respective states to get back in touch with the people they represent and many to campaign for re-election.

Failure to timely file Form 706 will effectively prevent the portability election.

Estates of decedents that passed away before January 1, 2011 are not entitled to make the portability election.

Last opportunity to attend – 2016 Estate, Gifts and Trust Seminar – Schererville, IN. – September 19 & 20. Learn about this portability election and why it is important to protect your clients and yourself. Call ncpe today at 800-682-2163 to register – only a few seats available – you will not want to miss this one. Beanna is instructor.

News from Capital Hill

Key House Republican to Unveil Sales Tax Plan for Purchases Across State Lines

A top House Republican will release a new proposal in coming days that attempts to resolve the long-running dispute among retailers, state governments and online retailers over how to tax purchases made across state lines.

The discussion draft from House Judiciary Committee Chairman Bob Goodlatte (R., Va.) would introduce a new legal framework for cross-border sales, largely replacing the current system that relies on whether a seller has a physical presence in a state.

Instead, sales would be taxed according to the tax base of the retailer and a single tax rate chosen by the consumer’s state, a Judiciary Committee aide said.

So, for example, an Ohio company shipping a pair of pants to Maryland would use Ohio’s rules for taxing clothing and Maryland’s tax rate.

Currently, that seller only collects taxes on the sale if it has a presence in Maryland.

The debate over sales taxes has split the retailing industry.

That is an enormous change from the way sales taxes have traditionally worked, and it could create complications, including how to handle the five states—Alaska, Delaware, Montana, New Hampshire and Oregon—that don’t levy sales taxes.

Mr. Goodlatte’s proposal is the latest twist in a yearslong dispute in Congress over whether and how to set national standards and rules for state sales taxes.

It contrasts with the approach favored by large retailers, who say they face a competitive disadvantage, and state governments, who say they are missing out on billions of dollars of revenue annually. They would rather let states tax out-of-state sellers who ship goods into their states. If that

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Business Promotion

Grow Your Practice

Growing your tax/accounting practice requires imagination, perseverance and a strong commitment to being the best Tax Professional in your area.

Starting a firm from scratch usually occurs when a person breaks away from the firm where they began working. Once a certain level of confidence has been attained during the apprenticeship, those individuals with an entrepreneurial spirit start believing they can manage a firm as well as or better than their current employers. After developing the belief, they need two other components to make it work: capital and clients. Provided both are available, a new firm opens its doors.

Once a firm begins operations, survival depends on obtaining new and more clients. At this point, most new proprietors are not discriminatory and accept any new client, using the tried-and-true methods, such as local newspapers and phone book advertising that work to some degree. Working with local chambers of commerce and realtors usually provides solid leads on newcomers to the area. Being active in your area chapter of your state society allows you some possible unique opportunities as well. On more than one occasion during my days as a sole proprietor, I was contacted by other tax professionals looking for someone to assist them. This actually led to referrals coming from these other tax professionals from time to time when they did not have the capacity to accept new clients.

As your reputation grows, new business should come from referrals. Referrals usually represent your most solid type of new client. Why? Referrals come from satisfied clients who are willing to tell their friends and family about you. However, referrals bring about their own type of unique cost. Your first inclination is to provide the referring client with some type of reward or incentive. Nothing wrong about complying, but don’t give away the farm in an effort to show your appreciation. Keep it simple and modest. If eventually a client becomes a substantial rainmaker for you, you can always ramp up your appreciation.

As your skills grow and you desire to take on more clients, think about establishing relationships with other professionals. Seek out attorneys who practice client representation before the Internal Revenue Service (IRS) or who perform retirement and/or estate planning. Many times these lawyers need tax professionals in order to preserve their attorney-client privilege. As a result, they don’t prepare tax returns but have other tax professional perform those services.

As you prosper and grow, you will undoubtedly have clients who fall into the “problem clients” category. Who are problem clients? Problem clients never organize their data, rarely have receipts, don’t believe in mileage logs, return phone calls slowly and generally thumb their noses at the IRS. They

represent problems in the form of extra efforts you must go through in order to complete their tax returns. They frustrate you and your staff because you can never seem to get finished with their returns. Grow your business by firing them! Let me repeat — when they become more trouble to you than they any benefit they might represent, let them become someone else’s problem. Over the years, I have heard many CPE lecturers suggest you should fire your worst 10 percent clients each year. Early on, the idea of firing clients is unthinkable. Regardless of the efforts expended, you need the revenue. As your client base rises, you can afford to be more discriminating.

Perhaps the most important way to grow a tax practice is developing a niche. Time and again industry experts report that the best of the best develop a niche or exclusive focus in one particular area of accounting. Developing a niche, such as yellow book audits, SEC audits, federal government focus, client representation before the IRS, retirement planning or any other niche hotspots can create untold growth opportunities.

Once your business reaches a growth or mature stage, growing your business occurs differently. Growth usually comes in the form of acquisition or merger. For example, you might be at the point in which a partner could be valuable to your firm. An experienced partner with their own client base might provide a significant growth avenue. Or, someone leaving another firm (be careful not to violate any non-compete clauses) might become available with whom to join forces. Try to become aware of older sole proprietors in your area who are contemplating retirement. Acquiring the client base of retiring tax professionals willing to steer their clients to you, can provide great growth opportunities.

If you live in a rural setting, consider opening branch offices. Banks have been successful with this strategy for years and it can be just as successful for you. Make it a point to staff it properly as well as scheduling yourself to be onsite on a regular basis.

Finally, recognize your need for an exit strategy. You worked hard to develop a successful tax/accounting practice throughout your career, so don’t fail to plan for retirement. I have seen too many sole proprietors who have no plan to sell the most valuable business asset they own. They simply retire, leaving their clients to find someone new without recommendation. Market your business, plan an exit strategy and provide yourself with a meaningful end to career of hard work.

Use Resources and Toolsfor Tax Professionals

On Our WebsitencpeFellowship.com

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* 2002, 2003, 2004, and 2007 are the average percentageraise as military pay raises differed for various military paygrades.

2017 military pay increases are for all branches of the U.S. Armed Forces; Air Force, Army, Coast Guard, Marines, Navy, and Reserve forces where applicable.

Estate and Trust News

Gift-Tax and the IRC Sec. 529 Qualified Tuition Program

College savings plans, which originated from state programs, allow federal tax-free distributions when funds are spent on eligible education expenses. The federal recognition of these programs occurred in 1996 when Congress created the Qualified Tuition Program (QTP) and was made permanent by a provision in the Pension Protection Act of 2006 (PPA). The federal tax provisions are found in the Internal Revenue Code §529.

Basic rules

Anyone can set up a §529 plan. There are no income restrictions either for the contributor or for the beneficiary. When you contribute to a §529 plan, it is a completed gift for the benefit of the named beneficiary (including the social security

Military Taxes

Military Pay

Military Benefits Information for US Military, Active Duty, Reserve, National Guard, Military Spouses and Military Family2017 Military Pay

2017 Defense Budget proposal proposes a 1.6% military pay increase. This increase is .3% higher than the 1.3% increase in 2016, however it is less than the 2.1% estimation for salaries of private sector employees. The 2016 Defense Budget allotted a pay increase of less than the 2.1% as well, continuing a six year trend of lower increase.

The annual pay increase for service members is determined by the Bureau of Labor Statistics’ Employment Cost Index and growth in private-sector wages. However, by law, Title 37, Chapter 19, Section 1009, the President can set an alternate pay raise which is being proposed in the 2017 Defense Budget, and was also proposed and implemented for 2016.Historical Military Pay Raises by Year

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number of the named beneficiary). The annual exclusion applies (currently $14,000). Since the annual exclusion is per-donor/per-donee, if total gifts by the donor to the beneficiary (including contribution to the §529) do not exceed the annual exclusion for the calendar year, no gift tax return (Form 709) is required.

A donor may set up an unlimited number of plans with no restrictions as to who may be the named beneficiary. That is to say, a donor may set up a plan for a person who is a family member or for anyone who is not a family member. Be mindful of this: Each §529 plan can have only one beneficiary. Yes, there are provisions for changing the beneficiary but that discussion diverts us from the focus of this column.

Special gift-tax rule if you contribute a large amount

Section 529 plans offer a special gifting feature called “forwarding” or “forward gifting.” Specifically, you can make a lump-sum contribution to a §529 plan of up to five times the annual gift tax exclusion (5 x $14,000 = $70,000), elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period. By electing split-gifts, a married couple can gift up to $140,000. How does that work for gift tax purposes?

You file Form 709. On that form, you elect under Section 529(c)(2)(B) to treat any transfers made during the calendar year to a qualified tuition program as made ratably and evenly over a 5-year period beginning in the year of contribution. The election is made on Form 709 (2015) Page 2, Schedule A Computation of Taxable Gifts (Including transfers in trust), Item B. An explanation attachment is required. When making this election, Form 709 filing is required even if it is only to bring the donor below the annual exclusion limit.

For the next five years, unless your gifts to any beneficiary exceed the annual exclusion, including the pro-rata §529 contribution, no additional Form 709 is required. However, if you continue to gift in any other way (birthday, holiday, graduation, etc.) to a §529 plan beneficiary that has a pro-rata §529 contribution, a gift tax return will be required when thepro-rata amount plus any additional gifts in the calendar yearexceed the applicable annual threshold which is $14,000 foryears 2015 and 2016.

Don’t be pushing up daisies too soon

Take care of your health. If you should die during the five year period, then the gift-tax-free amount must be recalculated. The amount of the donated basis, but not the earnings on the donated amounts, is added back to the now-deceased contributor’s estate for any portion of the five years for which the contributor was not living.

For more information, see our Sponsor-of-the-Month, 529 NOW, LLC.

Contact: Vincent SullivanOnline: www.529now.com Email: vsullivan@529NOW.com

Telephone: 720-318-9765

Also, you may wish to download a copy of Pub. 970, Tax Benefits for Education found at the IRS web site: https://www.irs.gov/pub/irs-pdf/p970.pdf

People in the Tax News

Police Investigating After Man Killed at FW Tax Office

One person died after being shot in a shed behind a tax service office in Fort Worth.

MedStar tweeted about the shooting at Flores Income Tax Services in the 1600 block of NW 28th Street.

Fort Worth police later said the man was discovered shot dead in a storage building at the location.

Police were initially searching for a suspect in the area, but the search is no longer active.

No one is in custody at this time.

Forth Worth police say two witnesses told detectives they heard an argument in the shed.

“Then they heard a gunshot and they saw a person leaving the scene,” Officer Daniel Segura said.

A caller to MedStar reported the victim in his 20s.

Longtime customers of the tax service say they were surprised to see police activity outside the business.

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“I came over here for my taxes,” John Leija said. “I saw the police and I said ‘wow.’”

The ‘open’ sign remained illuminated, but repeated calls to Flores Tax Service went unreturned.

Chiropractor Interfered with IRS Collection Efforts and Retired Firefighter Willfully Failed to File Return

Anna Allen and Martin Armendariz of El Paso, Texas, pleaded guilty today in the U.S. District Court for the Western District of Texas to tax crimes, announced Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division and U.S. Attorney Richard L. Durbin Jr., of the Western District of Texas.

Allen, a practicing chiropractor, and her husband, Armendariz, a retired El Paso firefighter, have not filed federal income tax returns since 2004. Allen pleaded guilty to evading her 2009 individual income taxes. Armendariz pleaded guilty to willfully failing to file a 2009 tax return.

According to the statement of facts accompanying the plea agreements, after the Internal Revenue Service (IRS) levied upon Allen’s bank accounts and accounts payable in order to collect back taxes, Allen sent threatening correspondence to her bank regarding the bank’s responses to the IRS’s levy requests and altered her banking habits to prevent any seizures. Allen also instructed a third party to submit insurance billings on behalf of Allen’s chiropractic business using an Employment Identification Number assigned to another business in order to thwart the IRS’s collection efforts. Armendariz failed to file a tax return for tax year 2009 for himself and his wife, thereby failing to report more than $211,000 in gross income.

U.S. District Judge Kathleen Cardone of the Western District of Texas set sentencing for both defendants on Oct. 13. Allen faces a statutory maximum sentence of five years in prison and a maximum fine of $250,000. Armendariz faces a statutory maximum sentence of one year in prison and a maximum fine of $100,000.

Online Public School Founder Admits to $8M in Tax Fraud

The founder and former CEO of an online public school that educates thousands of Pennsylvania students pleaded guilty Wednesday to federal tax fraud, acknowledging he siphoned more than $8 million from The Pennsylvania Cyber Charter School through for-profit and nonprofit companies he controlled.

In entering his plea, Nicholas Trombetta, 61, who headed the school, acknowledged using the money to buy, among other things, a Bonita Springs, Florida, condominium for $933,000, pay $180,000 for houses for his mother and girlfriend in Ohio, and spend $990,000 more on groceries and other items.

He manipulated companies he created and controlled to draw the money from the school, also spending it on a $300,000 plane, Assistant U.S. Attorney Stephen Kaufman said.

Trombetta was making $127,000 to $144,000 annually at PA Cyber when he ran the illegal tax evasion scheme from 2006 to 2012. He faces up to five years in prison when he’s sentenced Dec. 20.

By running the money through the companies or their straw owners, Trombetta avoided income taxes, though prosecutors haven’t said how much. Most of the siphoned money was squirreled away in Avanti Management Group, which functioned as Trombetta’s retirement savings account, Kaufman said.

“This case reflects the priority we’ve placed on protecting against fraud in education,” U.S. Attorney David Hickton said.The school, founded in Midland in 2000, had more than 11,000 students across the state when Trombetta was charged three years ago and still has more than 9,000. As a public institution, it’s funded by federal, state and local taxes. Districts across the state pay the school to educate any students who opt to enroll in PA Cyber instead of a bricks-and-mortar school.

Trombetta almost didn’t plead guilty Wednesday when his attorney, Adam Hoffinger, began sparring with Kaufman, who had to describe the complicated conspiracy to the judge.

Kaufman said Trombetta used Avanti, the National Network of Digital Schools and other companies in the scheme. The Network of Digital Schools markets a curriculum developed in conjunction with PA Cyber and sold it back to the school, while Avanti provided unspecified management services, the prosecutor said. Avanti had four owners who pretended to be equal 25 percent partners when, in reality, Trombetta owned 80 percent of the firm, Kaufman said.

Hoffinger objected to some of Kaufman’s descriptions — though they’re contained in the indictment — at one point prompting U.S. District Judge Joy Flowers Conti to say, “Well, if you can’t agree on that, I can’t take this plea.” The attorneys recessed to discuss the case for two hours before Trombetta returned to plead guilty.

Hoffinger also took issue with Kaufman calling Trombetta “the” founder of PA Cyber, arguing a “team” of people founded the school.

Hoffinger and Trombetta declined comment afterward, but they’re apparently preparing to argue at sentencing that Trombetta didn’t direct or head the scheme, in an effort to draw a shorter sentence.

But Hickton said Trombetta was always lauded as the innovative school’s founder — at least until he was indicted three years ago.

“You can find a million speeches where he’s honored as the ‘soul’ of this” school, Hickton said. “So I don’t buy any of that.”

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Trombetta’s accountant, Neal Prence, also is charged in the tax fraud case and is scheduled for trial next month. His attorney, Stanton Levenson, attended the guilty plea hearing but declined to comment.

Pastor Sentenced for Tax Refund Fraud

A 28-year-old pastor who pleaded guilty to wrongfully receiving tax refunds after he claimed to live and work in the mainland U.S. while he actually lived and worked in Guam was sentenced to three years of probation in federal court Tuesday.

Endy Raymond will not spend time in jail for his crime.

U.S. District Court of Guam Chief Judge Frances Tydingco-Gatewood also ordered that Raymond pay back more than $7,000 in restitution to the IRS as part of his punishment. The chief judge handed down the sentence in federal court before Raymond and his wife. Maria Cruz, U.S. probation officer, said Raymond is a pastor.

Residents of Guam who work on island are supposed to file income tax returns with the local Department of Revenue and Taxation. They are not eligible for the federal Child Tax Credit or Earned Income Tax Credit.

With the help of a tax preparer, Raymond filed income tax returns for tax years 2010, 2011 and 2013 with the IRS and claimed federal child tax credit and earned income tax credit, court documents state. He worked in Guam but claimed to work and live in Oregon and Washington on those tax returns and received tax refunds for those three years, according to court documents.

Raymond also filed income tax returns in Guam for those years. The federal government reported losing more than $13,000 because of Raymond’s false tax returns.

Raymond is the fourth person who also is a citizen of the Federated States of Micronesia to recently be sentenced to probation for false tax returns filed with the IRS. He entered a guilty plea to making and subscribing a false tax return, statement or other document in September 2015. He faced zero to six months behind bars, but avoided jail time altogether as he was sentenced to probation.

Tydingco-Gatewood asked if Raymond or the other three defendants were part of a ring of people defrauding the IRS, but Assistant U.S. Attorney Marivic David said they were not part of a ring.

The four defendants went to different tax preparers to file their income tax returns, David said.

Raymond’s attorney, John Gorman, federal public defender, said Tuesday that it appeared a few years ago there were people who recruited others in the Chuukese community to file income tax returns with the IRS, wrongly informing them that they would not get into trouble.

An IRS agent said in court that since stories have been published about people charged with tax refund fraud, there has been a downward trend of Guam residents filing false IRS income tax returns.

When the judge asked how many income tax returns were filed falsely, the agent said he did not know because it was still under investigation.

Raymond has no prior criminal record and he and his wife have worked in Guam for the past nine years and have two children together, Gorman said. A Chuukese interpreter was present during the sentencing hearing, but Raymond, who understood some English, addressed the court personally and said in English that he was sorry for what he did and would not do it again.

Prince’s Estate Wants to Sell His Houses, Great News for Homeless Millionaires Who Love Purple Furniture

TMZ reports that Prince’s estate has filed a request with a judge to sell off some of the late musician’s real-estate properties, promising it will only accept offers that are at least 90 percent of their market value. It’s unclear which or how many of Prince’s various properties the estate wants to sell, and there are a lot to choose from.

In Minnesota alone, Prince’s real estate — which includes multiple houses, random buildings, and vast tracts of land — has been valued at $30 million. It seems likely that these will be the ones sold off, and not Paisley Park, site of an impromptu Prince memorial that the estate has indicated it wants to preserve. But still, no matter what happens to the $10 million complex, Paisley Park will be in your heart.

