Congress recently passed—and the President signed into law—the SECURE Act, landmark legislation that may affect how you plan for your retirement. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement-planning situation.

Congress recently passed—and the President signed into law—the SECURE Act, landmark legislation that may affect how you plan for your retirement. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement-planning situation.

Here is a look at some of the more important elements of the SECURE Act that have an impact on individuals. The changes in the law might provide you and your family with tax-savings opportunities. However, not all of the changes are favorable, and there may be steps you could take to minimize their impact. Please give me a call if you would like to discuss these matters.

Sincerely,

Setting Every Community Up for Retirement Enhancement Act (SECURE Act)

Key provisions affecting individuals:

Repeal of the maximum age for traditional IRA contributions.

Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.

Required minimum distribution age raised from 70½ to 72.

Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.

For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.

Partial elimination of stretch IRAs.

For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary s life or life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”).

However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries are generally required to be distributed within ten years following the plan participant s or IRA owner s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).

Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans.

A Section 529 education savings plan (a 529 plan, also known as a qualified tuition program) is a tax-exempt program established and maintained by a state, or one or more eligible educational institutions (public or private). Any person can make nondeductible cash contributions to a 529 plan on behalf of a designated beneficiary. The earnings on the contributions accumulate tax-free. Distributions from a 529 plan are excludable up to the amount of the designated beneficiary's qualified higher education expenses.

Before 2019, qualified higher education expenses didn't include the expenses of registered apprenticeships or student loan repayments.

But for distributions made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions from 529 plans can be used to pay for fees, books, supplies, and equipment required for the designated beneficiary s participation in an apprenticeship program. In addition, tax-free distributions (up to $10,000) are allowed to pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.

Kiddie tax changes for gold star children and others.

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), which made changes to the so-called “kiddie tax,” which is a tax on the unearned income of certain children. Before enactment of the TCJA, the net unearned income of a child was taxed at the parents' tax rates if the parents' tax rates were higher than the tax rates of the child.

Under the TCJA, for tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. Children to whom the kiddie tax rules apply and who have net unearned income also have a reduced exemption amount under the alternative minimum tax (AMT) rules.

There had been concern that the TCJA changes unfairly increased the tax on certain children, including those who were receiving government payments (i.e., unearned income) because they were survivors of deceased military personnel (“gold star children”), first responders, and emergency medical workers.

The new rules enacted on Dec. 20, 2019, repeal the kiddie tax measures that were added by the TCJA. So, starting in 2020 (with the option to start retroactively in 2018 and/or 2019), the unearned income of children is taxed under the pre-TCJA rules, and not at trust/estate rates. And starting retroactively in 2018, the new rules also eliminate the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income.

Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.

Generally, a distribution from a retirement plan must be included in income. And, unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59-1/2 is subject to a 10% early withdrawal penalty on the amount includible in income.

Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.

Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes, and so could not be used as the basis for making IRA contributions.

Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable these students to begin saving for retirement without delay.

Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits.

Many home healthcare workers do not have taxable income because their only compensation comes from “difficulty-of-care” payments that are exempt from taxation. Because those workers do not have taxable income, they were not able to save for retirement in a qualified retirement plan or IRA.

For IRA contributions made after Dec. 20, 2019 (and retroactively starting in 2016 for contributions made to certain qualified retirement plans), the new rules allow home healthcare workers to contribute to a retirement plan or IRA by providing that tax-exempt difficulty-of-care payments are treated as compensation for purposes of calculating the contribution limits to certain qualified plans and IRAs.

Reference: Thomson Reuters\Checkpoint

Avoid the Surprise!  In the world of Income tax, 2018 and 2019 saw many changes as a result of the Tax Cuts and Jobs Act (TCJA) that was passed in 2017.  To that end, what follows in this memo is a highlight of the most relevant changes and some recurring “standard” advice around which meaningful year-end planning can occur.

December 2019 Tax Planning Letter

Clients & Friends:

Yes it is that time again. Black Friday sales way before "Black Friday", holiday décor at stores, holiday songs redone for political correctness, holiday party invites and the time for some TAX PLANNING AND YEAR END FINANCIAL REVIEWS. 

Our purpose in this communication is to encourage you to give a little attention to your tax and economic situations. Action taken after New Year's Eve may be too late to impact 2019. 

The 2017 tax reform, which mostly became effective for 2018 tax return filing, gave us some new perspectives on tax filings and the related planning. We are sure a lot of you were surprised when your 2018 individual returns reflected the new increased standard deduction amounts rather than the itemized deductions to which we had all become accustomed. For 2019, those standard deduction amounts are $12,200 for single filers, $18,350 for head of household status and $24,400 for married joint filers. If you are over 65, the standard amounts are increased by $1,650 in the single or head of household status and by $1,300 per person over 65 on a joint return (e.g. the standard deduction for a joint return with both over age 65 is $27,000). 

With the increased standard deduction in place, it gives you the opportunity/incentive to time and manage your deductions including mostly "elective" medical expenses (starting in 2019 medical expenses must exceed 10% of your adjusted gross income (AGI) to be deductible) and charitable contributions. A popular strategy is to bunch these deductions every other year and take advantage of the high standard deductions in the intervening years. A way to "manage" your charitable contributions is to use a donor advised fund (DAF) to make and deduct a large contribution amount in 2019 and pay amounts to your favorite charities in succeeding years from the fund. If the DAF strategy is cumbersome or will not work for you, make two years' worth of donations in 2019 and skip the payments to the charities of your choice in 2020. 

If your itemized deductions still will not meet the standard deduction amount and you are over 70½, consider sending your required minimum distribution (RMD) amount from your IRA account directly to the charity of your choice. You will not have to pay tax on the distribution and "in effect" get the qualified charitable deduction for the payment. This contribution distribution is limited to payments of $100,000 or less. 

Remember, itemized deductions from tax reform limited the TOTAL amount of all personal tax deductions (income and real estate tax) to $10,000, so there is very limited tax planning available in this area and usually no benefit in accelerating the final state estimated tax payments due 1/15/2020. 

Mortgage rates are favorable again. If you are purchasing a home or considering refinancing, remember the new mortgage limit for tax deduction is $750,000. You can, however, refi your old mortgage and apply the $1M limit as long as you do not receive "proceeds" from the refi. 

Last year at this time we warned of surprises because of changes in the federal income tax withholding tables that occurred early in 2018 and left many taxpayers short on their 2018 tax returns. If you were one that owed tax with the 2018 federal return because of this AND did not adjust your tax withholding in 2019, we encourage you to revisit the withholding NOW to avoid or at least be prepared for that unpleasant conversation with us in early 2020 about tax due. We will be happy to assist you in this assessment if needed. We dislike these surprise moments as much as you do! 

A few other tax adjustments we became more knowledgeable and familiar with in the 2018 returns include the new Qualified Business Income (or QBI) deduction under Sec. 199(A) which resulted in a deduction from your taxable income of 20% of your QBI. This deduction which is subject to various complex limitations was beneficial to many with business income on schedule "C" or business income passed through from partnerships or "S" corporations. We also dealt with limitations on business interest deductions under new section 163(j) and the overall limitations on business losses. These changes among others made for a challenging filing season! 

We are a bit "thankful" at this time that Congress has other "issues" to consider and it appears that no further tax "simplification" will occur in 2019! 

As of this writing, the stock market is on a bit of a roll. That means this is a good time to review your portfolio and balance any 2019 gains by selling positions that will result in capital losses. Remember when considering the 2019 gains to factor-in any capital gain distributions from mutual funds that will be reported to you and taxable in 2019. Most mutual funds will post on their websites the approximate amounts of capital gain distributions late in November or early December. 

Recent tax law allows for tax on certain qualified long-term gains to be deferred if they are reinvested in a qualified opportunity fund. If you have significant gains and are interested in this concept, please contact us. 

Do not be reluctant to realize net capital losses in 2019. The losses will offset 2019 gains including mutual fund distributions and the balance can be carried over to offset gains in 2020 and succeeding years! You may also find that 2019 is not a bad year to realize capital gains. Again the market is at an all-time high and you know the maximum capital gain rate is 20% or 23.8% if the net investment income tax applies. One should never feel bad about taking some gains off the table! As always in this area, be sure the economic considerations in any decision outweigh the possible tax benefits or costs. 

While we are talking of your portfolio and if you are charitably inclined, or want to fund the DAF mentioned earlier, giving appreciated securities to a charity is a very effective method of donation. You get a full fair market value deduction for the donated stock or fund held over one year, and do not pay capital gain tax on the gain in the position. 