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Facebook Fails to Show Up for Seventh Tax Summons from IRS

Facebook Inc. officials failed to show up after getting seven summonses from the Internal Revenue Service demanding internal corporate records on one of its offshore tax strategies, according to an IRS court filing.

U.S. authorities are examining Facebook’s federal income tax liability for the period ending Dec. 31, 2010 and are looking at whether the company understated the value of global rights for many of its intangible assets outside the U.S. and Canada that it transferred to a subsidiary in low-tax Ireland.

While Facebook has supplied some documents to the tax authority, it hasn’t provided books, records, papers and other data demanded in seven summonses, the IRS said in an amended petition filed Monday at the U.S. District Court for the Northern District of California. These include a request to show up at an IRS office in San Jose on June 29.

The documents sought “may be relevant to understanding Facebook executives’ internal views regarding the transferred intangibles, Facebook’s valuation with respect to third-party investors, Facebook’s valuation with respect to the sale of stock by Facebook employees, and valuation modeling with respect to acquired companies and, and thus may be relevant to determining the value of the transferred intangibles,” the IRS said in an amended declaration filed with the updated petition.

Like all multinational companies with intellectual property, Facebook creates cost-sharing arrangements with its foreign subsidiaries for use of the property -- and sets prices that the units will pay each other. By transferring its global rights to an Irish subsidiary, Facebook can allocate IP-related income received in higher-tax jurisdictions to lower-tax Ireland, thus lowering its tax bills. Ireland’s corporate income tax rate is 12.5 percent, compared with a statutory tax rate of 35 percent in the U.S.

Summonses were served by personal delivery to David Wehner, Facebook’s chief financial officer, according to the filing.

The company declined to immediately comment.

The IRS began examining Facebook’s 2010 tax filing in January 2013. Tax officials said in a previous filing that a “problematic” approach may have been used to value the property. The rights covered the company’s online platform, which lets users communicate with one another, as well as property that lets advertisers and software developers reach those users and other property, according to the filings.

Facebook employees told the IRS that the property was “interdependent,” and that “it would be difficult to isolate one from the other,” the government said in an earlier filing.

IRS NewsWorrying About the IRS’s ‘Future State’

The Future State plan of the IRS envisions how the agency will operate in five years and beyond. A central component of the plan is the development of online taxpayer accounts, aspects of which Nina Olson, the National Taxpayer Advocate, praised. However, she expressed concern that the IRS intent in developing the accounts is largely to save money in light of recent budget cuts by reducing telephone and face-to-face assistance.

She also cautioned that many taxpayers will not conduct business with the IRS through online accounts because they lack Internet access or skills, cannot complete the authentication process required to set up an account, do not trust the security of the IRS system, or would prefer to speak with an IRS employee. As a result, she expressed concern that critical taxpayer needs may go unmet under the Future State plan.

Vivian Hoard, tax partner at Atlanta-based Taylor English Duma LLP, stated that access to IRS systems through e-services should be limited. “It should be someone who isgoverned by Circular 230, or someone that can demonstratetax proficiency in some matter,” she said. “Taxpayers shouldn’thave to trust people who haven’t demonstrated proficiency intax preparation. At least, if a preparer is governed by Circular230 there would be sanctions - - you want a preparer to beaccountable.”

Preparers can already access client transcript if they have a power of attorney.

Roger Harris, President of Padgett Business Services said “You’ve got to find the right balance between technology and human interaction, but you can’t ignor either. The service should focus on the places where it would be most effective.

The concern is that the IRS will completely move away from human interaction.

“The Taxpayer Advocate has said that this will develop a “pay to play” and a two—class system, noted Marty Davidoff, principal at E. martin Davidoff & Associates LLC., “Not only is she right, but that system is already here. Those who are represented are getting different services than those who are not represented. The representatives know how to get to people at the IRS to have substantive conversations, and that’s the issue.

“those who are noncompliant will get service but it will be in the form of a revenue agent contacting them wanting money,” he said. “The government is not paying enough attention to the 97 percent who are compliant or tying to be compliant. If that number dropped to 95 percent we’re in trouble.”

I D Theft

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Aside from the continuing emphases on Future State, ID theft is the No 1 issue facing the IRS and practitioners, according to Beanna Whitlock a Reno, Nev. – based practitioner and educator, and former director of National Public Liaison for the IRS. “ID theft is crucial not only to taxpayers but is critical to effective tax administration,” she said. “They held a security summit, and said that tax practitioners should be doing certain things, but they have to understand that someone’s ID doesn’t get stolen for tax purposes until it gets inside 1111 Constitution Avenue (the IRS building in Washington, DC). Someone can get my taxpayer’s SSN but it’s not tax ID theft until it’s used and the IRS allows them to file a return. The issue is not me as a practitioner.”

“ID theft happens for one reason, and that’s to get a refund,” she said. “What the IRS should do is program their computers to spot certain changes in returns from year to year, such as bank accounts for automatic deposit, and address changes. If critical things change - - for example, if income jumps from $100,000 to $300,000, or a refund goes from $$1,000 to $15,000 - - those should be a red flag. Once the crime is committed and the money is out the door.”

The report identifies 14 other issues that the Office of the Taxpayer Advocate will focus on during the upcoming fiscal year, including ID theft victim assistance procedures, the FATCA burden, private debt collection and EITC compliance.

Final Reg Reduces Preparer Tax Identification Number User Fee

T.D. 9781, 08/09/2016; Reg. § 300.13

In a final reg that makes no changes to a 2015 temporary reg, IRS has announced a reduction in the fee for applying for and renewing Preparer Tax Identification Numbers (PTINs).

Background. Code Sec. 6109(a)(4) authorizes IRS to prescribe regs for the inclusion of a tax return preparer’s identifying number on a return, statement, or other document required to be filed with IRS.

On Sept. 30, 2010, IRS published final regs (T.D. 9501, 09/28/2010; Weekly Alert ¶ 3 09/30/2010) providing that, for returns or claims for refund filed after Dec. 31, 2010, the identifying number of a tax return preparer is the individual’s PTIN or such other number prescribed by IRS in forms, instructions, or other appropriate guidance. The PTIN regs require a tax return preparer who prepares or who assists in preparing all or substantially all of a tax return or claim for refund after Dec. 31, 2010 to have a PTIN. (Reg. § 1.6109-2(d))

Also on Sept. 30, 2010, IRS issued regs (T.D. 9503, 09/28/2010; Weekly Alert ¶ 21 09/30/2010) providing that, in order to apply for or renew a PTIN, one had to pay $50 per year plus an outside vendor fee. (Reg. § 300.13(b)) The outside vendor fee, which was set at $14.25 for new applications and $13 for

renewal applications, is paid directly to the vendor. (Preamble to TD 9503, 09/28/2010)

In 2015, IRS announced that, effective for PTIN applications filed on or after Nov. 1, 2015 (Reg. § 300.13T(d)), the regular fee was reduced to $33 per year (Reg. § 300.13T(b)), and the outside vendor fee was changed to $17 for both new and renewal applications. (T.D. 9742, 10/29/2015) Final reg keeps $33 fee. IRS has now issued a final reg that makes no changes to the temporary reg and sets the fee at $33 per year. (Reg. § 300.13(d))

Effective date. The final reg is effective for PTIN applications and renewals that are filed on or after Sept. 9, 2016. (Reg. § 300.13(b))

Draft Forms Reflect Election for Small Businesses to Offset FICA Liability with Research Credit

IRS has issued a draft version of 2017 Form 941, Employer’s Quarterly Tax Return, that reflects the provision in the “Protecting Americans from Tax Hikes Act of 2015” (the 2015 PATH Act) that allows a “qualified small business” to elect to claim a portion of their research credit as a tax credit against their employer FICA tax liability. This change is also reflected on the recently posted draft version of 2016 Form 6765, Credit for Increasing Research Activities.

The Federal Insurance Contributions Act (FICA) imposes two “payroll” taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

Employers file their initial Form 941 for the quarter in which they first paid wages that are subject to Social Security and Medicare taxes, and/or federal income tax withholding. Then they must file the form in every quarter after that (i.e., every three months), even if they have no taxes to report, unless they are a seasonal employer or are filing their final return.

In general, the research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount (unless the taxpayer elected an alternative simplified research credit); (2) the university basic research credit (i.e., 20% of the basic research payments); and (3) 20% of the taxpayer’s expenditures on qualified energy research undertaken by an energy research consortium. (Code Sec. 41(a)) Taxpayers can also elect an “alternative simplified research credit” instead under Code Sec. 41(c)(5). The research credit is claimed on Form 6765.

PATH Act changes. The 2015 PATH Act retroactively extended the research credit (which had expired at the end of 2014) and made it permanent.

In addition, for tax years that begin after Dec. 31, 2015, the

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PATH Act provided an election for qualified small businesses to claim a portion of their research credit as a payroll tax credit against their employer FICA tax liability, rather than against their income tax liability. (Code Sec. 41(h) and Code Sec. 3111(f))

This law change goes into effect for research-credit-eligible expenses incurred in 2016. Thus, the election can first be made on a 2016 income tax return filed in 2017, and the offset will first be available for Forms 941 filed after that time.

A qualified small business is a corporation or partnership: (1) with gross receipts for the tax year of less than $5 million (as determined under the rules of Code Sec. 448(c)(3), without regard to Code Sec. 448(c)(3)(A)), and (2) that did not have gross receipts (as determined in (1), above) for any tax year preceding the 5-tax-year period ending with the tax year. (Code Sec. 41(h)(3))

Qualified small businesses that elect to claim the research credit as a payroll tax credit will do so on Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activity. The credit may be applied against up to $250,000 of an employer’s annual FICA tax liability. Form 8974 must be attached to Form 941.

IRS Works to Help Taxpayers Affected by ITIN Changes

The Internal Revenue Service announced important changes to help taxpayers comply with revisions to the Individual Taxpayer Identification Number (ITIN) program made under a new law. The changes require some taxpayers to renew their ITINs beginning in October.

The new law will mean ITINs that have not been used on a federal tax return at least once in the last three years will no longer be valid for use on a tax return unless renewed by the taxpayer. In addition, ITINs issued prior to 2013 that have been used on a federal tax return in the last three years will need to be renewed starting this fall, and the IRS is putting in place a rolling renewal schedule, described below, to assist taxpayers.

If taxpayers have an expired ITIN and don’t renew before filing a tax return next year, they could face a refund delay and may be ineligible for certain tax credits, such as the Child Tax Credit and the American Opportunity Tax Credit, until the ITIN is renewed.

“The ITIN program is critical to allow millions of people to meet their tax obligations,” said IRS Commissioner John Koskinen. “The IRS will be taking steps to help taxpayers with these changes, and we’re designing this effort to minimize the burden as much as possible. We will be working with partner groups on an outreach effort to share information about these changes to ensure people understand what they need to do in advance of next year’s tax season.”

The ITIN changes are required by the Protecting Americans from Tax Hikes (PATH) Act enacted by Congress in December 2015. These provisions, along with new procedures to help taxpayers navigate these changes, are outlined in IRS Notice 2016-48, which was released today.

Who Has to Renew an ITIN

The IRS emphasizes that no action is needed by ITIN holders if they don’t need to file a tax return next year. There are two key groups of ITIN holders who may need to renew an ITIN so it will be in effect for returns filed in 2017:

• Unused ITINs. ITINs not used on a federal incometax return in the last three years (covering 2013, 2014, or2015) will no longer be valid to use on a tax return as ofJan. 1, 2017. ITIN holders in this group who need to filea tax return next year will need to renew their ITINs. Therenewal period begins Oct. 1, 2016.

• Expiring ITINs. ITINs issued before 2013 will beginexpiring this year, and taxpayers will need to renew themon a rolling basis. The first ITINs that will expire underthis schedule are those with middle digits of 78 and 79(Example: 9XX-78-XXXX). The renewal period for theseITINs begins Oct. 1, 2016. The IRS will mail letters to thisgroup of taxpayers starting in August to inform them of theneed to renew their ITINs if they need to file a tax returnand explain steps they need to take. The schedule forexpiration and renewal of ITINs that do not have middledigits of 78 and 79 will be announced at a future date.

How to Renew an ITIN

Only ITIN holders who need to file a tax return need to renew their ITINs. Others do not need to take any action.

Starting Oct. 1, 2016, ITIN holders can begin renewing ITINs that are no longer in effect because of three years of nonuse or that have a middle digit of 78 or 79. To renew an ITIN, taxpayers must complete a Form W-7, Application for IRS Individual Taxpayer Identification Number, follow the instructions and include all information and documentation required. To reduce burden on taxpayers, the IRS will not require individuals renewing an ITIN to attach a tax return when submitting their Form W-7. Taxpayers are reminded to use the newest version of the Form W-7 available at the time of renewal which will be posted in September (Use version “Rev. 9-2016”).

There are three methods taxpayers can use to submit their W-7 application package to renew their ITIN. They can:

• Mail their Form W-7 – along with the original identificationdocuments or certified copies by the agency that issuedthem -- to the IRS address listed on the form (identificationdocuments will be returned within 60 days),

• Use one of the many IRS authorized Certified

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Acceptance Agents or Acceptance Agents around the country, or

• In advance, call and make an appointment at an IRSTaxpayer Assistance Center in lieu of mailing originalidentification documents to the IRS.

Other Steps to Help Taxpayers

To make this renewal effort easier and reduce paperwork, the IRS will be offering a family option for ITIN renewal. If any individual having an ITIN middle digit of 78 or 79 receives a renewal letter from the IRS, they can choose to renew the ITINs of all of their family members at the same time rather than doing them separately over several years. Family members include the tax filer, the spouse and any dependents claimed on their tax return.

The IRS is also working closely with a variety of partner and outreach groups to share information about the ITIN changes and help raise awareness about the new guidelines. The IRS will be providing additional information and material to share with these groups and taxpayers in the near future.

“We encourage people who need to renew their ITINs to plan ahead and take action this fall to avoid issues when they file tax returns in early 2017,” Koskinen said.

IRS Tells Tax Preparers to Keep Tabs on Their PTINs

The IRS has issued a security alert warning tax preparers to ensure that the number of filings they’ve made using their Preparer Tax Identification Number (PTIN) matches IRS records.

Crooks increasingly are targeting tax preparers’ PTINs and other electronic passwords, the IRS states. The IRS is working with state tax agencies and tax professionals to increase awareness of the threat.

Preparers can monitor their PTIN filings by going on the IRS website and logging into their account. Find “Additional Activities” on the main menu, and then go to “view returns filed per PTIN.”

To sign into the PTIN site, preparers must be an enrolled agent, CPA, attorney, enrolled retirement plan agent or enrolled actuary, or a participant in the IRS’s Annual Filing Season Program.

They also must have at least 50 tax returns from the Form 1040 series processed in the current year.

If the PTIN return site shows nothing, it means that fewer than 50 returns were processed using the preparer’s PTIN.

The IRS updates the information weekly. If the number of returns indicated as processed is significantly more than the number of tax returns filed, and misuse of a PTIN is suspected, preparers should submit Form 14157, Complaint: Tax Return Preparer.

On July 6, the IRS released its first fact sheet as part of a new data security initiative aimed at tax professionals.

The “Protect Your Clients; Protect Yourself” campaign is intended to raise awareness among practitioners on their responsibilities to protect their clients’ personal and financial information from cyberthieves and steps they can take to safeguard that data.

This new effort is an expansion of the Security Summit, a partnership between the IRS, state tax agencies, and the tax industry, to combat tax-related identity theft and refund fraud.

Editor’s Note: Check the use of your PTIN with the instructions on the Fellowship web site provided by “Mr. Bill” Nemeth.

Big Win for Tax Whistleblowers as Pair Gets $17.8 Million

The U.S. Tax Court awarded $17.8 million to a pair of whistleblowers in a decision that significantly expands the scope of what can be claimed in such cases.

The ruling for the first time allowed the whistleblowers to get a portion of criminal fines and civil forfeitures in addition to part of the taxes the government recouped because of information they provided.

“This opens the door to much larger whistleblower payments in offshore-account cases,” said Bryan Skarlatos, a tax lawyer at Kostelanetz & Fink LLP in New York who wasn’t involved in the case.

The parties involved in the case weren’t disclosed, but it appears to stem from the prosecution of Wegelin & Co. The Swiss bank closed after it pleaded guilty in 2013 to conspiring with U.S. taxpayers to hide money from the Internal Revenue Service. The amounts and breakdown of the $74.1 million in fines, taxes and forfeitures in the partially redacted case match those in the Wegelin case.

Dean Zerbe, the lead lawyer for the whistleblowers, called the case a “pillar-to-post victory” for his clients and the IRS

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the type of return you filed, your adjusted gross income and taxable income. It also includes any changes that you or the IRS made to your tax return after you filed it.

• The quickest way to get a copy of your tax transcript isto use the Get Transcript application. Once you verify youridentity, you will be able to view and print your transcriptimmediately online. This Fact Sheet provides details onhow to complete this step.

• If you’re unable or prefer not to use Get TranscriptOnline, you may order a tax return transcript and/or a taxaccount transcript using the online tool Get Transcript byMail or by calling 800-908-9946. Transcripts arrive at theaddress we have on file for you in five to 10 calendar daysfrom the time IRS receives your request.

To order by phone, call 800-908-9946 and follow the prompts. You can also request your transcript using your smartphone with the IRS2Go mobile phone app.

Businesses that need a tax account transcript should use Form 4506-T, Request for Transcript of Tax Return.

• If you need a copy of your filed and processed taxreturn, it costs $50 for each tax year. You should completeForm 4506, Request for Copy of Tax Return, to makethe request. Mail it to the IRS address listed on the form.Copies are generally available for the current year and pastsix years. You should allow 75 days for delivery.

• If you live in a federally declared disaster area, you canget a free copy of your tax return. Visit IRS.gov for moredisaster relief information.

IRS Tax Levies Caused Hardship for Social Security Recipients

Internal Revenue Service employees pushed too hard to impose levies on elderly people’s Social Security benefits, leading to economic hardship for some low-income people with tax debts, according to a new report.

J. Russell George

The report, from the Treasury Inspector General for Tax

whistleblower program.

“My real hope is that the IRS and Treasury will take the opportunity with this court decision to swing the doors wide open for whistleblowers to come forward,” said Mr. Zerbe of Zerbe, Fingeret, Frank & Jadav.

Judge Julian Jacobs focused on the term “collected proceeds,” which refers to the amounts used to calculate the award, in his ruling.

“The term ‘collected proceeds’ means all proceeds collected by the Government from the taxpayer. The term is broad and sweeping; it is not limited to amounts assessed and collected under” the tax code, Judge Jacobs wrote.