If you are making gifts to family members it may also be efficient to give long-term appreciated positions. It is possible the donee could sell the stock or fund and take advantage of the ZERO% tax rate on the gain. That rate exists if taxable income is below $39,385 for singles and $52,750 and $78,750 for head of household or joint filers, respectively. If the donee is under age 24, Kiddie tax rules could impact the tax calculation. One last note here, if you have loser positions, DO NOT give them away. Sell the position and take the loss on your return where it is probably more valuable. 

If for some reason you find yourself in a low income tax bracket in 2019 AND have funds in an IRA account, one option to consider is converting all or a portion of that account to a ROTH IRA to take advantage of a low rate in 2019. The future distributions from the ROTH will not be subject to tax as long as it is in place for 5 years. 

While this letter is aimed primarily at our individual filers, those who have or own business entities should consider taking advantage of the very generous depreciation tax breaks and Section 179 deductions for the purchase of equipment and other business property. Some of these deduction limits decrease or phase-out in the future. As a result, investing now may be a wise choice. 

Also consider implementing or enhancing your retirement plans. For example, a solo 401(k) is a particularly popular plan design for a sole proprietor with no employees to take advantage of higher deduction limits. 

This is also a good time to review the designated beneficiaries on your retirement plans and life insurance policies as well as who you may have named as an executor of your will, power of attorney or trustee. Changes due to death or divorce sometimes occur in our lives and these designations go unchanged. These are relatively easy to change when you are in charge and often very difficult or impossible to alter after a disability or death. 

The year end is also a good time to revisit your estate planning and the related documents. Consider taking advantage NOW of the annual gift tax exclusion which is $15,000 per year per donee. As an example, dad and mom can gift as much as $60,000 to son and spouse by December 31 with no gift tax issue or filing requirement. These annual exclusion gifts DO NOT reduce your current lifetime gift/estate tax exemption of $11.4 million for each spouse and is portable. A married couple NOW enjoys a total exclusion of $22.8 million. With these exclusions in place we are not filing very many "taxable" gift or estate tax returns at this time. It is important to remember that these enhanced exclusion amounts are scheduled to sunset in 2026. While that may or may not happen, you may want to take advantage while we know they are available. 

Please keep our firm in mind as you gather with friends and family over the next few months. Our best referrals often come from existing clients who are able to speak highly on our behalf. We greatly appreciate the opportunity to do business with new individuals and businesses each year. 

Reminder: our firm continues to be very involved in estate administration including the preparation and filing of PA Inheritance tax returns and federal estate and gift tax returns. Please do not hesitate to contact us if you unfortunately have a need in these areas. 

One Final Reminder: do not hesitate to contact us to discuss and/or help implement any tax or economic planning or any other matter if you feel we can be of assistance. We are a more valuable asset to you when we have the opportunity in advance to consider and comment on the economic transactions which impact your tax matters. 

Finally, we hope you have a joyous and peaceful Holiday Season and find plentiful reasons to give thanks for 2019 and wish you all the best for a Happy and Healthy 2020!!! 

Thank you for being our clients and friends and allowing our firm to provide your tax and accounting needs. 

Siana Carr O'Connor & Lynam, LLP

Please read about the various changes in payroll withholding and related tax filing requirments for 2020.

The following is a summary of the various changes in payroll withholding and related filing requirements for 2020. As always, if you have any questions on these matters please contact us.

 The Tax Cuts and Jobs Act (TCJA), passed in December 2017, impacted individuals through the introduction of new tax rates and brackets, increased standard deduction, changes to allowable itemized deductions, elimination of personal exemptions, among many other changes.

 Under TCJA, various deductions and certain tax-favored fringe benefits were eliminated or modified. These changes included the suspension of the deductions for moving expenses and certain qualified transportation expenses. The tax-free reimbursement of employment-related moving expenses was suspended. The Act also suspended an employee's deduction for unreimbursed business expenses (previously deductible as a miscellaneous itemized deduction).

 The Act reduced the federal corporate (C-Corp) tax rate to 21%, while also providing a new deduction from pass-through income generated by most S-Corps, Partnerships, Sole Proprietors, etc. These provisions have many business owners reconsidering their current entity structure and evaluating the methods for paying themselves and their employees. Please note that the issues of reasonable compensation to owners, and the classification of workers as employees vs. independent contractors remain the focus of Internal Revenue Service scrutiny. Numerous other provisions exist which may impact your employees, you and/or your business, but a more in-depth analysis of the complete Act is beyond the scope of this newsletter focusing on employment taxes. Please contact our office should you desire a more in-depth explanation of this legislation.

 FEDERAL TAX DEPOSITS

 Most taxpayers are required to make federal tax deposits for payroll taxes, corporate income tax, and back-up withholding electronically through use of the electronic federal tax payment system (EFTPS). Paper coupons are discontinued as the paper coupon system is no longer maintained by the Treasury Department. The primary exception is for employers that have $2,500 or less in quarterly payroll tax liability who may pay this liability when filing the quarterly employment tax return.

 Officers and/or employees of a corporation or partnership can become personally liable for failure to withhold and remit federal employment taxes. If you are using a payroll service to make your deposits, you should ensure that the payments are made timely. Penalties can equal the amount of the tax due (100% penalty). If you are having difficulty paying your employment taxes timely, please call us.

 The net FUTA rate for most Pennsylvania and New Jersey employers is 0.6% for 2019. The 2020 net FUTA tax rates are likely to approximate the same. FUTA tax continues to be assessed on the first $7,000 of wages paid to each worker during a calendar year.

 The Internal Revenue Service’s deadline for submitting government copies of the 2019 Form W-2 to the Social Security Administration is January 31, 2020. This is the same as the deadline to furnish employees with their forms.

 SOCIAL SECURITY & MEDICARE TAXES

 For 2020, the taxable social security wage base limit is $137,700. The employee and employer tax rate for social security is 6.2%. In 2020, all wages are taxable for the Medicare portion of the tax which is 1.45% for both employees and employers. The self-employment tax rate will be 15.3% on the first $137,700 of net earnings.  

 The Patient Protection and Affordable Care Act (ACA) imposes an additional 0.9% Medicare tax on wages, compensation, or self-employment income exceeding the threshold amount $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately, and $200,000 for other taxpayers. There is no corresponding amount owed by the employer. Employers must withhold Additional Medicare tax from wages it pays to an individual in excess of $200,000 in a calendar year. If individuals anticipate owing more Additional Medicare tax than the amount withheld, they should request additional income tax withholding using Form W-4 and/or should make estimated tax payments. Taxpayers will calculate Additional Medicare tax liabilities on their individual income tax returns (Form 1040), and will apply any Additional Medicare tax withheld against all taxes shown on this return.

 PENNSYLVANIA PERSONAL INCOME TAXES

 The withholding rate remains at 3.07%. The PA Dept. of Revenue no longer provides paper coupon booklets. Instead, employer returns and payments should be filed using three electronic options: Internet, Tele file or third-party software. If you have not yet registered under one of these methods, we encourage you to do so. If you want our help in using these filing methods, please call us. More information can be obtained via the internet at www.revenue.pa.gov and www.etides.state.pa.us. Employers may still file using paper returns and checks, however, we recommend that you switch to the D.O.R. mandated methods.

 PENNSYLVANIA UNEMPLOYMENT COMPENSATION

The first $10,000 of wages paid to each worker in calendar year 2020 is taxed at the employer’s standard rate, as provided by the State. In addition, employers are required to withhold unemployment taxes from employees’ gross wages at a rate of 0.06%. The amount of compensation subject to employee withholding is not limited. Pennsylvania employers are required to electronically file quarterly UC tax and wage reports through the Unemployment Compensation Management System (UCMS). The Department of Labor is no longer mailing paper UC-2 forms to employers. Additional information is available at www.dli.state.pa.us.

 PENNSYLVANIA ELECTRONIC FILING REQUIREMENT

             Employers who file 10 or more W-2 forms with the Department are now required to file those forms electronically. Employers should visit e-TIDES, the Department’s online system for business taxes, at www.etides.state.pa.us to file their Annual Withholding Reconciliation Statement (REV-1667). The REV-1667 must be filed by January 31, 2020. Copies of the Individual Wage Statement (W-2) must also be filed electronically with the form REV-1667.

             The PA Department of Revenue has expanded the EFW2 and CSV format specifications to include corrections for filing the W-2/1099 information for tax year 2019. Corrected W-2/1099 information can only be submitted for original filings done through e-TIDES.