The case removes a worry for potential whistleblowers that they would receive less of the proceeds if the IRS chose to pursue a criminal case than if the case were pursued purely to collect owed taxes.

“That was always a danger, but now that danger has been resolved in favor of the whistleblower,” said Scott Knott, a whistleblower lawyer at the Ferraro Law Firm in Miami.

Under the IRS whistleblower program, people who have knowledge of tax violations can file confidential claims with the IRS and get as much as 30% of what the government collects. In fiscal 2015, the IRS paid 99 awards totaling $103.5 million. The case decided on Wednesday is likely one of the five largest awards issued, Mr. Knott said.

The IRS can appeal the ruling. An agency spokesman declined to comment.

How to Request a Transcript or Copy of a Prior Year’s Tax Return

You should always keep a copy of your tax return for your records. You may need copies of your filed tax returns for many reasons. For example, they can help you prepare future tax returns. You’ll need them if you have to amend a prior year’s tax return. You often need them when you apply for a loan to buy a home or to start a business. Or, you may need them to apply for student financial aid. If you can’t find your copies, the IRS can give you a transcript of the information you need, or a copy of your tax return. Here’s how to get your federal tax return information from the IRS:

• Transcripts are free. You can get them for the currentyear and the past three years. In most cases, a transcriptincludes the tax information you need.

• A tax return transcript is a summary of the tax returnthat you filed. It also includes items from any accompanyingforms and schedules that you filed. It doesn’t reflect anychanges you or the IRS made after you filed your originalreturn.

• A tax account transcript includes your marital status,

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levy actions should not be taken if they are likely to cause or exacerbate an existing economic hardship based on the facts and circumstances of the case. The IRS should also review the levy determinations to identify those that caused financial hardship, and it should remind employees about the proper form to use when levying Social Security benefits, TIGTA suggested. The IRS should also provide the opportunity to claim the proper amount of exemptions allowed for the affected taxpayers whose cases were included in TIGTA’s sample.

The IRS said it plans to provide guidance on using discretion before levying Social Security benefits and to clarify the Internal Revenue Manual to spell out the requirements for a determination of economic hardship, while also reminding employees to use the proper forms. The IRS also intends to review the levy determinations for the levies that caused financial hardship. However, the IRS did not agree to provide all taxpayers in TIGTA’s sample the opportunity to claim the proper amount of exemptions allowed. TIGTA said it believes all of its recommendations would benefit the IRS and taxpayers.

“We appreciate your recognition that in the overwhelming majority (85 percent) of the cases you reviewed, the decision to levy was in compliance with existing IRS procedures and the law,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “Indeed we assert that our compliance rate is even higher than that, as your findings with respect to the remaining 15 percent of the cases you reviewed are speculative in nature. We do not agree that TIGTA identified any cases in the sample they examined wherein the levy caused an economic hardship at the time the levy was issued. There is no legal requirement that the IRS complete an economic hardship determination prior to issuing the levy. At the time the levies were issued, the revenue officers were acting within their sound discretion when they could not secure or verify the taxpayers’ financial information.”

New Procedure Helps People Making IRA and Retirement Plan Rollovers

The Internal Revenue Service provided a self-certification procedure designed to help recipients of retirement plan distributions who inadvertently miss the 60-day time limit for properly rolling these amounts into another retirement plan or individual retirement arrangement (IRA).

In Revenue Procedure 2016-47, posted on IRS.gov, the IRS explained how eligible taxpayers, encountering a variety of mitigating circumstances, can qualify for a waiver of the 60-day time limit and avoid possible early distribution taxes. In addition, the revenue procedure includes a sample self-certification letter that a taxpayer can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver.

Normally, an eligible distribution from an IRA or workplace retirement plan can only qualify for tax-free rollover treatment if it is contributed to another IRA or workplace plan by the 60th day after it was received. In most cases, taxpayers who fail to

Administration, acknowledged that most IRS revenue officers abided by the law when issuing levies, but in some cases they failed to give taxpayers exemptions from the levies, which they had the discretion to permit.

TIGTA noted that Social Security benefits are the main source of income for many elderly and low-income taxpayers. While the IRS can impose a levy on Social Security benefits, the Tax Code requires the agency to release levies that cause economic hardship. Taxpayers also have the right to claim an exemption against the levy, enabling them to receive a minimum amount of the Social Security payment while eliminating all or part of the levy.

IRS revenue officers make levy determinations of Social Security benefits on a case-by-case basis and are able to exercise their own judgment when deciding whether to impose a levy on someone with outstanding tax debts. The IRS has special procedures and thresholds in place for levying individual retirement accounts and 401(k) retirement accounts, but there are no special considerations or procedures for when revenue officers impose a levy on Social Security benefits. In such cases, revenue officers tend to follow the general procedures for levying assets, and they usually comply with those same procedures when levying Social Security benefits.

However, for 15 percent of the sample cases examined by TIGTA, the levy action probably caused or exacerbated economic hardship for those Social Security recipients. A change in collection policies at the IRS seems to give equal weight to nonlegal considerations (such as whether taxpayers are “cooperative,” according to the revenue officers’ subjective determination) and the legal requirement to release the levy when the IRS decides it is creating an economic hardship for a taxpayer. In these cases, revenue officers should have realized the taxpayers were experiencing economic hardship, according to the report.

IRS procedures allow revenue officers to manually levy up to 100 percent of Social Security benefits, but taxpayers have the right to claim an exemption from the levy. However, in 28 percent of the cases sampled by TIGTA, revenue officers used the wrong form to levy Social Security benefits. As a result, the IRS did not consider the exemption amounts before imposing the levy. Of those cases, 6 percent involved taxpayers who suffered greater Social Security levies than allowed by law.

“TIGTA’s audit found that a change in policy at the IRS likely contributed to levies that caused economic hardship,” said TIGTA Inspector General J. Russell George in a statement. “We believe the IRS needs to adjust its policies and procedures to allow revenue officers, with appropriate discretion, not to levy if facts and circumstances clearly show that taxpayers are in or on the threshold of an economic hardship.”

TIGTA made five recommendations, four of which the IRS agreed with, while partially agreeing with the fifth suggestion. The report recommended the IRS provide guidance on levying Social Security benefits and give examples to its revenue officers and revise the Internal Revenue Manual to clarify that

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and saying, “Oh sh-t,” according to the FBI summaries of interviews with officials.

Lerner, who has since refused to answer questions before Congress, was the first official to publicly acknowledge the practice, in May 2013.

No criminal charges resulted from either the Obama Justice Department or FBI investigations into the scandal.

The documents support the findings of a May 2013 report issued by the Treasury Inspector General for Tax Administration (TIGTA) that concluded IRS agents had “used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions.”

In addition, TIGTA said that IRS officials “knew that agents were targeting conservative groups for special scrutiny as early as 2011.”

“These new smoking-gun documents show Obama FBI and Justice Department had plenty of evidence suggesting illegal targeting, perjury, and obstruction of justice,” Judicial Watch President Tom Fitton said in a statement.

The Dissembling IRS

The IRS has spent three years trying to slow-roll discovery in lawsuits about the way it slow-rolled the applications of conservative nonprofits. The latest episode is on display in federal court in Washington, DC, in the lawsuit brought by the pro-Israel group Z Street.

You may recall that in 2009 Z Street filed for 501(c)(3) status and it had its application caught in the net of IRS targeting for groups that opposed Administration policy. When Z Street called the IRS to check on the hold up, an agent confirmed that its application had been sent for special screening for groups connected with Israel.

Z Street asked the IRS in 2010 for viewpoint discrimination, arguing that the agency’s behavior violates the First Amendment. The IRS tried to claim immunity but lost in federal court, clearing the way for discovery that produces evidence and internal documents. Now taxpayers are getting their first glimpse of how the IRS misled about the reasons for its decision to target Z Street.

The IRS has maintained that Z Street’s application was flagged because the group might be working with organizations inside Israel. IRS Exempt Organizations Determinations Group manager Jon Waddell denied that there was an Israel special policy and said in a December 2010 sworn declaration in federal court in Pennsylvania that flagging Z Street was “appropriate” because “Israel is one of many Middle Eastern countries that have a higher risk of terrorism.”

That’s hilarious, since Z Street supports a country targeted by terrorism. But it also is untrue, which the Administration

meet the time limit could only obtain a waiver by requesting a private letter ruling from the IRS.

A taxpayer who missed the time limit will now ordinarily qualify for a waiver if one or more of 11 circumstances, listed in the revenue procedure, apply to them. They include a distribution check that was misplaced and never cashed, the taxpayer’s home was severely damaged, a family member died, the taxpayer or a family member was seriously ill, the taxpayer was incarcerated or restrictions were imposed by a foreign country.

Ordinarily, the IRS and plan administrators and trustees will honor a taxpayer’s truthful self-certification that they qualify for a waiver under these circumstances. Moreover, even if a taxpayer does not self-certify, the IRS now has the authority to grant a waiver during a subsequent examination. Other requirements, along with a copy of a sample self-certification letter, can be found in the revenue procedure.

The IRS encourages eligible taxpayers wishing to transfer retirement plan or IRA distributions to another retirement plan or IRA to consider requesting that the administrator or trustee make a direct trustee-to-trustee transfer, rather than doing a rollover. Doing so can avoid some of the delays and restrictions that often arise during the rollover process.

Documents Indicate IRS Officials Knew of Tea Party Targeting Since 2011

A new batch of FBI documents released Thursday by Judicial Watch indicates that several senior Internal Revenue Service (IRS) officials were aware of the targeting of conservative groups almost two years before they told Congress.

Lois Lerner, who oversaw tax-exempt groups for the IRS, and top IRS official Holly Paz “knew that agents were targeting conservative groups for special scrutiny as early as 2011,” the conservative legal advocacy group said in a release Thursday.The IRS did not respond to requests for comment.

The detailed narratives of FBI agent investigations, known as FBI 302 documents, were obtained through a Freedom of Information Act lawsuit filed by Judicial Watch.

According to the documents, Paz and other IRS officials were notified in the late spring and summer of 2011 that agents in the Cincinnati branch were flagging Tea Party and conservative groups for additional scrutiny in their applications for nonprofit status.

In the spring of 2012, official Nancy Marks was tasked with investigating how applications were being processed and to find any problems.

The documents show she told then-acting IRS Commissioner Steven Miller on May 3, 2012 that “Cincinnati was categorizing cases based on name and ideology, not just activity.”

Miller responded by throwing “his pencil across the room”

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Home equity indebtedness is indebtedness (other than acquisition indebtedness) secured by taxpayer’s qualified residence, to the extent the aggregate amount of the debt doesn’t exceed the fair market value (FMV) of the residence, as reduced by the amount of acquisition indebtedness on it. (Code Sec. 163(h)(3)(C)(i)) The total amount treated as home equity indebtedness for any period can’t exceed $100,000 ($50,000 in the case of a married individual filing separately; this, and the above limitation for married individuals filing separately, are referred to throughout as “the parentheticals”). (Code Sec. 163(h)(3)(C)(ii))

Charles Sophy and Bruce Voss (the taxpayers), who were not married to each other, bought two houses together. They acquired the houses as joint tenants and held the property as joint tenants during the years in issue. They financed the purchases by obtaining a mortgage that was secured by each house. They also obtained a home equity line of credit for one of the houses. They were jointly and severally liable on the mortgage and home equity debt. They used one of the houses as their principal residence and the other as their second residence.

On audit, IRS determined that Sophy and Voss, as co-owners of the two residences, were together limited to deducting interest on $1 million of acquisition indebtedness and $100,000 of home equity indebtedness under Code Sec. 163(h)(3)(B)(ii) and Code Sec. 163(h)(3)(C)(ii) . IRS contended that theseCode Sec. 163(h)(3) limitations (the limits) were properlyapplied on a per-residence basis, regardless of the number ofresidence owners and whether the co-owners were marriedto each other. That is, co-owners are collectively limited toa deduction for interest paid on a maximum of $1.1 millionof acquisition and home equity indebtedness ($1 million+ $100,000). This conclusion followed the reasoning in a2009 Chief Counsel Advice (the CCA) in which it answeredthe question on how to apply the acquisition indebtednesslimitation where the total acquisition indebtedness was morethan $1 million and the taxpayer was one of two unmarried co-owners of the residence (Chief Counsel Advice 200911007.

The taxpayers disagreed and sued in Tax Court.

Tax Court held for IRS. The Tax Court found that the limitations in Code Sec. 163(h)(3)(B)(ii) and Code Sec. 163(h)(3)(C)(ii) on the amounts that may be treated as acquisition and home equity indebtedness for a qualified residence were properly applied on a per-residence basis, rather than per-individual basis. (Sophy (2012), 138 TC 204

In analyzing the statutory language of the Code Sec. 163(h)(3) limitations, the Tax Court found that the use of “anyindebtedness” in the definitions of acquisition indebtednessand home equity indebtedness isn’t qualified by languageregarding an individual taxpayer. The focus is on the entireamount of indebtedness with respect to the residence itself.Thus when the statute limits the amount that may be treatedas acquisition indebtedness, what is being limited is the totalamount of acquisition debt that may be claimed in relation to

apparently knew before Mr. Waddell gave his statement to the court. In an October 25, 010 internal IRS memo on the Z Street case produced in discovery, the IRS acknowledged that when Z Street’s application was being scrutinized Israel wasn’t on the list of terrorist countries, and that an agent may have been using an outdated list.

Discover has also revealed documents that show the IRS made early attempts to shield and obfuscate its special Israel policy. In a November 29, 2010 email, IRS deputy commissioner Steven Miller asked IRS employee Sarah Ingram about “an article on a letter we apparently sent to an org. on Israel settlements. What can you tell me.” Ms. Ingram replied that she “Just told Rush to pull me out when you have a minute. Not doing email on this.”

There are similar emails on the subject that have been produced in discovery but redacted to the point that they are unreadable. The IRS is blocking them on grounds that the documents are protected by so=called deliberative process privilege. But that privilege was created to safeguard internal government deliberations not to prevent the public from getting information about government wrongdoing.

The IRS wants to stonewall evidence production until the clock runs out on the Obama Administration on January 20. Let’s hope the courts keep the pressure on the agency so Z Street can see how and why it was mistreated for partisan purposes.

Wall Street Journal – August 7, 2016

IRS Acquiesces to Per-taxpayer Interpretation of Mortgage Interest Deduction Limits

AOD 2016-02,8/3/2016

IRS has announced its acquiescence with a decision of the Court of Appeals for the Ninth Circuit that the Code Sec. 163(h)(3) limitations ($1 million of acquisition indebtedness and $100,000 of home equity indebtedness) are applied on a per-individual basis, and not a per-residence basis. Under this interpretation, unmarried co-owners are collectively limited to a deduction for interest paid on a maximum of $2.2 million, rather than $1.1 million, of acquisition and home equity indebtedness.

Personal interest is nondeductible (Code Sec. 163(h)(1)), but qualified residence interest, which includes interest on acquisition indebtedness and home equity indebtedness, is deductible. (Code Sec. 163(h)(1)) Qualified residence interest is interest paid or accrued on acquisition debt, which is debt: a) incurred to acquire, construct, or substantially improve anyqualified residence of the taxpayer, and b) that’s secured bythe residence. A qualified residence is a taxpayer’s principalresidence and one other home that is used as a residenceby the taxpayer. (Code Sec. 163(h)(4)(A)) The aggregateamount treated as acquisition debt can’t exceed $1 millionfor any period (or $500,000 in the case of a married individualfiling separately) . (Code Sec. 163(h)(3)(B)(ii))

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following criteria. You must have:

• A professional credential (Enrolled Agent, CertifiedPublic Accountant, Attorney, Enrolled Retirement PlanAgent or Enrolled Actuary) or are an Annual Filing SeasonProgram participant, and

• At least 50 tax returns from the Form 1040 seriesprocessed in the current year.

It is important to monitor this information even if you do not prepare returns or only prepare a small number of returns. If there is no data shown, less than 50 returns have been processed with your PTIN.

To access “Returns Filed Per PTIN” information, follow these steps:

1. Visit http://www.irs.gov/ptin and log into your PTINaccount.2. From the Main Menu, find “Additional Activities.”3. Under Additional Activities, select “View Returns FiledPer PTIN.”4. A chart labeled Returns Per PTIN should appear.5. A count of individual income tax returns filed andprocessed in the current year will be displayed.

The information in the Returns Per PTIN chart is updated weekly and it is important that you check this information regularly. If the number of returns processed is significantly more than the number of tax returns you’ve prepared and you suspect possible misuse of your PTIN, complete and submit Form 14157, Complaint: Tax Return Preparer, to the IRS.

New Guidance for Taxpayers in the Sharing Economy on How to Meet Their Tax Responsibilities

IR 2016-110

In a newly launched web page, the “Sharing Economy Resource Center,” IRS has provided guidance to taxpayers involved in the sharing economy (also called the on-demand, gig or access economy) to help them quickly locate the resources they need to satisfy their tax obligations.

IRS notes that an emerging area of activity in the past few years has changed how people commute, travel, rent vacation places and perform many other activities. The sharing economy allows individuals and groups to utilize technology advancements to arrange transactions to generate revenue from assets they possess. Typically, the Internet is used to connect suppliers willing to provide services or the use of assets—apartments for rent, cars for transportation services, etc.—to consumers. These platforms are also used to connect workers and businesses for short-term work, such as household chores or technology services. Although this is a developing area of the economy, there are tax implications for the companies that provide the services and the individuals who perform the services.

the qualified residence, rather than the amount of acquisition debt that may be claimed in relation to an individual taxpayer.

The Court of Appeals for the Ninth Circuit, noting that this was a case of first impression, reversed, holding that the limits apply on a per-individual, not a per-residence, basis. (Voss v. Comm., (CA 9 8/7/2015) 116 AFTR 2d 2015-5529)

The Ninth Circuit relied largely on the parentheticals in reaching its conclusion, stating they suggest that, other than the debt limit amount, which differs, one can expect that in all respects the case of a married individual filing a separate return should be treated like any other case. It found telling the per-taxpayer wording of the parentheticals, the fact that they operate in a per-taxpayer manner, and the very inclusion of the parentheticals (which would be rendered superfluous under the Tax Court’s interpretation).

In addition, the Court noted that Congress could have, but didn’t, word the statute so as to support the result reached by the Tax Court. It also found the statute’s repeated references to a single “taxable year” support its conclusion as taxpayers have tax years but residences do not, and that the CCA should be afforded only limited weight.