             Additional information regarding the electronic filing requirement is available through the Department’s Business Taxes e-Services Center by accessing its website www.revenue.pa.gov or calling 717-787-8326.

 PHILADELPHIA CITY WAGE TAX

 Employers must withhold city wage taxes for residents at the rate of 3.8712% (.038712) and nonresidents who work in the city at the rate of 3.4481% (.034481). Every Pennsylvania employer who employs a Philadelphia resident must register with the Philadelphia City Revenue Commissioner and withhold the city wage tax. Please note that Philadelphia commonly changes these rates in July each year.

 LOCAL PAYROLL TAXES

PA Act 32 - Local Earned Income Tax Law

 The Pennsylvania law known as “Act 32” requires every business that employs individuals who work within Pennsylvania, either at a worksite or from their homes to withhold the applicable local earned income tax amount from employees’ wages and to remit this timely to the appropriate tax collection agency. The employer must withhold the greater of the employee’s resident tax rate for where they live or nonresident tax rate for where they work. Each employee must complete a Residency Certification Form, to identify the proper subdivision where they live and work. Additional information regarding Act 32 is available through the PA Department of Community and Economic Development by accessing its website www.dced.PA.gov or calling 1-866-466-3972.

Philadelphia is not regulated by Act 32, so the present system administered by the Philadelphia Department of Revenue remains in effect.

 Local Services Tax (LST)                                                          

 The Local Services Tax (LST) allows local governments to levy a tax of $10 to $52 per employee per year. If the locality levies a tax of $10, then the employer should withhold the tax from the first paycheck of the employee unless the employee qualifies for an exemption. The LST exempts employees who make less than $12,000 annually from the tax. The LST also exempts disabled veterans and reservists who are called to active duty at any time during the year from the tax. The employer must obtain and retain exemption certificates from such employees to document the non-withholding exemption. The LST (if more than $10) is not collected at one time, but must be withheld pro rata during the year with each payroll.

 NEW HIRE REPORTING

Federal regulation mandates all employers to report information about any new employee within 20 days of their hire date. Penalties for noncompliance can be up to $500 per employee. Mandatory information to report for all Pennsylvania employers includes: employee’s name, address, social security number, date of birth and hire date, also employer’s name, address, federal identification number, contact and phone number. Employers may report their new hire information by either manual or electronic means. Multi-state employers must report employees either by magnetic tape or electronically. Additional information can be obtained at www.cwds.pa.gov or call 1-888-PAHIRES.

 RETIREMENT PLANS

 *     The limitation on the exclusion for elective deferrals under 401(k) and other plans is increased from $19,000 in 2019 to $19,500 in 2020. Taxpayers who are age 50 and older (during 2020) can make an additional catch-up contribution in the amount of $6,500 in 2020.

 *     401(k) and 403(b) plans may offer qualified Roth contributions that allow employees to elect to make all or a portion of their 401(k) contributions on an after-tax basis. Similar to Roth IRA’s, earnings grow tax free and, in most circumstances, distributions are free from tax when withdrawn. Your plan documents must explicitly allow designated Roth contributions.

 *     The annual compensation limit taken into account for qualified plan purposes is increased from $280,000 in 2019 to $285,000 in 2020.

 *     The maximum annual amount of salary reduction contributions to a SIMPLE retirement plan is increased from $13,000 in 2019 to $13,500 in 2020. Taxpayers who are age 50 and older (during 2020) can make an additional contribution of $3,000 in 2020.

 *     The limitation on the annual benefit under a defined benefit plan is increased from $225,000 in 2019 to $230,000 in 2020. The limitation for defined contribution plans is increased from $56,000 in 2019 to $57,000 in 2020.

 *     The amount used to identify highly compensated employees for non-discrimination testing purposes is increased from $125,000 in 2019 to $130,000 in 2020.

 MINIMUM WAGE RATE

            The minimum wage rate for Pennsylvania is currently set at $7.25 per hour. A proposal to raise the minimum wage by $2.25 over the next three years is advancing in the state legislature.

 STANDARD MILEAGE RATES

 The standard mileage rate for business automobile usage is 57½ cents per mile in 2020, down from 58 cents per mile in 2019. The optional mileage allowance deduction may be used for both leased and purchased autos. If you elect the standard mileage rate for a leased auto, that method must be used for the entire lease period of that auto.

 NON-CASH FRINGE BENEFITS

 As noted above, the Tax Cuts and Jobs Act modifies or eliminates the tax-favored treatment of certain fringe benefits such as moving expenses. The rules regarding the taxation and reporting of other fringe benefits still apply. Taxable fringe benefits include the following: the cost of nondiscriminatory group-term life insurance provided to employees in excess of $50,000; personal use of an employer provided vehicle; the cost of life insurance (other than group-term) provided to employees where the employee may determine the beneficiary; and discriminatory payments to key employees under educational assistance plans, self-insured medical reimbursement plans, dependent care assistance programs and group legal service plans.

 1099 REPORTING

             Report on Form 1099-MISC payments made in the course of your business. Personal payments are not reportable. Form 1099-MISC must be issued to persons and unincorporated entities (including partnerships and LLCs not taxed as corporations) receiving at least $600 for: 1) services rendered other than as an employee; 2) rent; 3) prizes; 4) medical and health care payments; or 5) other payments. Form 1099-MISC is not required to be filed for payments for merchandise, payments made via credit card, nor most payments to corporations, subject to some exceptions. You must also file Form 1099-MISC for each person from whom you have withheld any federal income tax under the backup withholding rules regardless of the amount of payment. In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment. Form 1099-INT should be filed to report interest payments of at least $10.

 The filing deadline for Form 1099-MISC to report non-employee compensation in Box 7 and the related Form 1096 is January 31, 2020. For all other reported payments, file Form 1099 by February 28, 2020. The forms generally should be provided to recipients by January 31, 2020. Penalties for late filing, non-filing, or filing incorrect information range from $50 per information return to the greater of $550 or 10% of the aggregate dollar amount of the items required to be reported correctly. In certain instances, these penalties may be higher. Should you require our assistance in preparing these forms, please submit all information to us as soon as possible to allow for timely filing and to avoid the assessment of significant penalties. We recommend that you collect names, addresses and taxpayer identification numbers for every payee and vendor with whom you transact business. Forms W-9 should be used for this purpose and may be obtained via the internet at www.irs.gov or from our website.

             Companies paying non-employee compensation for Pennsylvania based work must submit copies of federal forms 1099-MISC to the Pennsylvania Department of Revenue at the same time they are due to the Internal Revenue Service. Payors of $5,000 or more for Pennsylvania-sourced work to nonresident individuals or to disregarded entities owned by nonresident individuals are required to withhold Pennsylvania personal income tax from such payments at a rate of 3.07%. Similarly, a business making rent or royalty payments exceeding $5,000 to nonresidents with regard to Pennsylvania property is required to withhold Pennsylvania personal income tax on such payments. These new withholding rules require electronically filed copies of IRS Form 1099-MISC with the Pennsylvania Department of Revenue, as well as quarterly withholding returns and annual reconciliations.

             Rental property owners may benefit from the Qualified Business Income (QBI) Deduction under Sec. 199A of the Tax Cuts and Jobs Act. The 20% QBI deduction is available only for activities that qualify as a trade or business. The regulations are complex in determining whether a rental real estate activity qualifies as a trade or business for purposes of this deduction. The issuance of Forms 1099-MISC, where applicable, may be helpful in establishing this trade or business motive.

 The issue of whether workers should be classified as employees or as independent contractors remains the focus of Internal Revenue Service scrutiny. In determining appropriate worker classification, businesses must weigh a variety of factors. Some will dictate in favor of employee status while others will be indicative of independent contractor status. No single factor establishes the outcome, and all must be carefully considered within the context of the relationship. Improper reporting of workers can result in a requirement to pay back taxes plus interest and punitive penalties. Additional guidance with regard to this complex and important determination may be found at www.irs.gov (search “worker classification”). Should you have any questions, please call us.

 HEALTH FLEXIBLE SPENDING ARRANGEMENT

 The maximum salary reduction contribution to a health flexible spending arrangement (health FSA) is $2,750 for 2020. Any salary reductions in excess of this amount will be subject to tax on distributions from the health FSA.