A dissenting opinion found that, since the plain language of the statute gave no indication of how to resolve the issue, IRS’s reasonable reading of Code Sec. 163(h)(3) in the CCA should have been respected. (For more details on the Ninth Circuit’s opinion,

IRS acquiesces. IRS has announced that it acquiesces in the Ninth Circuit’s Voss decision. Accordingly, it will apply the limits on a per-taxpayer basis, allowing each taxpayer to deduct mortgage interest on indebtedness of up to $1 million and $100,000, respectively, on a qualified residence.

Editor’s Note: This was one of the Tax Court cases reviewed at the 2015 What’s Happening in the World of Tax and all attendees should take particular note that it’s never over until the taxpayers say it’s over.

Tax Professionals: Monitor Your PTIN for Suspicious Activity

Tax preparers can help protect clients and their businesses from identity theft by checking their PTIN Accounts to ensure the number of returns filed using their identification number matches IRS records.

Criminals are increasingly targeting tax professionals, not only to steal client data but also to steal the professionals’ data such as PTINs, EFINs or e-Service passwords. The IRS has teamed up with state tax agencies and the tax industry for a “Protect Your Clients; Protect Yourself” campaign to help increase awareness among tax professionals.

The IRS offers many preparers the ability to monitor “Returns Filed Per PTIN.” This information is available in the online PTIN system for tax return preparers who meet both of the

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New guidance. IRS notes that if a taxpayer receive income from a sharing economy activity, it’s generally taxable. This is true even if the taxpayer even didn’t receive a Form 1099-MISC (Miscellaneous Income), Form 1099-K (Payment Card and Third Party Network Transactions), Form W-2 (Wage and Tax Statement), or some other income statement. There is likely a tax obligation even if the taxpayer pursued this activity as a side job or as a part time business and even if the taxpayer was paid in cash. On the brighter side, depending upon the circumstances, some or all of the taxpayer’s business expenses may be deductible, subject to the normal tax limitations and rules.

IRS has provided guidance to taxpayers with the release of its new “Sharing Economy Resource Center” webpage (at https://www.irs.gov/businesses/small-businesses-self-employed/sharing-economy-tax-center). IRS offers tips and resources on a variety of topics ranging from filing requirements and making quarterly estimated tax payments to self-employment taxes and special rules for reporting vacation home rentals. Some topics include:

• . . . Taxes. Income received is generally taxable, evenif the recipient doesn’t receive a Form 1099, W-2 or someother income statement and even if the activity is only part-time or a sideline business.

• . . . Deductions. There are some simplified optionsavailable for deducting many business expenses for thosewho qualify. For example, a person who uses his car forbusiness often qualifies to claim the standard mileage rate,currently 54¢ a mile for 2016.

• . . . Rentals. Special rules generally apply to the rentalof a home, apartment or other dwelling unit that is used bythe taxpayer as a residence during the tax year. Usually,rental income must be reported in full, any expenses needto be divided between personal and business purposesand special deduction limits apply. But if the dwelling unit isrented out fewer than 15 days during the year, none of therental income is reportable and none of the rental expensesare deductible.

• . . . Estimated payments. Those involved in the sharingeconomy often need to make estimated tax payments duringthe year to cover their tax obligation. These payments aredue on Apr. 15, June 15, Sept. 15 and Jan. 15. Form 1040-ES is used to figure these payments.

• . . . Payment options. The fastest and easiest way tomake estimated tax payments is to do so electronically usingIRS Direct Pay or the Treasury Department’s ElectronicFederal Tax Payment System (EFTPS).

• . . . Withholding. Alternatively, those involved in thesharing economy who are employees at another job canoften avoid needing to make estimated tax payments byhaving more tax withheld from their paychecks. FormW-4 can be filed with an employer to request additionalwithholding.

Proposed Regs Increase Fees for Installment Payment Agreement & Offer Reduced Fee Online Options

Preamble to Prop Reg 08/19/2016; Prop Reg § 300.1, Prop Reg § 300.2; IR 2016-108

IRS has issued proposed regs and an accompanying news release that would increase the fees for entering into an installment arrangement for paying taxes but also offer a new set of fees for taxpayers who set up an installment agreement via IRS’s website. The new fees would take effect for installment agreements entered into on or after Jan. 1, 2017.

Code Sec. 6159 authorizes IRS to enter into an agreement with any taxpayer for the payment of tax in installments to the extent IRS determines that entering into the installment agreement will facilitate the full or partial collection of the tax. Installment agreements are voluntary, and taxpayers may request an installment agreement in person, by completing the appropriate forms and mailing them to IRS, online, or over the telephone.

IRS currently charges three rates for installment agreements. The user fee, in general, is $120 for an installment agreement. The user fee is reduced to $52 for a direct debit installment agreement, which is an agreement whereby the taxpayer authorizes IRS to request the monthly electronic transfer of funds from the taxpayer’s bank account to IRS The user fee is $43 notwithstanding the method of payment if the taxpayer is a low-income taxpayer. A low-income taxpayer is an individual who falls at or below 250% of the dollar criteria established by the poverty guidelines updated annually in the Federal Register by the U.S. Department of Health and Human Services. (Reg. § 300.1)

Under Reg. § 300.2, IRS currently charges $50 for restructuring or reinstating an installment agreement that is in default. An installment agreement is deemed to be in default when a taxpayer fails to meet any of the conditions of the installment agreement. Currently, there is no exception to this fee for low-income taxpayers.

Fee change as of Jan. 1, 2017. Under the new proposed regs, the following fees would be charged for installment agreements:

• Regular Installment Agreements – A taxpayer contactsIRS in person, by phone, or by mail and sets up an agreementto make manual payments over a period of time either bymailing a check or electronically through the ElectronicFederal Tax Payment System (EFTPS). The proposed feefor entering into a regular installment agreement on or afterJan. 1, 2017 would be $225. (Prop Reg § 300.1(b))

• Direct Debit Installment Agreements – A taxpayercontacts IRS by phone or mail and sets up an agreementto make automatic payments over a period of time througha direct debit from a bank account. The proposed fee for

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entering into a direct debit installment agreement on or after Jan. 1, 2017 would be $107. (Prop Reg § 300.1(b)(1))

• Online Payment Agreements – A taxpayer sets upan installment agreement Online Payment Agreementapplication on http://www.irs.gov and agrees to makemanual payments over a period of time either by mailing acheck or electronically through the EFTPS. The proposedfee for entering into an online payment agreement on orafter Jan. 1, 2017 would be $149. (Prop Reg § 300.1(b)(2))

• Direct Debit Online Payment Agreements – A taxpayersets up an installment agreement Online PaymentAgreement application on http://www.irs.gov and agrees tomake automatic payments over a period of time through adirect debit from a bank account. The fee for entering intoa direct debit online payment agreement on or after Jan. 1,2017 would be $31. (Prop Reg § 300.1(b)(2))

• Restructured/Reinstated Installment Agreements –A taxpayer modifies a previously established installmentagreement or reinstates an installment agreement onwhich the taxpayer has defaulted. The proposed fee forrestructuring or reinstating an installment agreement on orafter Jan. 1, 2017 would be $89. (Prop Reg § 300.2(b))

• Low-Income Rate – A rate that applies when a low-income taxpayer enters into any type of installmentagreement, other than a direct debit online paymentagreement, and when a low-income taxpayer restructuresor reinstates any installment agreement. The definition oflow-income taxpayer would not be changed from that in thepreviously-existing reg. The low-income rate would remainat $43. The fee would be $31 when the taxpayer pays byway of a direct debit from the taxpayer’s bank account withrespect to online payment agreements entered into on orafter Jan. 1, 2017. (Prop Reg § 300.1(b)(3))

Proposed Education Credit and Tuition Deduction Compliance Regs Implement Recent Legislation

IRS has issued proposed regs containing compliance requirements for persons wishing to take the American Opportunity Tax Credit, the Lifetime Learning Credit, or the deduction for qualified tuition expenses and for education institutions. Most of the provisions in the proposed regs would implement law changes contained in 2015 legislation; the proposed regs also contain clarifications, etc. of older rules.

Code Sec. 6050S requires educational institutions to file information returns and statements to assist students and IRS in determining the tax credits that may be claimed under Code Sec. 25A (American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC)), as well as other tax breaks that may be available for higher-education costs (e.g., above-the-line deduction under Code Sec. 222 for qualified tuition and expenses). The information must be reported on Form 1098-T (Tuition Statement).

Code Sec. 6721 imposes a penalty on an eligible educational

institution that fails to timely file correct information returns with IRS. Code Sec. 6722 imposes a penalty on an educational institution that fails to timely furnish correct written statements to the student. However, Code Sec. 6724(a) provides that the penalty under Code Sec. 6721 or Code Sec. 6722 may be waived if it is shown that the failure was due to reasonable cause and not due to willful neglect.

The Trade Preferences Extension Act of 2015 (P.L. 114-27; TPEA) and the Protecting Americans from Tax Hikes Act of 2015 (P.L. 114-113, PATH) made several changes to the abovementioned Code sections.

Proposed regs would implement 2015 legislation, etc. IRS has issued a comprehensive set of proposed regs that include rules that implement many provisions of TPEA and PATH.

Changes to regs under Code Sec. 25A. The new regs propose changes to the education credit regs themselves, including:

...TPEA changes. Section 804 of TPEA changes the requirements for a taxpayer to claim education tax benefits under Code Sec. 25A or Code Sec. 222. For qualified tuition and related expenses paid during tax years beginning after June 29, 2015, TPEA provides that, unless IRS provides otherwise, a taxpayer must receive a Form 1098-T to claim either a credit under Code Sec. 25A or a deduction under Code Sec. 222.

The proposed regs reflect these changes. Specifically, the proposed regs would add a new paragraph Prop Reg § 1.25A-1(f)(1) to require that, for tax years beginning after June 29, 2015, unless an exception applies, no education tax credit would be allowed unless the taxpayer (or the taxpayer’s dependent) received a Form 1098-T.

However, the proposed regs note that the amount reported on the Form 1098-T may not reflect the total amount of qualified tuition and related expenses that the taxpayer has paid during the tax year because certain expenses are not required to be reported on the Form 1098-T. For example, under Prop Reg § 1.25A-2(d)(3), expenses for course materials paid to a vendor other than an eligible educational institution would be eligible for the AOTC. However, because these expenses are not paid to an eligible educational institution, these expenses would not be required to be reported on a Form 1098-T. Accordingly, a taxpayer who meets the requirements in Prop Reg § 1.25A-1(f) regarding the Form 1098-T requirement to claim the credit and who can substantiate payment of qualified tuition and related expenses, would be able to include these unreported expenses in the computation of the amount of the education tax credit allowable for the tax year even though the expenses are not reported on a Form 1098-T. (Prop Reg § 1.25A-1(f)(1))

In other words, unless an exception applies, a taxpayer who receives no Form 1098-T cannot take an education credit. But, if he receives a credit or one of those exceptions applies, the amount of expenses that would enter the credit calculation would not necessarily be limited to the expenses shown on

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Form 1098-T.

Prop Reg § 1.25A-1(f)(2)(i) would provide an exception to the Form 1098-T requirement in Prop Reg § 1.25A-1(f)(1) if the student has not received a Form 1098-T by the later of (a) January 31 of the tax year following the tax year to which the education credit relates or (b) the date the federal income tax return claiming the education tax credit is filed. This exception would only apply if the taxpayer or taxpayer’s dependent (i) has requested, in the manner prescribed in publications, forms and instructions, or published guidance, the eligible educational institution to furnish the Form 1098-T after January 31 of the year following the tax year to which the education tax credit relates but on or before the date the return is filed claiming the education tax credit, and (ii) has cooperated fully with the eligible educational institution’s efforts to obtain information necessary to furnish the statement.

Prop Reg § 1.25A-1(f)(2)(ii) would provide that the receipt of a Form 1098-T would not be required if the reporting rules under Code Sec. 6050S and related regs provide that the eligible educational institution is exempt from providing a Form 1098-T to the student (for example, non-credit courses).

Until the proposed regs under Prop Reg § 1.25A-1(f) and Prop Reg § 1.6050S-1(a) (see “Changes to regs under Code Sec. 6050S,” below) are finalized, a taxpayer (or the taxpayer’s dependent) (other than a non-resident alien) who does not receive a Form 1098-T because its institution is exempt from furnishing a Form 1098-T under current Reg. § 1.6050S-1(a)(2) may claim an education tax credit under Code Sec. 25A(a)if the taxpayer (1) is otherwise qualified, (2) can demonstratethat the taxpayer (or the taxpayer’s dependent) was enrolledat an eligible educational institution, and (3) can substantiatethe payment of qualified tuition and related expenses. Section804(b) of TPEA also amends Code Sec. 222 to require aForm 1098-T to claim a deduction for qualified tuition andrelated expenses for tax years beginning after June 29, 2015.(Preamble to Prop Reg 07/29/2016)

Rules similar to those in Prop Reg § 1.25A-1(f), including the exceptions, apply for purposes of Code Sec. 222. (Preamble to Prop Reg 07/29/2016)

Prop Reg § 1.25A-1(f)(2)(iii) also provides that IRS may provide additional exceptions in published guidance of general applicability.

The proposed rules under Prop Reg § 1.25A-1(f) would apply to education tax credits claimed for tax years beginning after June 29, 2015. (Prop Reg § 1.25A-1(f)(3))

...PATH changes. Section 206(a)(2) of PATH amends Code Sec. 25A(i) to provide that the AOTC is not allowed if the student’s TIN or the TIN of the taxpayer claiming the credit is issued after the due date for filing the return for the tax year. This amendment is generally effective for any return or amended return filed after Dec. 18, 2015.

The proposed regs would reflect this change. Specifically, the

proposed regs would add new Prop Reg § 1.25A- 1(e)(2)(i), which would provide that, for any federal income tax return (including an amended return) filed after Dec. 18, 2015 (Prop Reg § 1.25A-1(e)(3)(ii)), no AOTC would be allowed unless the student’s TIN and the taxpayer’s TIN are issued on or before the due date (including an extension, if timely requested) for filing the return for that tax year.

Section 211 of PATH amends Code Sec. 25A(i) to provide that the AOTC is not allowed unless the taxpayer’s return includes the EIN of any institution to which the qualified tuition and related expenses were paid with respect to the student. The proposed regs would reflect this change by adding new Prop Reg § 1.25A-1(e)(2)(ii), effective for tax years beginning after Dec. 31, 2015. (Prop Reg § 1.25A-1(e)(3)(iii))

...Other changes. The proposed regs would also clarify the rules regarding a refund of qualified tuition and related expenses received from an eligible educational institution. The current regs do not address the situation where the taxpayer receives a refund in the current tax year of qualified tuition and related expenses for an academic period beginning in the current tax year, where payments were made during the prior tax year under the prepayment rule and payments were made during the current tax year. To address this situation, the proposed regs would provide that the taxpayer could allocate the refund in any proportion to reduce qualified tuition and related expenses paid in either tax year, except that the amount of the refund allocated to a tax year could not exceed the qualified tuition and related expenses paid in the tax year for the academic period to which the refund relates. The sum of the amounts allocated to each tax year could not exceed the amount of the refund. (Prop Reg § 1.25A-5(f)(6)) The proposed regs would add an example to illustrate this rule. (Prop Reg § 1.25A-5(f)(7), Example 4)

This clarification would apply to qualified tuition and related expenses paid, and education furnished, in academic periods beginning on or after the date of publication of the final regs. However, taxpayers would be able to apply the clarification in tax years for which the limitation on filing a claim for credit or refund under Code Sec. 6511 has not expired. (Prop Reg § 1.25A-5(g)(2))

Changes to regs under Code Sec. 6050S. The new regs propose changes to the regs on higher education returns to be prepared by educational institutions, including the following TPEA changes:

Currently, the regs under Code Sec. 6050S include exceptions to reporting. For instance, under Reg. § 1.6050S-1(a)(2)(i), institutions are not required to file a Form 1098-T with IRS or provide a Form 1098-T to a nonresident alien, unless the individual requests a Form 1098-T. And, under Reg. § 1.6050S-1(a)(2)(ii), institutions are not required to report information with respect to courses for which no academic credit is awarded.

IRS says that these exceptions, other than the exception for no-academic-credit courses, are inconsistent with the TPEA,

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information rule.

Under Code Sec. 501(c)(4), civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare are exempt from income taxation if no part of their earnings inures to the benefit of any private shareholder or individual and no substantial part of the organization’s activities consists of providing commercial-type insurance. These organizations may engage in political campaign activities on behalf of or in opposition to candidates for public office. However, in order to retain its tax-exempt status, an organization must ensure that political campaign activities do not constitute its “primary” activity. (Reg. § 1.501(c)(4)-1(a)(2)(i); Rev Rul 81-95, 1981-1 CB 332 )

On May 14, 2013, the Treasury Inspector General for Tax Administration issued a report entitled “Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review,” which stated, “the criteria developed by the [IRS] Determinations Unit gives the appearance that the IRS is not impartial in conducting its mission. The criteria focused narrowly on the names and policy positions of organizations instead of tax-exempt laws and Treasury regs.”

Returns and return information are confidential, and may not be disclosed except as authorized under the Code. (Code Sec. 6103(a)) “Return information” is defined broadly to include “any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to a determination of the existence, or possible existence” of a taxpayer’s liability under the Code. (Code Sec. 6103(b)(2)(A)) Under one of the exceptions to Code Sec. 6103(a), inspection by or disclosure to officers and employees of the Department of the Treasury whose official duties require such inspection or disclosure for tax administration purposes, is permitted. (Code Sec. 6103(h)(1)) Code Sec. 7431 provides damages for violations of Code Sec. 6103.

Federal courts, pursuant to Article III of the Constitution, have no jurisdiction to act unless there is “a case or controversy.” Where a case once posed a live controversy when filed, the mootness doctrine requires the Court to refrain from deciding it if events have so transpired that the decision will neither presently affect the parties’ rights nor have a more-than-speculative chance of affecting them in the future. See, e.g., Clarke v. United States, (CA Dist Col 1990) 915 F.2d 699.

The taxpayers in the case were two sets of politically conservative groups, True the Vote, Inc. (True) and Linchpins of Liberty (Linchpins), that applied for tax-exempt status under Code Sec. 501(c)(4) as social welfare organizations.

Each taxpayer brought a suit in district court in which it sought a declaratory judgment that an “IRS targeting scheme” violated its First Amendment rights and injunctive relief to prevent additional violations. Each also sought civil damages for IRS violations of Code Sec. 6103. (True the Vote, Inc., (DC Dist Col 2014) 114 AFTR 2d 2014-6381; Linchpins of Liberty, (DC Dist Col 2014) 114 AFTR 2d 2014-6391)

which generally requires a student to receive a Form 1098-T from the educational institution to claim a Code Sec. 25A education credit. Therefore, the proposed regs would remove the exceptions other than the no-academic-credit courses exception.

The proposed regs would add new paragraph Prop Reg § 1.6050S-1(b)(2)(ii)(I) to require the institution to indicate the number of months that a student was a full-time student during the calendar year. The proposed regs would also add to that paragraph a definition of what constitutes a month. This information would assist IRS in determining whether a parent properly claimed the student as a dependent and, therefore, properly claimed the credit for the student’s qualified tuition and related expenses.

The proposed regs would clarify Reg. § 1.6050S-1(b)(2)(v) regarding the rules for determining the amount of payments received for qualified tuition and related expenses. This clarification is intended to provide a uniform rule for all institutions to determine whether a payment received by an institution should be reported on a Form 1098-T as qualified tuition and related expenses in the current year. Under the proposed rule, payments received during a calendar year would be treated first as payments of qualified tuition and related expenses up to the total amount billed by the institution for qualified tuition and related expenses for enrollment during the calendar year and then as payments of expenses other than qualified tuition and related expenses for enrollment during the calendar year. A similar rule would apply in the case of payments received during the calendar year with respect to enrollment in an academic period beginning during the first three months of the next calendar year. In that case, the payments received by the institution with respect to the amount billed for enrollment in an academic period beginning during the first three months of the next calendar year would be treated as payments of qualified tuition and related expenses for the calendar year in which the payments are received. (Prop Reg § 1.6050S-1(b)(2)(v)) Examples have been added to illustrate these rules. (Prop Reg § 1.6050S-1(b)(2)(vii))

These Prop Reg § 1.6050S-1 rules would apply to information returns required to be filed, and statements required to be furnished, after the date final regs are published. (Prop Reg § 1.6050S-1(g))

CA Reverses: Conservative Nonprofit Groups May Proceed with IRS Discrimination Suit

True the Vote Inc. et al, (CA Dist Col 8/5/2016) 118 AFTR 2d ¶ 2016-5092

The Court of Appeals for the District of Columbia, reversing and remanding a district court, has held that a case brought by politically conservative groups that sought a declaratory judgment and injunctive relief because IRS singled them out for unnecessary scrutiny and delayed consideration of their applications for tax-exempt status, was not moot and so could proceed. The Court also affirmed the lower court’s finding that IRS had not violated Code Sec. 6103’s confidentiality of return

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remained pending with IRS on that day. But the Court said that a heavy burden of establishing mootness is not carried by proving that the case is nearly moot, or is moot as to a “vast majority” of the parties. Their heavy burden requires that they establish cessation, not near cessation.

The Court was even less impressed when IRS argued that the continued failure to afford proper processing to at least some of the victim applicants should not prevent a finding of cessation. IRS explained that the organizations whose applications were still pending were involved in litigation with the Justice Department and that “under long-standing procedures, administrative action on an application for exemption is ordinarily suspended if the applicant files suit in court.” The Court said “[i]t is not at all clear why the IRS proposes that not ceasing becomes cessation if the victim of the conduct is litigating against it.”

Code Sec. 6103 issue. The Court, citing NorCal Tea Party Patriots (DC OH 2014)114 AFTR 2d 2014-5358, said that, in order for the taxpayers to prevail on their Code Sec. 6103 argument, they had to establish that IRS officials who inspected or disclosed the return information did so knowing that the information was not necessary for tax administration purposes, regardless of whether the IRS officials who requested the information knew or believed it was necessary for the Code Sec. 501(c)(4) application. And, it said that the taxpayers failed at this because their complaint made only conclusory allegations about this issue.

So, the Court affirmed the district court holding that the taxpayers could not receive damages for IRS violations of Code Sec. 6103.

IRS Responds to National Tax Advocate’s Criticism of “Future State” Plans

IR 2016-112

In her 2015 annual report to Congress, National Taxpayer Advocate (NTA) Nina Olson expressed particular concern that IRS’s “Future State” plans on how the agency will operate in five years would result in substantially reduced telephone and facet-to-face service for taxpayers, which in turn would increase taxpayer compliance costs to the extent that they would instead turn to third parties (like tax return preparers and tax software companies) for the help they need. IRS has responded to rebut these contentions, and the NTA, having the last word, has offered her comments on the response.

The NTA is required by statute to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The first of these reports, submitted mid-year, identifies the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year. The second of these reports is submitted at the end of the year and is required to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.

The two district court cases were not officially consolidated at the Circuit Court, but the issues were the same and therefore there was one opinion. The Circuit Court only discussed the facts in Linchpins and, as a result, except where otherwise specifically noted, the rest of this article will consider only facts involving Linchpins.

The taxpayers in Linchpins included two parties whose application for tax-exempt status had not been acted upon as of the date when the Linchpins complaint had been filed.

IRS contended, and the district court agreed, that taxpayers’ claims became moot because IRS had stopped using its admittedly improper discriminatory criteria and handling of applications by taxpayers with politically disfavored names. And so the district court ruled that it didn’t have jurisdiction to grant the declaratory or injunctive relief sought by the taxpayers.

As to the claim for damages for IRS’s violation of Code Sec. 6103, the district court also sided with IRS. It held that the taxpayer’s real bone of contention was that IRS allegedly demanded information that was not necessary for determining the taxpayer’s tax-exempt status, and then inspected it. The court said that, although True was upset about IRS’s inspection of its tax return information, it was actually IRS’s alleged unconstitutional conduct in acquiring that information that formed the basis of the taxpayer’s complaint. But, it said, Code Sec. 6103 is silent as to how tax return information can be acquired. Even assuming that IRS improperly acquired the taxpayer’s tax return information, that does not compel a finding that such information was improperly inspected.

Circuit Court reverses; issue isn’t moot. The Circuit Court, reversing and remanding the district court, held that the taxpayers’ claims for declaratory judgment and injunctive relief were not moot and should be heard by the district court on remand.

As it had in the district court, the question boiled down to whether IRS could meet the doctrine of “voluntary cessation.” That doctrine governs the case in which the defendant actor is not committing the controversial conduct at the moment of the litigation, but “the defendant is free to return to its old ways, thereby subjecting the plaintiff to the same harm but, at the same time, avoiding judicial review.” For a defendant to successfully establish mootness by reason of its voluntary cessation of the controversial conduct, the defendant must show that “(1) there is no reasonable expectation that the conduct will recur and (2) interim relief or events have completely and irrevocablyeradicated the effects of the alleged violation.” The defendanthas the burden of establishing that these criteria have beenmet, and it is a “heavy burden.”

The Court cited several reasons that IRS did not meet the voluntary cessation requirements. It said that IRS had admitted to the Inspector General, to the district court, and to it that applications for exemption by some taxpayers had not been processed, even as of the day of the Circuit Court pleading. IRS said that no more than two applications for exemption

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The NTA’s annual report to Congress creates a dialogue within IRS and the highest levels of government to address taxpayers’ problems, protect taxpayers’ rights, and ease taxpayers’ burden. The NTA delivers its report directly to the tax-writing committees in Congress (the House Committee on Ways and Means and the Senate Committee on Finance), with no prior review by the IRS Commissioner, the Secretary of the Treasury, or the Office of Management and Budget. By statute, IRS must respond to the NTA’s recommendations with regard to her “most serious problems.”

NTA’s concerns. In her 2015 annual report to Congress, foremost among the issues that the NTA focused on was the potential adverse impact of IRS Future State plans on taxpayers. Since 2014, IRS has invested substantial resources to develop a Future State plan, which has involved significant participation by virtually all IRS business units and the engagement of management consultants. The NTA reports says that implicit in the plan—and explicit in internal discussion—is IRS’s intention to substantially reduce telephone and face-to-face interaction with taxpayers. Ms. Olson notes that while these reductions are a central assumption in the Future State planning process, it is impossible to describe the scope of the contemplated reductions with specificity because little about service reductions has been committed to writing. The Future State plan also calls for expanding the role of tax return preparers and tax software companies in providing taxpayer assistance, which would likely increase compliance costs for millions of taxpayers who now obtain free IRS assistance.

IRS has historically maintained a robust customer service telephone operation that, in every year since Fiscal Year 2008, has received more than 100 million taxpayer telephone calls, as well as a network of nearly 400 walk-in sites that, in every year for over a decade, has provided face-to-face assistance to more than 5 million taxpayers.

IRS now appears to presume that taxpayer interactions with IRS through online accounts will address a high percentage of taxpayer needs, enabling it to curtail existing taxpayer services without significantly impacting taxpayers. The NTA stated that technology improvements often do not reduce demand for personal service to the extent expected.

In recent years, IRS has already begun to reduce taxpayer services by declaring that all but simple tax-law questions are “out of scope” for IRS to answer during the filing season; by declaring that it will not answer any tax-law questions after the filing season (including questions from millions of taxpayers with proper extensions of time to file); by eliminating an online program that allowed taxpayers to submit questions electronically; and by eliminating the preparation of tax returns in its walk-in sites.

Ms. Olson characterized the combination of reductions in personal service and IRS’s plans to direct taxpayers with questions to preparers and other third parties (along with the expansion of IRS user fees) as creating a “pay to play” tax system, where only taxpayers who can afford to pay for tax advice will receive personal service, while others will be left

struggling for themselves. Further, expressing concerns about data security, she warned about the consequences of giving unregulated tax return preparers more access to taxpayer accounts.

The NTA report says that it’s critical that IRS share its plans in detail with Congress and outside stakeholders and then engage in a dialogue about the extent to which it intends to curtail or eliminate various categories of telephone service and face-to-face service, and how it will provide sufficient support for taxpayers. The NTA report recommends that: (1) IRS immediately publish its plan and seek public comments; and (2) Congress hold hearings on the future state of IRS operations. .

IRS’s response. IRS maintained that the goal of the Future State, which outlines IRS’s vision for delivery of additional taxpayer service and enforcement treatments moving forward, is to do business with taxpayers more timely and interactively through their preferred channels and means, which will also reduce taxpayer burden and encourage and enhance voluntary compliance.

IRS complained that the NTA mischaracterized the envisioned Future State in fundamental ways, giving the impression that the Future State was fully developed when it was still very much under development. IRS noted that seven cross-functional IRS teams, which included representatives from the NTA’s Office, were currently working on what it would take to produce the capabilities and functionalities necessary to deliver 18 Future State initiatives—including digital, analytic, and communication capabilities. The teams were now developing plans that would collectively form a roadmap to the Future State and provide the basis for updating the IRS Strategic Plan, from 2017 to 2021.

IRS envisioned more digital offerings over time that will allow taxpayers to interact with it in a manner similar to how they interact currently with their banks, retailers, and doctors. However, IRS had absolutely no intention of leaving critical taxpayer needs or preferences unsatisfied, as the NTA suggested. IRS recognized there will always be taxpayers who do not have access to the digital economy, or who simply prefer not to conduct their tax business with IRS online, and IRS remained committed to providing the services these taxpayers need.

IRS stated that its expanded digital, online and self-service capabilities were not intended to replace its existing telephone and face-to-face taxpayer services. Rather, these additional service channels would complement its existing service options (which would remain available) and would allow new options for taxpayers who prefer online interaction.

IRS said it was building the Future State with the benefit of taxpayer perspectives gained through various surveys, analyses and conjoint analyses that began in the early 2000s with the Taxpayer Assistance Blueprint. Even then, some taxpayers expressed a preference for interacting with us through an online service channel, such as an online chat.

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rolled over to an IRA or other eligible retirement plan (i.e., qualified trust, governmental Code Sec. 457 plan, Code Sec. 403(a) annuity and Code Sec. 403(b) tax-shelter annuity). For the rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. (Code Sec. 408(d)(3)) A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). (Code Sec. 72(t)) Only one tax-free IRA-to-IRA rollover per IRA account can be made within a one-year period. (Code Sec. 408(d)(3)(B))

IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond his reasonable control, and not waiving the 60-day rule would be against equity or good conscience (i.e., hardship waiver). (Code Sec. 408(d)(3)(I))

Rev Proc 2003-16, 2003-1 CB 359, establishes a letter-ruling procedure for taxpayers to apply for a waiver of the 60-day rollover requirement and sets out several factorsthat IRS considers in determining whether to waive the 60-day rollover requirement. These factors include time elapsedsince the distribution and inability to complete the rollover dueto death, disability, hospitalization, incarceration, restrictionsimposed by a foreign country, postal error, errors committedby a financial institution, etc. Rev Proc 2003-16, Sec. 3.03also provides for automatic approval for a waiver of the 60-day rollover requirement in certain circumstances in which arollover is not made timely due to an error on the part of afinancial institution.

New self-certification option. A taxpayer may make a written certification to a plan administrator or an IRA trustee, custodian, or issuer by using the model letter provided in Rev Proc 2016-47 or by using a letter that is substantially similar in all material respects. A copy of the certification should be kept in the taxpayer’s files and be available if requested on audit.

The certification must state that a contribution satisfies the following conditions:

• . . . IRS must not have previously denied a waiverrequest with respect to a rollover of all or part of thedistribution to which the contribution relates.

• . . . The taxpayer must have missed the 60-day deadlinebecause of the taxpayer’s inability to complete a rolloverdue to one or more reasons set out in Rev Proc 2016-47,Sec. 3.02(2), including error by the financial institution,postal error, and a death in the taxpayer’s family.

• . . . The contribution must be made to the plan or IRA assoon as practicable after the applicable reason(s) no longerprevent the taxpayer from making the contribution. Thisrequirement is deemed to be satisfied if the contribution ismade within 30 days after that time.

IRS intends to modify the instructions to Form 5498, IRA Contribution Information, to require that an IRA trustee that

“Where’s My Refund” and other online applications which had allowed millions of taxpayers to get desired information quickly and easily without having to call or visit IRS. IRS said it continued to elicit taxpayers’ perspectives through updates to its surveys and conjoint analyses to include aspects of the Future State. IRS was also exploring other research techniques and channels to gain additional taxpayer insights as it developed its Future State vision and related capabilities.

IRS noted that the IRS Commissioner and Deputy Commissioners have been describing aspects of the Future State in various forums, both internally and externally, for well over a year. This includes ongoing dialogue about the shape and course of Future State developments with numerous stakeholders. IRS efforts to share information also include publishing a wide range of Future State material on IRS’s website, and highlighting these documents extensively in numerous media interviews and public appearances. The Commissioner and others have periodically briefed Congressional staffs and members on the Future State development.

IRS emphasized that the Future State’s goal was to make all interactions, whether taxpayer service interactions or enforcement interactions, more efficient and effective. For years, IRS enforcement interaction survey results have reflected taxpayers’ frustration with the time it takes to resolve compliance issues. The Future State includes early issue detection, through more robust anomaly detection at the time of filing, and more efficient interactions to resolve differences. Such will reduce taxpayer frustration and improve the overall taxpayer experience.

NTA’s response to IRS’s response. The NTA acknowledged that IRS has taken significant steps since the publication of the NTA’s report to publicize details of the Future State plan. To date, however, it was not clear that IRS has seriously sought public comments or adjusted its plan to take public comments into account. The NTA urged IRS both to continue a public dialogue and to give more weight to taxpayer and practitioner needs and preferences as it refines and implements its long-term plans.

New Self-certification Procedure for Taxpayers Who Miss 60-day Rollover Deadline

Rev Proc 2016-47, 2016-37 IRB; IR 2016-113

In a Revenue Procedure, IRS has provided a new self-certification procedure designed to help recipients of retirement plan distributions who, due to one or more specified reasons, inadvertently miss the 60-day time limit for properly rolling these amounts into another retirement plan or individual retirement arrangement (IRA). The new self-certification procedure allows these taxpayers to claim eligibility for a waiver of the 60-day rollover requirement that can be relied upon by a plan administrator or IRA trustee in accepting and reporting receipt of the rollover contribution.

There is no immediate tax if distributions from an IRA are

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• A smaller test involving 2 million forms in 2016 wasextremely successful in verifying the information on theforms.o The objective is to verify the information at the point offiling and prevent fraudsters from using fake Forms W-2 tocreate fraudulent refunds.

• State and the IRS will receive new data elements fromindividual returns that will help improve authentication ofthe taxpayer and identify possible identity theft scams.These new data elements are in addition to the more than20 elements identified last year.

• Partners also will share data elements from corporatetax returns to expand identity theft protections to businesses.

• Partners will enhance authentication efforts of taxreturn preparers and transmitters using Electronic FilingIdentification Numbers (EFINs.)

Communication and Taxpayer Awareness Work Group

• The Security Summit’s “Taxes. Security. Together.”campaign will expand to also focus its efforts on educationand outreach aimed at the nation’s 700,000 tax returnpreparers and making sure they have the informationthey need to protect themselves from cyberattacks and tosafeguard taxpayer data. This work group will collaboratewith the Tax Professional Work Group on outreach efforts.

Financial Services Work Group

• Twenty-three states worked with the financial industryon an external leads program, similar to the IRS ExternalLeads Program. The program, starting in 2017, allows thefinancial industry to help identify those state tax refunds thatappear fraudulent and return them to states for validationand review rather than depositing them.

• In an effort to ensure that refunds go only into properaccounts, the Summit partners expanded the definitionof Ultimate Bank Account to include all refund transferproducts, including gift and pre-paid cards, paper checksand direct deposit. UBA helps identify actual owners ofthe account. States and the IRS also will expand real-timecommunications with the pre-paid card industry to blockaccounts associated with fraud.

• The work group also is conducting several “test andlearn” pilot programs to enhance ways of identifying andstopping fraudulent or questionable refunds.