 THE PATIENT PROTECTION AND AFFORDABLE CARE ACT (ACA)

Beginning in 2019, the TCJA eliminates the individual mandate imposing a penalty on those individuals failing to have health insurance coverage required under ACA; however, other provisions of the ACA are still in effect. Generally, ACA requires employers with at least 50 full-time equivalent employees (FTE) to provide health coverage, or risk paying a penalty. ACA also requires employers and insurers to report certain information to the Internal Revenue Service.

 In addition, ACA requires certain employers to report on Form W-2 the aggregate cost of applicable employer sponsored health coverage paid during the calendar year. The aggregate reportable cost is reported on Form W-2 in Box 12, using Code DD. Pending further guidance from the IRS, transition relief of this disclosure requirement may apply to certain small employers who issue less than 250 W-2 Forms each year. A detailed analysis for implementing these provisions is beyond the scope of this newsletter, but please contact us if further guidance is needed in regard to the Affordable Care Act.

 EMPLOYEE BUSINESS EXPENSE REIMBURSEMENTS

 If an employee is reimbursed for business expenses under an “accountable plan”, the reimbursements are not treated as taxable income to the employee. An accountable plan must require the employee to: 1) substantiate the nature and amount of the expenses, and 2) repay to the employer any reimbursements in excess of the business expenses incurred. Please contact us if you need assistance in designing an accountable plan.

 ANNUAL LEASE VALUE AMOUNTS FOR PERSONAL USE OF COMPANY CARS

 The “Annual Lease Value” (ALV) table, as issued by the Internal Revenue Service (www.irs.gov), shows the annual value to employees for the personal use of a company car. This ALV amount of the auto is includible in the employee’s income, unless the car is used exclusively for business purposes. If the car is used partly for personal driving, a percentage of the ALV (based on the percentage of personal use) is reported on the employee’s W-2. Note that the ALV does not change each year. Instead, it is treated as constant for each of the first four years of use. If the company car is still in use after four years, it is revalued at the beginning of the fifth year, and the ALV based on this new fair market value is used for the next four years of employee use. The ALV includes the value of auto insurance, registration fees and repairs paid by the company. It does not include the cost of fuel. If the company pays for fuel, the cost consumed in personal driving is additional W-2 income to the employee. A standard rate of 5½ cents per mile (based on 2019 rates) may be used in computing income attributable to personal fuel costs paid by the employer.

 OVERTIME UPDATE

             The U.S. Department of Labor has finalized a rule expanding overtime pay eligibility for certain American workers. This rule increases the minimum salary requirement to be considered exempt from overtime under the Fair Labor Standards Act and is scheduled to take effect on January 1, 2020. Please contact us for the specifics of these regulations.

DISCLOSURE

 The above synopses are brief reviews of general payroll tax issues. They are not intended to be complete explanations or to provide tax advice for specific fact patterns. Please discuss any decision concerning specific situations with a tax advisor qualified on such issues.

The IRS and the Treasury Department have automatically extended the federal income tax filing due date for individuals for the 2020 tax year, from April 15, 2021, to May 17, 2021. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed.

The IRS and the Treasury Department have automatically extended the federal income tax filing due date for individuals for the 2020 tax year, from April 15, 2021, to May 17, 2021. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed.

This postponement applies to individual taxpayers, including those who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021.

The IRS has informed taxpayers that they do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief.

Individual taxpayers who need additional time to file beyond the May 17 deadline can request a filing extension until October 15 by filing Form 4868 through their tax professional or tax software, or by using the Free File link on the IRS website. Filing Form 4868 gives taxpayers until October 15 to file their 2020 tax return, but does not grant an extension of time to pay taxes due.

Not for Estimated Taxes, Other Items

This relief does not apply to estimated tax payments that are due on April 15, 2021. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. Also, the federal tax filing deadline postponement to May 17, 2021, only applies to individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021, not state tax payments or deposits or payments of any other type of federal tax. The IRS urges taxpayers to check with their state tax agencies for details on state filing and payment deadlines.

Winter Storm Relief

The IRS had previously announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns and make tax payments. The extension to May 17 does not affect the June deadline.