• The work group also will work with financial institutionsto identify best practices used to identify fraudulent refundsand share that information with other financial institutions.Information Sharing Work Group

• The work group will collaborate with the AuthenticationWork Group to evaluate proposed additional data elementsfrom electronic returns and work with industry and state

accepts a rollover contribution after the 60-day deadline report that the contribution was accepted after the 60-day deadline. (Rev Proc 2016-47, Sec. 3.03)

A plan administrator or IRA trustee may, absent actual knowledge to the contrary, rely on a taxpayer’s self-certification solely for purposes of determining whether the taxpayer has satisfied the conditions for a waiver of the 60-day rollover requirement. (Rev Proc 2016-47, Sec. 3.04(1))

IRS cautioned that a self-certification is not a waiver of the 60-day requirement. However, a taxpayer may report thecontribution as a valid rollover unless later informed otherwiseby IRS. If IRS, in the course of an examination, determinesthat the requirements for a waiver were not actually met, thetaxpayer may be subject to additions to income and penalties,such as the penalty for failure to pay the proper amount of taxunder Code Sec. 6651. (Rev Proc 2016-47, Sec. 3.04(2))

Modification of prior Rev Proc. Rev Proc 2016-47 also modifies Rev Proc 2003-16, by providing that, in addition to automatic waivers and those granted via application for a letter ruling, IRS may grant a waiver during an examination of the taxpayer’s income tax return. (Rev Proc 2016-47, Sec. 4)Effective date. Rev Proc 2016-47 is effective on Aug. 24, 2016. (Rev Proc 2016-47, Sec. 5)

Security Summit Partners Update Identity Theft Initiatives for 2017

The Internal Revenue Service, state tax agencies and private-sector industry continued their unprecedented Security Summit partnership by identifying and implementing additional taxpayer safeguards for the upcoming 2017 filing season.

IRS Commissioner John Koskinen convened the public and private tax administration leaders in 2015 to meet the evolving threat posed by increasingly sophisticated identity thieves, which included national and international criminal syndicates.For 2017, the emphasis remains on authentication of legitimate tax filers, information sharing and cybersecurity. Most activities also will be invisible to taxpayers but will be extremely helpful to Summit partners in detecting and preventing identity theft returns and fraudulent refunds.

The Security Summit consists of seven work groups. The 2017 initiatives include:

Authentication Work Group

• The IRS and its partners in the payroll and softwareindustries will greatly expand a pilot program to add W-2Verification Codes to 50 million Forms W-2 in 2017. Thissafeguard will be among the most visible to taxpayers andtax preparers in the 2017 filing season.

• The Verification Code is a 16-digit alphanumeric codethat taxpayers and tax preparers enter when prompted bytheir software product.

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• In addition, there will be continued support for theAuthentication and Information Sharing work groups aswell as a focus on continued outreach and education forthe participants.

Related Actions

• Starting July 1, 2016, the Security Summit’s effortswill come under the Electronic Tax Administration AdvisoryCommittee (ETAAC). An amendment to ETAAC’s charterexpanded its scope to include identity theft.

Tax Pros in Trouble

Federal Court Bars Two Tax Preparers

A federal court in Charleston, South Carolina, has permanently barred two women from preparing federal tax returns for others, the Justice Department announced.

According to a civil complaint filed by the United States, Latasha Failey and her sister Latoya Windham prepared federal income returns in North Charleston from 2009 to 2012. They continually and repeatedly prepared income tax returns that claimed false deductions or credits in order to understate their customers’ tax liabilities, the complaint alleged. The defendants falsely claimed education credits; child and dependent care credits; itemized deductions on Schedule A; and dependency exemptions, according to the complaint. In 2013, Failey and Windham each pleaded guilty to two counts of aiding and assisting in the preparation and presentation of a false income tax return and were sentenced to prison and probation, respectively, the complaint states.

The court’s order also requires Failey and Windham to give the United States a list of all of their return preparation customers since Jan. 1, 2013.

Jupiter Attorney Pleads Guilty to Filing False Tax Returns with the IRS

A Jupiter trust and estate attorney pled guilty before United States Magistrate Judge James M. Hopkins in West Palm Beach to filing false personal income tax returns with the Internal Revenue Service (IRS) in which her income was underreported, resulting in additional tax due of $923,695 for tax years 2007 through 2012.

Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, and Kelly R. Jackson, Special Agent in Charge, Internal Revenue Service, Criminal Investigation (IRS-CI), made the announcement.

Kathleen Kozinski, pled guilty to a criminal information charging her with two counts of filing a false tax return, in violation of Title 26, United States Code, Section 7206(1), for tax years 2008

partners for testing the proposed data elements.

• The work group will improve existing documents,reports and processes, including enhancing analysisof leads to provide more meaningful communication tostate and industry partners. The improved communicationmay provide alerts on filing patterns and other actionableinformation on questionable filing activity and that willboost efforts to reduce identity theft refund fraud across allplatforms.

• Confirmed identity theft account information will beprovided to industry and states at the start of the filingseason to provide Summit partners with the opportunity toanalyze the information and update their internal fraud andprocessing filters. The work group also will analyze andaddress industry lead reporting compliance with Publication1345 and the requirement upon industry to provide identitytheft data.

Information Sharing and Analysis Center Work Group (ISAC)

• Like early warning radar, a new Identity Theft TaxRefund Fraud Information Sharing & Analysis Center(IDTTRF-ISAC)will launch in 2017. A tax ecosystem ISACwill allow for significant gains in detecting and preventingidentity theft refund fraud and will provide better data tolaw enforcement to investigate and prosecute identitythieves. This will provide all Summit partners with a threatassessment capability, early warning and insights aboutidentity theft fraud schemes through nimble and agileinformation sharing.

Tax Professionals Work Group

• The work group will collaborate with the Communicationand Taxpayer Awareness Work Group on an outreach andeducation campaign aimed at tax professionals.

• This outreach will also include a filing season guide onlocating available information regarding returns filed witha preparer EFIN or PTIN, and the importance of using thecapability regularly to detect potential identity theft.Strategic Threat Assessment and Response (STAR) WorkGroup

• Tax industry participants will begin implementation ofthe National Institute of Standards and Technology (NIST)Cybersecurity Framework.

• STAR work group plans include determining futureassessment criteria, compliance options and sharing bestcybersecurity practices through continued education andoutreach.

• The STAR work group plans to develop a cyber-threat assessment of the tax ecosystem, incorporate anychanges in NIST guidance and continue implementation ofthe Cybersecurity Framework.

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in Roseville.

According to court documents obtained by the Press Tribune, Dougan substantially underreported his gross profit and net profit, and overstated his cost of goods sold and net expenses, to his tax preparers in 2006 and 2007. He also claimed business expenses to which he was not entitled.

When the IRS audited his 2006 return, Dougan gave documents to his audit representatives that understated his 2006 gross income in order to substantiate certain entries on his Schedule C – a form to report income and losses – for that year.

On July 28, a federal grand jury returned a three-count indictment against Dougan including two counts of assisting in the preparation of a false tax document and one count of corruptly trying to impede the administration of Internal Revenue Laws.

Assistant U.S. Attorneys Michael Beckwith and Matthew Yelovich are prosecuting the case.

If convicted, Dougan could face a maximum penalty of three years in prison and a fine of up to $100,000, or twice the value of the gross gain or loss from the tax violation, for each count of conviction.

New York Tax Return Preparer Convicted

A Queens, New York, tax return preparer was convicted by a federal jury yesterday in the U.S. District Court for the Eastern District of New York of preparing false income tax returns for clients of her tax return preparation business, announced Principal Deputy Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division.

Williesteina Jacobs was convicted of 21 counts of aiding and assisting in the preparation of false income tax returns after a seven day jury trial. According to court documents and testimony at trial, between 2007 and 2010, Jacobs operated International Professional Business Services, a tax preparation business located in South Richmond Hill, New York, and Jamaica, New York. During the years at issue, Jacobs prepared false individual income tax returns on behalf of clients for submission to the Internal Revenue Service (IRS). These tax returns claimed false losses from Schedule C businesses and grossly inflated or wholly fictitious Schedule A deductions. The false items on these returns resulted in the clients receiving larger tax refunds than they were entitled to receive.

“With the verdict, Williesteina Jacobs is held accountable for her crimes against the United States and the harm she caused to our nation’s tax system,” said Principal Deputy Assistant Attorney General Ciraolo. “Tax return preparers owe a duty to their clients to prepare accurate and honest returns, and when they willfully fail to do so, the Department stands ready with its partners in the IRS to investigate and aggressively prosecute these offenders.”

and 2011. As part of her plea agreement, Kozinski agreed to pay $923,695 in restitution to the IRS to reflect unpaid and underreported taxes due and owing for tax years 2007-2102. Kozinski is scheduled to be sentenced before United States District Judge Robin L. Rosenberg in West Palm Beach on October 7, 2016 at 11:00 a.m. At sentencing, Kozinski faces up to three years in prison per count of conviction.

According to court documents, Kozinski was an attorney with a solo estate planning and probate practice, Kathleen G. Kozinski, PA, located in Jupiter, Florida. For tax years 2007 through 2012, Kozinski failed to report all of her income on her individual Form 1040 tax returns.

Specifically, Kozinski willfully failed to report all of the gross receipts from Kathleen G. Kozinski, PA on her Form 1120S, Income Tax Return for an S Corporation. Shareholders of S corporations are required to report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. Kozinski underreported her income on her individual Form 1040 tax returns by not reporting all of the gross receipts from her law practice on her Form 1120S.

In addition to not including all of the gross receipts, Kozinski also falsely claimed “mortgage write-off” losses in the amount of $137,293.00 in tax year 2007, while she knew she had not provided an actual loan to another individual and was not entitled to this deduction. In tax year 2011, Kozinski claimed a loss of $113,745 on a “Schedule F Farm Loss” by falsely claiming that she paid labor expenses and insurance expenses, but the defendant did not operate a farming business and knew she was not entitled to these deductions. In 2012, Kozinski claimed a “Home Office” expense of $39,001, but the defendant knew that she was not entitled to claim this deduction because she did not have a home office.

Granite Bay Attorney Stephen Dougan Charged with Tax Fraud; Faces Up to 3 Years, $100K Penalty.

Following an investigation by the Internal Revenue Service, a Granite Bay attorney was charged last week with three counts of tax offenses that could result in prison time and a $100,000 fine.

The attorney was 57-year-old Stephen J. Dougan Esq., who lives in Granite Bay but has a practice on Douglas Boulevard

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“Taxpayers rely on tax return preparers to prepare accurate tax returns,” said Chief Richard Weber of IRS-Criminal Investigation. “Return preparers who willfully falsify tax returns in order to generate more business for themselves violate the trust their clients place in them and violate the law. The verdict reinforces our commitment to identify and prosecute crooked tax preparers.”

Tampa Woman Sentenced for Tax Fraud

U.S. District Judge James S. Moody, Jr. today sentenced Latosha Strong to 15 months in federal prison for filing false federal income tax returns in the names of deceased individuals. The Court also ordered her to pay $52,735.71 in restitution to the U.S. Treasury, which are traceable to proceeds of the offense. Strong pleaded guilty on December 11, 2015.

According to court documents, Strong, and others working with her, prepared and filed fraudulent tax returns using the stolen identities of at least 10 deceased individuals for the 2010 and 2011 tax years. The resulting tax refunds were directed to at least five different bank accounts in Strong’s name. The amount of false claims totaled $85,814, but due to federal seizure warrants and financial institution reclamations, the actual tax loss amounted to $52,735.71.

Analysis of information from the 10 deceased individuals’ returns shows that these conspirators used similar “formulas” to generate the fraudulent returns, including income, tax withholding, and interest income. In addition, several of the false returns claimed identical refund amounts.Strong and others shared in the proceeds from the scheme. The monies were spent on a variety of retail items and services, and in transactions at a local casino.

Tax Return Preparer Sentenced for Filing False Tax Returns with the IRS

A tax return preparer was sentenced to 30 months in prison, to be followed by one year of supervised release, and was ordered to pay restitution in the amount of $163,865 for filing false tax returns with the Internal Revenue Service (IRS).

Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, Kelly R. Jackson, Special Agent in Charge, Internal Revenue Service, Criminal Investigation (IRS-CI), and Steve Steinberg, Chief, Aventura Police Department, made the announcement.

Erica Antoinette Hollingsworth, 37, of Opa Locka, previously pled guilty to one count of aiding and assisting tax fraud, in violation of Title 26, United States Code, Sections 7206(2) and 2.

According to court documents, the IRS received information that Hollingsworth prepared a false tax return for an unemployed student claiming a $4,000 refund. Based on this information, an undercover agent (UC) met with Hollingsworth

in an office at her house to discuss the filing of a tax return. The UC provided identification and a Form W-2 to Hollingsworth. In exchange, the defendant explained the tax filing process and advised that a refund in the “thousands” was possible.

IRS agents then executed a search warrant at Hollingsworth’s residence, where agents recovered tax returns and a computer. During the investigation, Hollingsworth stated that she was a self-employed tax return preparer and had compiled returns through her current company, EH&S Professional Services, LLC, and previous company, A&E Professional Services. Hollingsworth advised that she learned how to prepare tax returns from another individual, who taught her how to get clients inflated refunds even if they were not entitled to such refunds.

Hollingsworth ultimately admitted to entering false amounts on some of her clients’ Form W-2s. Hollingsworth made $60 to $500 for each return that she prepared. Hollingsworth filed approximately thirty-five fraudulent returns that falsely represented that the taxpayer worked for a company, earned wages, and had federal taxes withheld from those wages, even though the taxpayer never actually worked for the company.Mr. Ferrer commended the investigative efforts of IRS-CI and the Aventura Police Department. The case was prosecuted by Assistant U.S. Attorneys Brooke Watson and John R. Byrne.

Mount Vernon Tax Preparer, 59, Convicted On 39-Count Indictment

A Mount Vernon tax preparer has been found guilty of obstructing the IRS and preparing dozens of falsified income tax returns for his clients.

Samuel Gentle, 59, who ran GenGen Inc., has been convicted of obstructing the IRS and 38 counts of aiding and assisting preparation of false and fraudulent tax returns, according to United States Attorney Preet Bharara.

For four years, beginning in 2010, Gentle’s business prepared and submitted more than 3,000 tax returns annually, with several containing “various inflated deductions for unreimbursed employee business expenses, gifts to charity and Schedule C business expenses,” Bharara said.

During the investigation, an undercover IRS agent posed as one of Gentle’s clients, providing him with a W-2 form showing income from wages. According to Bharara, although there were no records to support it, Gentle included fraudulent deductions in the tax return, causing it to illegally claim a refund.

Additionally, Gentle failed to report hundreds of thousands of dollars on his own tax returns from 2010 to 2014, spreading the receipts across eight back accounts in five banks. He also failed to issue proper forms to himself or employees, allowing him to conceal the amount of receipts his business received. “About 60 percent of American taxpayers use tax professionals to prepare their tax returns. Fortunately, most tax professionals are reputable and prepare accurate and honest returns for

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Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, Kelly R. Jackson, Special Agent in Charge, Internal Revenue Service, Criminal Investigation (IRS-CI), Mark Selby, Special Agent in Charge, U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (ICE-HSI), and Antonio J. Gomez, Inspector in Charge, U.S. Postal Inspection Service (USPIS), Miami Division, made the announcement.

On August 8, 2016, Danny Horne, 30, was sentenced to 51 months in prison, to be followed by three years of supervised release, and was ordered to pay joint and several restitution in the amount of $200,484. On July 29, 2016, Artravette Thomas, a/k/a Artravette Wilson, 41, was sentenced to 51 months in prison, to be followed by three years of supervised release, and was ordered to pay joint and several restitution in the amount of $538,765. On July 22, 2016, Tomeka Anderson, a/k/a Tomeka Owens, 36, was sentenced to 65 months in prison, to be followed by three years of supervised release, and was ordered to pay joint and several restitution in the amount of $774,320. On July 21, 2016, Natalie Mitchell, 42, and Artrice Reid, a/k/a Artrice Nelson, 40, were each sentenced to 57 months in prison, to be followed by three years of supervised release, and were ordered to pay joint and several restitution in the amounts of $954,557 and $880,457, respectively. On July 20, 2016, Tiffany Gaines, a/k/a Tiffany Morris, 38, was sentenced to 61 months in prison, to be followed by three years of supervised release, and was ordered to pay joint and several restitution in the amount of $607,377. Each of the defendants previously pled guilty to one count of conspiracy to defraud the government with respect to claims, in violation of Title 18, United States Code, Section 286, one count of conspiracy to commit wire fraud, in violation of Title 18, United States Code, Section 1349, and one count of aggravated identity theft, in violation of Title 18, United States Code, Section 1028A(1).

Four additional co-conspirators previously pled guilty and were sentenced for their participation in the fraudulent scheme. On December 15, 2015, Tameka Walker, 38, Celia Cromer, 43, and Maritynque Cromer, 25, were sentenced to 78 months, 50 months, and 36 months in prison, respectively, followed by three years of supervised release, and were all ordered to pay joint and several restitution in the amount of $796,535. On September 29, 2015, Marlin Mejia, 29, was sentenced to 21 months in prison, followed by three years of supervised release, and was ordered to pay restitution in the amount of $17,428.

Co-defendant Paganini Fleurantin, a/k/a Hu’Ra Al’Dey, 28, pled not guilty. A trial date has not been set.

According to court documents, from September 2010 through May 22, 2013, the defendants conspired to defraud the IRS by filing fraudulent tax returns claiming fraudulent tax refunds. Defendant Walker owned and operated Family Tree Taxes, Inc., a tax preparation business in Miami Gardens. Walker purchased stolen personal identification information (PII) from various sources, including defendant Mejia, to file fraudulent tax returns. Mejia worked as a radiology transporter at

their clients,” IRS-CI Special Agent in Charge Chantelle Kitchen said when initially announcing Gentle’s charges.

“IRS Criminal Investigation is responsible for investigating unscrupulous tax return preparers and, working with the United States Attorney’s Office, seeing that they are prosecuted. I stress the importance of choosing your preparer carefully. Ask him or her questions about your return and use your common sense in evaluating the answers you receive.””

Gentle was found guilty on all 39 counts. He will be sentenced on Tuesday, Oct. 25, where he will face a maximum sentence of three years per charge.

“As a jury found after trial, Samuel Gentle abused his position of trust as a tax preparer by systematically violating the nation’s income tax laws,” Bharara said in a statement. “The investigation that led to this conviction underscores our commitment, as well as that of our partners at the IRS, in pursuing and prosecuting people who circumvent our tax laws.”

Court Orders Return Preparer to Return to Her Customers the Portion of Their Refunds Diverted to Her Own Account

A federal court in Greenbelt, Maryland, held Barbara Lynn McCarthy in contempt for preparing federal income tax returns in violation of a prior order that prohibited her from acting as a return preparer. In 2014, the District Court enjoined McCarthy, who formerly operated as Barbara’s Tax Service, from preparing tax returns.

After entry of injunction, the Internal Revenue Service (IRS) discovered that McCarthy continued preparing tax returns despite the court’s order banning her from doing so. The court held a hearing on Aug. 11, to determine whether McCarthy had prepared returns in violation of the court’s injunction.

At the hearing the government established that McCarthy violated the court’s order and the court has now ordered McCarthy to return to her customers the portions of their tax refunds McCarthy diverted to herself. The court also ordered McCarthy to pay the United States $2,500 for her actions after the injunction. Finally, the court ordered McCarthy to provide the government with a list of all tax returns she prepared since the injunction was put in place.

Six Tax Return Preparers Sentenced for Filing False Tax Returns with the IRS Using Stolen Identities

Scheme claimed more than $6.6 million in fraudulent tax refunds

Six additional tax return preparers were sentenced for filing false tax returns with the Internal Revenue Service (IRS) in a scheme that claimed more than $6,663,976 in fraudulent tax refunds.

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Disaster Relief and Emergency Assistance Act. It includes a major disaster or emergency declaration under the Act. See Publication 547, Casualties, Disasters, and Thefts, for more information.

Casualty Losses - A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration. If your property is personal-use property or is not completely destroyed, the amount of your casualty loss is the lesser of:

• The adjusted basis of your property, or

• The decrease in fair market value of your property as aresult of the casualty

If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis.

Theft Losses - A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent.

The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.

Insurance or Other Reimbursements

You must reduce the loss, whether it is a casualty or theft loss, by any salvage value and by any insurance or other reimbursement you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation. For more information about the basis of property, refer to Topic 703, Publication 547, Casualties, Disasters, and Thefts, and Publication 551, Basis of Assets. You may determine the decrease in fair market value by appraisal, or if certain conditions are met, by the cost of repairing the property. For more information, refer to Publication 547.

Claiming the Loss

Individuals are required to claim their casualty and theft losses as an itemized deduction on Form 1040, Schedule A (PDF), Itemized Deductions, (or Schedule A in Form 1040NR (PDF), if you are a nonresident alien). For property held by you for personal use, you must subtract $100 from each casualty or theft event that occurred during the year after you have subtracted any salvage value and any insurance or other reimbursement. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year. Report casualty and theft losses on Form 4684 (PDF), Casualties and Thefts. Use Section A for personal-use property and Section B for business or income-producing property. If personal-use

a hospital and stole documents (face sheets) containing patients’ PII (including names, dates of birth, and Social Security numbers) from patient files at the hospital. Mejia knew the PII belonged to real people who did not authorize him to possess their personal information. Mejia sold the face sheets to Walker knowing that Walker would use the stolen PII to file fraudulent tax returns.

Defendants Mitchell, Reid, Anderson, Gaines, Thomas, Horne, Fleurantin, Celia Cromer and Maritynque Cromer were employed by Walker as tax preparers at Family Tree Taxes. The employees filed tax returns using stolen identities to claim fraudulent tax refunds, and also filed tax returns claiming fraudulent overinflated tax refunds. Specifically, the stolen PII of 95 hospital patients was used by the employees to claim over $76,757 in fraudulent tax refunds. And in 2012, Mejia authorized Walker to file a tax return for him claiming a fraudulent overinflated tax refund of $3,452.

As part of the conspiracy, the defendants collectively filed tax returns claiming over $6.6 million in fraudulent tax refunds.A defendant is presumed innocent unless he is proven guilty beyond a reasonable doubt in a court of law.

Ragin Cagin

Topic 515 - Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas)

Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return. You may not deduct casualty and theft losses covered by insurance, unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement. Disaster Area Losses – A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Stafford

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property was damaged, destroyed or stolen, you may wish to refer to Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). For losses involving business-use property, refer to Publication 584-B (PDF), Business Casualty, Disaster, and Theft Loss Workbook. These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records.

When to Deduct

Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to treat the casualty loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year. Review Disaster Assistance and Emergency Relief for Individuals and Businesses for information regarding timeframes and additional information to your specific qualifying event. For more information, refer to Publication 2194 (PDF), Disaster Resource Guide for Individuals and Businesses.

Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which you can determine with reasonable certainty whether or not you will receive such reimbursement.

Special rules may apply to theft losses from Ponzi-type investment schemes. For more information, see the Form 4684 (PDF) and the Form 4684 Instructions (PDF), Casualties and Thefts. Additionally, review Help for Victims of Ponzi Investment Schemes.

When Your Loss Deduction Exceeds Your Income

If your loss deduction is more than your income, you may have a net operating loss (NOL). You do not have to be in business to have an NOL from a casualty. For more information, refer to Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.

The Internal Revenue Service offers a tremendous amount of information concerning casualty losses. I am sure you know why I am very interested in this topic for tax purposes.

My gratitude and appreciation to all attendees of the seminars and for your kind expressions of concern. The family is fine and will come out of this storm after some rebuilding. Thank you to David and Beanna for filling in for me. Our first priority was to get ncpe up and running and now Candy and I have the house repair to consider.

Again, thank you for your kind expressions of concern – and may you never have to review the Casualty Loss Rules for your return.

Jerry

Taxpayer AdvocacyThings We Thought We Knew – Repeat of August 1, 2016 Article

“OUO” is a designation for Internal Revenue Manual materials used to protect information whose release would hinder the law enforcement process with respect to one or more categories of persons.

IRM 11.3.12.3 The Intent of Designation

(3) The identification of a small proportion of IRS printedmaterials as “Official Use Only” facilitates the ready releaseto the public of the majority of printed materials that are notdesignated.

IRM 11.3.12.4 Guidelines for Designation

(3) The overall objective is that the greatest amount ofinformation be made available to the public wheneverpossible. Guidelines should not be applied in a manner thatwould produce a result contrary to this objective.

Okay Examples:

IRM 4.19.15.28.5 Examining the Schedule A on Preparer Referrals

1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

3. The examiners are required to familiarize themselves withSchedule A (See IRM 4.19.15.23, Schedule A. This IRMsection will provide information related to the allowable andunallowable deductions on the Schedule A.

4. The examiner will consider asserting penalties such asnegligence or substantial underpayment as applicable, asin the normal course of any examination if warranted on acase by case basis. Refer to IRM 20.1, Penalty Handbook, foradditional procedures. If any indication of fraud is discoveredin either the substantiation submitted or in the return itself, thisshould be brought to the attention of the W&I RPP Coordinator/manager/W&I HQ analyst.

IRM 4.19.15.28.6 Examining the Schedule C on Preparer Referrals

1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

Not So Okay Examples:

5.19.1.5.4 IAs 5.19.1.5.4.7 Pending IA Criteria

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Foreign TaxesDC Circuit: Tax Court Did Not Consider Laws of Both

Countries in Construing International Pact

Eshel, (CA Dist Col 08/05/2016) 118 AFTR 2d ¶2016-5093

The Court of Appeals for the District of Columbia Circuit has reversed and remanded a Tax Court decision that U.S. citizens weren’t allowed a foreign tax credit under Code Sec. 901 for social security taxes paid to France while the taxpayers were working there for a non-American employer. The DC Circuit Court found that the Tax Court failed to adequately consider the U.S.-France agreement under the laws of both countries.Background. Code Sec. 901 generally permits taxpayers to claim a credit for income, war profits, and excess profits taxes paid or accrued during the tax year to any foreign country or to any U.S. possession.

However, Sec. 317(b)(4) of the Social Security Amendments of ‘77 (SSA ‘77, P.L. 95-216, 91 Stat. 1509) provides that:

• Notwithstanding any other provision of law, taxes paidby any individual to any foreign country with respect to anyperiod of employment or self-employment which is coveredunder the social security system of such foreign country inaccordance with the terms of an agreement entered intopursuant to section 233 [emphasis added] of the SocialSecurity Act shall not, under the income tax laws of theUnited States, be deductible by, or creditable against theincome tax of, any such individual.

Section 223 of the Social Security Act authorizes agreements with foreign countries to establish totalization arrangements concerning the social security systems of the U.S. and those other countries.

In other words, taxes paid to a foreign country in accordance with a social security totalization agreement aren’t eligible for the foreign tax credit.

Facts. Ory and Linda Coryell Eshel, husband and wife, were dual citizens of the U.S. and France. They resided in France during 2008 and 2009. Ory Eshel worked for a non-American employer that paid him a salary. He paid two taxes to the French Government— the CSG and CRDS—and claimed credits for these payments under Code Sec. 901.

IRS disallowed the claimed credits in reliance on SSA section 317(b)(4), contending that taxpayers paid CSG and CRDS to France in accordance with the terms of the U.S.-France Totalization Agreement (Totalization Agreement).

The Totalization Agreement was entered between the U.S. and France in ‘87, and the CSG and CRDS were enacted in ‘98 and ‘96, respectively. The main issue in the case was whether the two taxes are covered by the Totalization Agreement,

5.19.1.5.4.7.1 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ?????????????

Whenever an IA request is received that does not meet pending IA criteria: Note: The entire text reproduced but the subsection title is labeled OUO

5.19.1.5.4.7.2 Requests Meeting Pending IA Criteria 5.19.1.5.4.8 IA Managerial Approval 5.19.1.5.5 PPIA

Editor’s Note: Inadvertently the author of this article was omitted last month. Our apologies and appreciation to Bryan E. Gates, EA, a most respected and knowledgeable individualon IRS Practice and Procedure.

Bryan, along with his wife Jean present the American Academy of Tax Practice each year. One opportunity remains for 2016..

Las Vegas - September 7th - 9th, 2016

2016 will be another great AATP year with the best and brightest taxpayer representatives sharpening their skills and preparing for another year of advising and assisting taxpayers who are being examined, taxpayers who cannot pay in full, and taxpayers who wish to appeals IRS determinations. The 2016 curriculum is whole group case study based with a hands on instructional approach. The emphasis will be on the IRS collection function and alternatives to enforced collection while the Service reorganizes its compliance operations into pre filing and post filing operations. Register at www.Americanacademyoftaxpractice.com Phone: 760-304-4152Email: Jean@americanacademyoftaxpractice.com

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function of the CSG, “requires reversal.”

However, the DC Circuit further found that the Esehels failed to adequately support their position, noting that the documents they cited fell short of a “sound basis” on which to conclude whether or not the CSG and CRDS were covered by the Totalization Agreement.

Accordingly, the DC Circuit reversed and remanded the case to the Tax Court.

Does Fraudulent Conduct by Someone Else Extend the Statute of Limitations Permitting the IRS to Pursue the Taxpayer?

A fraudulent tax return is bad news for a taxpayer. Normally, the IRS has a limited period of time (3 years) to audit a taxpayer’s return. The existence (or allegation) of fraud, however, gives the IRS an unlimited amount of time to make an assessment of tax liability. But more importantly, taxpayers may be surprised to learn that the IRS considers fraud by someone other than the taxpayer to also trigger the open-ended statute of limitations. So if a return preparer or someone else affecting the reporting of your taxes engages in fraud, the taxpayer could be the one left on the hook to make the IRS whole (including the possibility of a 75% fraud penalty to boot). The Tax Court has given the IRS latitude in using this tool against taxpayers in these situations, but an appellate court recently limited the IRS’s reach on the issue.

Sometimes tax return preparers act fraudulently on their own initiative without the taxpayer’s knowledge and without the taxpayer’s own fraudulent intent to evade tax. It seems appropriate and just in these circumstances for the IRS and Justice Department to pursue the unscrupulous return preparer. And the government frequently does so. But, in seeking to recover any tax loss, the IRS may decide that the unwitting taxpayer who submitted the fraudulent return is liable to make the government whole. The IRS approach is founded in the idea that the taxpayer signing and submitting the return is obligated to review it and is deemed to know its contents. If the return is fraudulent, the unwitting taxpayer should have found the errors and had them corrected. The argument that the taxpayer relied on the accountant and just signed the return without reviewing it generally does not stand up.

The framework for the IRS’s actions stems from an exception to the general three-year statute of limitations. Under IRC Section 6501(c)(1) and (2), fraudulent conduct can suspend the running of the limitations period indefinitely. The key statutory phrase is “intent to evade tax.” But the statute does not clearly state whose fraudulent intent triggers the open-ended assessment period by the IRS. It should be noted, however, that the IRS will bear the burden of proving that the return was fraudulent by clear and convincing evidence. It cannot merely make the assertion without something to back it up.

which states that, in addition to covering laws identified in the agreement, it also covers taxes paid under “legislation which amends or supplements the laws specified.”

The CSG is codified in France’s Social Security Code, which is not an enumerated French law in the Totalization Agreement but which includes most provisions governing social security benefits in France. The CRDS is withheld and collected like the CSG and its proceeds go to the Social Debt Redemption Fund.

Tax Court decision. The Tax Court concluded that SSA section 317(b)(4) precluded taxpayers’ foreign tax credits for CSG and CRDS paid to France, noting that:

• . . . Taxes are paid to a foreign country “in accordancewith the terms of” a totalization agreement if those taxesare covered by, or within the scope of, the totalizationagreement. The Court cited Erlich, (Ct Fed Cl 2012) 109AFTR 2d 2012-1277, which came to this same conclusion.

• . . . Although they were enacted after the effective dateof the Totalization Agreement and thus were not specificallylisted in it, the CSG and CRDS are covered by, or within thescope of, the Totalization Agreement because they “amendor supplement” the French social security laws enumeratedin that Agreement.

Appellate Court reverses and remands. The Court of Appeals for the District of Columbia framed the issue in the case as whether CSG and CRS amend or supplement the French laws listed in the Totalization Agreement and stated that the Tax Court, in seeking to resolve that issue, “asked the wrong legal question.” According to the DC Circuit, instead of looking to the text of the agreement or the countries’ shared understanding, the Tax Court focused on what “amends or supplements” means in a purely domestic sense—using four American dictionaries to aid—as if it were construing a purely domestic statute. Relying on these definitions, the Tax Court concluded that the CSG and CRDS do in fact amend or supplement the laws listed in the agreement and thus can’t be credited.

The DC Circuit found, however, that the Totalization Agreement is an executive agreement with a foreign country and should instead have been “interpreted under the same principles applicable to international treaties.” Such principles include construction in a manner consistent with the parties’ shared expectations, which was not accomplished by the Tax Court’s domestic-based interpretation. The Totalization Agreement further specified both U.S. and French laws as the applicable law for purposes of construing terms that are not defined in the agreement itself.

In addition, the DC Circuit found that the Tax Court also erred in considering whether CSG and CRDS “amend or supplement” the French security system as a whole, as opposed to the laws specified in the Totalization Agreement. Overall, the DC Circuit found that the cumulative effect of these defects, as well as IRS’s claimed lack of knowledge as to the actual

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and disadvantages of pursuing litigation in Tax Court versus the U.S. Court of Federal Claims.

State News of Note

Who Needs and Does Not Need Licenses to Work in Georgia Spurs Questions

In Georgia, the professional landscaper reimagining your backyard may need three separate licenses to do the work you want, but not the woman who does your taxes.

Several dozen professional occupations — such as auctioneers, used car dealers, accountants, makeup artists and manicurists — require licenses to work in the Peach State. But not tax preparers.

It’s an issue that played out earlier this year when state officials launched one of the largest tax preparation fraud investigations in Georgia history. According to the state Department of Revenue, a Hapeville tax preparer inflated the refunds due to potentially thousands of her clients and is accused of defrauding them through stolen refunds or bogus investments.

“If the person who does your hair and nails is regulated, why wouldn’t the person who prepares your taxes be regulated?” said Liz Coyle, the executive director of consumer watchdog Georgia Watch.

It’s just the latest front in a battle that has played out for decades in this state and nationally, with pushes to expand professional licensing as well as cut it. Just this year, Georgia added a new profession to its field of those who must be licensed, one that had a very specific audience: breastfeeding mothers.

Others say the last thing Georgia needs is more regulation.

A balancing act

Republicans in the Georgia Legislature have long maintained that less regulation means a better business climate, an argument that came into play this year when some complained as the General Assembly voted for the first time ever to regulate “lactation consultants” who help nursing mothers.Nationally, there has been an uptick over time in the number of professions that now require licenses. But for many policymakers, it is a balancing act that can be difficult to get right.

In the case of tax preparers, while some consumer advocates want them to come under the state’s regulatory umbrella, a number of lawmakers said they didn’t see a need because they felt the system already in place worked: Agencies such as the state Department of Revenue can use the law to catch bad guys while promoting consumer awareness and education.

In the past decade, the Tax Court has considered this issue and decided several cases favorable to the IRS. For example, in Allen v. Commissioner, 128 T.C. 37 (2007), a tax return preparer put false itemized deductions on a taxpayer’s return without the taxpayer having indicated to the preparer that he was entitled to those deductions. The return preparer was eventually convicted of preparing false and fraudulent tax returns under IRC Section 7206(2). The IRS then sent deficiency notices to the taxpayer after the general three-year assessment period had passed, claiming that IRC Section 6501(c)(1) applied because fraud was present, even if it wasn’t the taxpayer’s own conduct that caused it.

The Tax Court upheld the IRS’s deficiency notice based on the preparer’s fraudulent conduct even though the taxpayer was not to blame for the fraud. In its analysis of the issue, the Tax Court concluded that the statute’s fraud exception contained no “express requirement that the fraud be the taxpayer’s” in order to extend the statute of limitations. The court stated that “the statute keys the assessment extension to the fraudulent nature of the return, not to the identity of the perpetrator of the fraud,” [emphasis added] and so chose to strictly construe the limitations periods in the government’s favor. An additional reason for letting the IRS go after the taxpayer is Congress’s intent to ensure that the IRS is not at a disadvantage in recovering unpaid taxes resulting from fraudulent tax returns, the court said. The court seemed concerned that an outcome against the government could allow a taxpayer to “hide behind an agent’s fraudulent preparation.”

However, an appeals court recently held for a taxpayer in dismissing the government’s argument that third-party fraud is relevant in applying the unlimited statute of limitations. In BASR Partnership v. United States, No. 2014-5037 (Fed. Cir., 7/29/15) the taxpayer relied on a law firm’s tax opinion in deciding how to report large capital gains arising from the sale of a business. When the lawyer was later convicted for fraud, he acknowledged that he acted with intent to evade the tax that the taxpayer would have otherwise owed on the transaction. This allowed the government to claim the fraud exception in assessing tax against the partnership a decade after the returns had been filed.

The Federal Circuit, in an opinion issued in July 2015, held that IRC Section 6501(c) requires that the taxpayer be the one who has the intent to evade tax in order for the limitations period to stay open indefinitely. This means that in situations where the taxpayer has clean hands (i.e., no fraudulent intent), fraud by a third-party that causes a taxpayer’s return to be false will generally not allow the IRS to go after the taxpayer for the unpaid taxes if the three-year assessment period has passed. The circuit court maintained that the Tax Court had conducted only a limited analysis of IRC Section 6501’s text in Allen that was not necessarily congruent with Supreme Court precedents, and that even if the reasoning in Allen was persuasive, the particular facts of BASR further distinguished the case from Allen.

With different outcomes among federal courts, taxpayers facing this issue should be aware of the jurisdictional benefits

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“We know that there are people out there that are sort of gaming the system or taking advantage of taxpayers,” said state Rep. David Knight, R-Griffin, who is also a certified public accountant. The tax returns at issue in the investigation, he said, were not complex or hard to do. Rather, unscrupulous preparers preyed on unsuspecting people.

“They’re bad people, and we’re not going to catch them by testing whether they’re competent,” Knight said. “You can’t regulate people who are already intentionally doing bad stuff.”And even those professionals who are already required to be licensed in Georgia say it can often feel like a regulatory maze that can sometimes be difficult to navigate.

‘An undue burden’

Paying someone to design a fabulous new yard, for example, seems like a simple thing. Georgia law, however, bars anyone but a registered landscape architect from actually selling a design plan to a homeowner (under state law, contractors who perform design services cannot charge for it although they can charge for installation).

Registered landscape architects must pass a national and state examination to be licensed in Georgia. And depending on what other services you may want done, your contractor may need multiple separate licenses — both professional ones and ones through the state Agriculture Department — if they want to also handle their own plants, apply lawn pesticides or install low-voltage irrigation systems.

For some, it’s not worth it. Clinton C. Cenac, who runs a popular landscape design and maintenance company in Atlanta, has a bachelor’s degree in landscape architecture from Louisiana State University but does not have a landscape architecture license in Georgia.

“The last time I took the exam was in 1990, I believe,” Cenac said. “I was fresh out of school and did not pass the exam. I never went back to take it again. However, anyone can practice landscape design and not have a landscape architectural license. Ethically, you cannot call yourself a landscape architect if you do not have a license, but you can call yourself a landscape designer and perform the same type of work.”

Hairstylists, nail technicians and skin care specialists face several hundred to thousands of hours of schooling or apprenticeships, with some required to pass both written and practical exams. Those practicing in the field said Georgia has among the strictest cosmetology licensing rules in the country, sometimes making it hard to keep up.

Atlanta’s Kristen Eber, a licensed esthetician in Georgia since 2002, recently opened The Rosefinch Spa — an opening that was briefly delayed when her application to the state’s cosmetology board was initially denied because she didn’t specifically have the word “shop” or “salon” in her business name. It was only after she spent time on the phone with a patient customer service representative that they both

figured out she just needed to write “shop” on her state board application (rather than amend all her legal documents for the business).

“The rule changes can be very, very arbitrary,” Eber said. “When the field inspectors show up, they’re actually very nice. And I respect that they have a very important job to do, which is protecting the consumers.”

Georgia Watch’s Coyle said it made sense if “the state would be stepping back and looking at who is licensed, who doesn’t need to be licensed and what are the best mechanisms to do that.”

“Professions who really affect people’s lives should have enough scrutiny,” Coyle said. “Review it and make sure we’re not having an undue burden on some professions but not enough on others.”

Lewis Massey, a former Georgia secretary of state who led an unsuccessful effort to reduce state licensing boards, said Georgia would benefit if it revisited the issue. “Before any new board is added, you ought to have a very extensive study of why it’s needed,” Massey said.

‘It won’t kill people’

The White House Council of Economic Advisers just last year released a study that found more than one-quarter of U.S. workers now require a license to do their jobs, with the share of workers licensed at the state level rising fivefold since the 1950s.

According to the study, licensing requirements can make it harder for lower-income people to get a job given the cost of educational requirements and fees, and they can also push wages lower for unlicensed workers and increase costs for consumers.

Most agree, however, that jobs that deal directly with public health and safety should require some sort of license.

“When we are looking at regulation as it relates to patient care, that’s a whole different issue,” said state House Health and Human Services Chairwoman Sharon Cooper, R-Marietta, who battled for several years before finally winning passage early this spring for the lactation consultants licensing bill.

It made Georgia only the second state in the nation to license the consultants, who are often called in when mothers either begin to have trouble breastfeeding their newborns or have stopped altogether — something the American Academy of Pediatrics said can increase a child’s risk for obesity, type 2 diabetes, sudden infant death syndrome and other health problems.

Federal law requires coverage for lactation services, but many insurance companies will only pay for the services of licensed health care professionals. The academy said the lack of insurance reimbursement has made what’s known as

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“clinical breastfeeding care” too expensive for many to pay on their own.

“I’m not the type to over-regulate, but we’re talking about a child’s start to life,” Cooper said. “When you look at a tax preparer, while no one wants to get in trouble with the IRS, it won’t kill people.”

A spokesman for the state Revenue Department said the agency is not seeking any sort of legislation that would regulate tax preparers next tax season. Some have also questioned the effectiveness of a federal effort launched last year to track tax preparers, something Boyd Search, CEO of the Georgia Society of Certified Public Accountants, said his industry was monitoring.

“The IRS has launched a federal tax preparer registration program, which is currently in limbo, and some expect taxpayer advocates in Congress to take further action,” Search said. “In the interim, the Georgia Society of CPAs is participating in the conversations, at both the state and federal level, related to tax preparer issues.”

But, “as a principal, we do not believe simply requiring a form of registration does anything to further protect the public from unscrupulous or unqualified preparers,” Search said. “CPAs and other qualified tax professionals have a background built on the fundamentals of education, lifelong learning and adherence to rigorous ethical standards.”

‘A false sense of security’

Thirty years ago, in a still-ongoing effort to stop over-regulation, the state created something called the Georgia Occupational Regulation Review Council to review any legislation proposing to license or certify occupations and professions not currently regulated in the state. Its recommendations do not bind state lawmakers, although they do carry weight and are often followed.

Most recently, the council in May turned down a proposal to license durable medical equipment suppliers in Georgia, such as those that sell or rent out medical oxygen tanks or chair lifts. The reasons why would cheer free-market advocates: There was no documented proof of a problem due to lack of employee screening, poor customer service or product support; and there were already other means of protection for customers.

It’s not just a Georgia issue.

In Congress, Republican U.S. Sens. Mike Lee of Utah and Ben Sasse of Nebraska have introduced legislation targeting how the District of Columbia licenses some professions after learning that someone looking to work as a shoe shiner must have four different licenses and pay at least $337 to get them.Both have said the bill would be a new model for states looking to do something similar, a refrain that resonates for some here in Georgia. They say there are alternatives to professional licensing that can include voluntary certification

through professional associations and third-party consumer organizations such as the Better Business Bureau or Angie’s List.

“Just because you have a license doesn’t mean you can’t harm someone,” said Kelly McCutchen, the president of the conservative Georgia Public Policy Foundation. “We’re not trying to say we need to outlaw licensing. But we also shouldn’t create a false sense of security.”

Job licensing in Georgia

Five jobs that require a license:

• Librarian• Lactation consultant• Funeral director• Auctioneer• Used car dealer

Five jobs that don’t:

• Tax preparer• Lobbyist• Naturopathic physician• Shoe shiner• Hair braider

Wayne’s World

Turning Startup Profits into 100% Tax-free

Gain Under the Qualified Small Business Stock Rules

Successful startups can pay off big for those who get in on the ground floor, and the qualified small business stock (QSBS) provisions of Code Sec. 1202 can turn that big payoff into tax-free gain. The “Protecting Americans from Tax Hikes Act of 2015” (the 2015 PATH Act, P.L. 114-113), passed late last year, retroactively restored the QSBS provisions for stock acquired in 2015 and made it permanent threafter, making them a dependable tax planning tool.

Under pre-2015 PATH Act law, subject to a per taxpayer limit

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(see below), noncorporate taxpayers could exclude 100% of the gain realized on the sale of QSBS held for more than five years and acquired in the period that began on Sept. 28, 2010 and ended on Dec. 31, 2014. For periods before and after this time, a partial exclusion applied. Specifically, for QSBS acquired after Feb. 17, 2009 and before Sept. 28, 2010, noncorporate taxpayers can exclude 75% of any gain realized on the disposition of QSBS; and for QSBS acquired before Feb. 18, 2009 or after 2014, noncorporate taxpayers could exclude 50% of the gain on the disposition of QSBS (60% for certain stock issued by corporations in empowerment zones). The 2015 PATH Act restored the provision for stock acquired after 2014 and made the 100% exclusion and the exception from minimum tax preference treatment for QSBS permanent.

Thus, under Code Sec. 1202, subject to a per-taxpayer limit (see below), a taxpayer may exclude from gross income 100% of any gain realized on the sale or exchange of QSBS held for more than five years. (Code Sec. 1202(a)(4)) In addition, the excluded portion of the gain from eligible QSBS is excepted from treatment as an alternative minimum tax (AMT) preference item. (Code Sec. 1202(a)(4)(C)) Thus, subject to the per-taxpayer limit and the more-than-five-year holding requirement, no gain from QSBS is taxed for either regular tax or AMT purposes.

Taxpayers must keep track of the date on which QSBS was acquired, for reasons in addition to meeting the 5-year holding period requirement. If QSBS was acquired after Feb. 17, 2009, and before Sept. 28, 2010, only 25% of the gain will be subject to tax and 75% of the gain excluded, if the stock is sold or exchanged after being held for more than five years. If the QSBS was acquired on Feb. 17, 2009, then 50% of the gain will be excluded if the stock is sold or exchanged more than five years later. But if the taxpayer acquired the QSBS after Sept. 27, 2010, then no tax will be imposed on the gain if the 5-year holding period requirement is met.

A noncorporate taxpayer’s net capital gain that is adjusted net capital gain is taxed at a rate of 20%, 15%, or 0%. (Code Sec. 1(h)(1), Code Sec. 1(h)(1)(C)) Net capital gain attributable to “section 1202 gain” (as well as collectibles gain) is taxed at a maximum rate of 28%. (Code Sec. 1(h)(1)(E), Code Sec. 1(h)(4)) Section 1202 gain is the excess of (1) the gain that would be excluded from gross income on the sale of certain QSBS under Code Sec. 1202, if the percentage limitations of Code Sec. 1202(a) didn’t apply, over (2) the gain actually excluded under Code Sec. 1202. (Code Sec. 1(h)(7))

In addition, for tax years beginning after Dec. 31, 2012, a 3.8% surtax applies to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). (Code Sec. 1411(a)(1), Code Sec. 1411(b)) MAGI is adjusted gross income (AGI) increased by the amount excluded from income as foreign earned income under Code Sec. 911(a)(1) (net of the deductions and exclusions disallowed with respect to the foreign earned income). (Code Sec. 1411(d))

If all of a taxpayer’s gain is excluded from gross income, the 3.8% net investment income tax presumably would not apply to that gain.

Qualifying as QSBS. Stock qualifies as QSBS only if it meets all of the following tests. (Code Sec. 1202(c), Code Sec. 1202(d), Code Sec. 1202(e))

• (1) It must be stock in a C corporation (that is, not Scorporation stock) originally issued after Aug. 10, ‘93.

• (2) As of the date the stock was issued, the corporationwas a domestic C corporation with total gross assets of $50million or less (a) at all times after Aug. 9, ‘93 and before thestock was issued, and (b) immediately after the stock wasissued. Gross assets include those of any predecessor ofthe corporation, and all corporations that are members of thesame parent-subsidiary controlled group are treated as onecorporation.

• This $50 million limitation means that the companymust be relatively small when it begins life, but if all theconditions are met, the Code Sec. 1202 exclusion isavailable no matter how large it grows.

• (3) In general, the taxpayer must have acquired thestock at its original issue (either directly or through anunderwriter), either in exchange for money or other propertyor as pay for services (other than as an underwriter) to thecorporation.

• (4) During substantially all the time the taxpayer heldthe stock:

. . . the corporation was a C corporation;

. . . It is common for startup businesses to initially elect to be S corporations, mainly so that they can pass through to their shareholders losses that they anticipate incurring in their early years of operation. However, the decision to make an S election for a startup should be carefully considered if the shareholders anticipate taking advantage of the QSBS gain exclusion. If the S election results in the corporation not being a C corporation during “substantially all” of a given shareholder’s holding period for the stock, the QSBS gain exclusion won’t be available to that shareholder. Note that neither Congress nor IRS has given any indication as to what is “substantially all” of a shareholder’s holding period for this purpose.

. . . at least 80% of the value of the corporation’s assets were used in the “active conduct” of one or more qualified businesses (see below); and

. . . the corporation was not a foreign corporation, domestic international sales corporation (DISC), former DISC, regulated investment company (RIC), real estate investment trust (REIT), real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT), cooperative, or a corporation

55

that has made (or that has a subsidiary that has made) a Code Sec. 936 election (dealing with the Puerto Rico and possession tax credit).

Active conduct of a qualified business. For purposes of the rule requiring 80% of the value of assets to be used in the active conduct of a qualified business, all of the following are treated as used in the active conduct of a qualified business:

• (A) Assets used in certain activities relating to futurequalified businesses, without regard to whether thecorporation has any gross income from these activities atthe time this rule is applied. Those activities are (i) CodeSec. 195(c)(1)(A) startup activities, (ii) activities that resultin paying or incurring qualifying research and experimentalexpenditures under Code Sec. 174, and (iii) activitiesrelating to in-house research expenses. (Code Sec. 1202(e)(2))

• (B) Assets held to meet the “reasonably requiredworking capital needs” of a qualifying business, and assetsheld for investment that are reasonably expected to be usedwithin two years to finance research and experimentation ina qualified business or to finance increases in the workingcapital needs of such a business. (Code Sec. 1202(e)(6))But, after the corporation has been in existence for at leasttwo years, no more than 50% of its assets may qualify asbeing used in the active conduct of a qualified businessbecause of these rules. (Code Sec. 1202(e)(6))

• Under Reg. § 1.537-2(b)(4), earnings and profitsaccumulated “to provide necessary working capital” for abusiness are not subject to the accumulated earnings tax.The Bardahl formula (set out by the Tax Court in BardahlInternational Corp., TC Memo 1966-182 ) has been appliedto calculate “necessary working capital.” Although neitherCongress nor IRS has indicated that these rules haveapplication for Code Sec. 1202 purposes, it would appearthat the reg and other rules that have been developedto interpret the reg, including the Bardahl formula, haveapplication for purposes of computing “reasonably requiredworking capital needs.”

• (C) The rights to computer software which producesactive business computer software royalties as defined inCode Sec. 543(d)(1). (Code Sec. 1202(e)(8))

A corporation will be treated as failing to meet the active business requirement for any period during which: (1) more than 10% of the value of its assets in excess of its liabilities consists of stock or securities in other corporations which are not subsidiaries of the corporation, unless the stock or securities are described at (B) above; or (2) more than 10% of the total value of its assets consists of real property which is not used in the active conduct of a qualified business (for this purpose, owning, dealing in, or renting real property is not considered to be the active conduct of a qualified business). (Code Sec. 1202(e)(5)(B), Code Sec. 1202(e)(7))

A corporation will be treated as meeting the active business

requirement for any period during which it is a specialized small business investment company (SSBIC). (Code Sec. 1202(c)(2)(B)(i))

Qualified business. For QSBS purposes, a qualified business can’t be (Code Sec. 1202(e)(1), Code Sec. 1202(e)(3)):

• A business involving services performed in the fields ofhealth, law, engineering, architecture, accounting, actuarialscience, performing arts, consulting, athletics, financialservices, or brokerage services.• The rule in the first bullet is limited to service businesses,while the rule in the second, below, is not so limited.• A business whose principal asset is the reputation orskill of one or more employees.• There is no other instance in which either the Codeor the regs use the term “principal asset” in the context ofan intangible human quality like “reputation” or “skill.” And,the relevant Congressional Committee reports do not addany insight as to Congress’s intent regarding this language.Thus, it is quite unclear which trades or businesses will failthe qualified business test as a result of this language, orwhich more-specific characteristics of any given trade orbusiness are indicative of it failing this test.• A banking, insurance, financing, leasing, investing, orsimilar business.• A farming business (including the raising or harvestingof trees).• A business involving the production of products forwhich percentage depletion can be claimed.• A business of operating a hotel, motel, restaurant, orsimilar business.

Dollar limit on eligible gain. For each tax year, for each corporation in which the taxpayer sells or exchanges QSBS, the amount of gain eligible for the exclusion is limited to the greater of:

• (1) $10 million ($5 million for married persons filingseparately), less the total amount of eligible gain (i.e., gainon the sale or exchange of QSBS held for more than fiveyears) taken into account under the Code Sec. 1202(a)rules by the taxpayer with respect to dispositions of stockissued by the corporation in all earlier tax years, or• (2) 10 times the taxpayer’s total adjusted basis inQSBS of the corporation disposed of by the taxpayer in thetax year. (Code Sec. 1202(b)(1))

Other rules. The complex QSBS requirements include anti-abuse provisions (Code Sec. 1202(c)(3)), special rules for taxpayers or related parties that take certain short positions in the stock (Code Sec. 1202(j)), stock held by passthroughs (Code Sec. 1202(g)), and gifts and bequests (Code Sec. 1202(h)).

Wayne

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Letters to the Editor

Thank you to all who responded to the letter to the IRS. Your confirmation that our points were well-taken and that you supported our effort are valued. I will be speaking with our contact in the Deputy Commissioner’s Office next week and will let you know of the response.

Tax Jokes and QuotesTax Facts

The Gettysburg address is 269 words, the Declaration of Independence is 1,337 words, and the Bible is only 773,000 words. However, the tax law has grown from 11,400 words in 1913 to 7 million words today.

The IRS sends out 8 billion pages of forms and instructions each year. Laid end to end, they would stretch 28 times around the earth.

Nearly 300,000 trees are cut down yearly to produce the paper for all the IRS forms and instructions.

American taxpayers spend over $200 billion and 5.4 billion hours working to comply with federal taxes each year, more than it takes to produce every car, truck, and van in the United States.

The amount of effort needed to calculate and pay federal income for individuals and businesses in the United States is the equivalent of a staff of 3 million people working full time for a year.

The IRS employs 114,000 people-twice as many as the CIA and five times more than the FBI.

60% of taxpayers must hire a professional to get through their own return.

Taxes eat up 38.2% of the average family’s income; that’s more than for food, clothing and shelter combined.

Next Edition of Taxing Times,ncpeFellowship Monthly Newsletter:

October 1st, 2016

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