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Some of the tax-related provisions include the following:

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Some of the tax-related provisions include the following:

• 2021 Recovery Rebate Credits of $1,400 for eligible individuals ($2,800 for joint filers) plus $1,400 for each eligible dependent. Credit begins to phase out at adjusted gross income of $150,000 for joint filers, $112,500 for a head of household, $75,000 for other individuals. The IRS has already begun making advance refund payments of the credit to taxpayers.
• Exclusion of up to $10,200 of unemployment compensation from income for tax year 2020 for households with adjusted gross income under $150,000.
• Enhancements of many personal tax credits meant to benefit individuals with lower incomes and children.
• Exclusion of student loan debt from income, for loans discharged between December 31, 2020, and January 1, 2026.
• For tax years after December 31, 2026, the $1,000,000 deduction limit on compensation of a publicly-held corporation’s covered employees will expand to include the five highest paid employees after the CEO and CFO. The rule in current law applies to the CEO, the CFO, and the next three highest paid officers.
• For the payroll credits for paid sick and family leave: The credit amounts are increased by an employer’s collectively bargained pension plan and apprenticeship program contributions that are allocable to paid leave wages. Also, paid leave wages do not include wages taken into account as payroll costs under certain Small Business Administration programs.

The president is conducting a nationwide tour to explain and promote the over 600-page, $1.9 trillion legislation.

Stimulus Payments

Many of the 158.5 million American households eligible for the payments from the stimulus package can expect to receive them soon, White House Press Secretary Jen Psaki said the same afternoon Biden signed the legislation into law. Payments are coming by direct deposit, checks, or a debit card to those eligible.

FTC: Beware of Scams

Scammers are right now crawling out from under their rocks to fleece businesses and consumers receiving the aid, the Federal Trade Commission warned on March 12.

It is important for business owners and consumers to know that the federal government will never ask them to pay anything up front to get this money, said the FTC: "That’s a scam. Every time." The regulatory agency also cautioned that the government will not call, text, email or direct mail aid recipients to ask for a Social Security, bank account, or credit card number.

The IRS needs to issue new rules and guidance to implement the American Rescue Plan, experts said on March 11 as President Joe Biden signed his COVID-19 relief measure.

The IRS needs to issue new rules and guidance to implement the American Rescue Plan, experts said on March 11 as President Joe Biden signed his COVID-19 relief measure.

"I hope Treasury will say something very soon: FAQs, press release, something. IRS undoubtedly will have to write new regs," commented Urban-Brookings Tax Policy Center Senior Fellow Howard Gleckman. He stressed IRS certainly will have to figure out how to make the retroactive tax exemption for some 2020 unemployment benefits work. Gleckman also said he suspects the Child Tax Credit will require new guidance.

Gleckman claimed a new form this late in the tax season is unlikely. "Amended returns seems easiest," said the veteran IRS observer.

To help implement the tax-related changes in the American Rescue Plan, a colleague at the Tax Policy Center, Janet Holtzblatt, said that she, as well, is looking for guidance from the IRS on what taxpayers would do if they received unemployment benefits in 2020. Holtzblatt noted the law would exclude $10,200 of those benefits from adjusted gross income if the taxpayers’ adjusted gross income is less than $150,000.

What people will want to know, Holtzblatt stated, is:

• What to do if they already filed their tax return and paid income taxes on those benefits? Do they have to file an amended tax return just to get the tax refund for that reason, or will the IRS establish a simpler method to do so?
• And going forward, what about people who have not yet filed their tax return? If a new form is not released, what should they report on the existing return—the full amount or the partial amount? And how will the IRS know when the tax return is processed whether the taxpayer reported the full amount or the partial amount? (Eventually, the IRS could—when, after the filing season is over and tax returns are matched to 1099s from UI offices—but that could be months before taxpayers would be made whole.)

For the CARES Act, Holtzblatt said the IRS generally provided guidance through FAQs on their website which was insufficient for some tax professionals and later voided. "Some of their interpretations raised questions—and in the case of the treatment of prisoners, was challenged in the courts and led to a reversal of the interpretation in the FAQ," she explained.

National Association of Tax Professionals Director of Marketing, Communications & Business Development Nancy Kasten said new rules are musts and the agency will have to issue new FAQs, potentially on all of the key provisions in the legislation. The NATP executive asserted that old forms are going to need to be revised for Tax Year 2021. "Regarding 2020 retroactive items, we are waiting on IRS guidance," said Kasten.

National Conference of CPA Practitioners National Tax Policy Committee Co-Chair Steve Mankowski said the primary rules that will need to be written ASAP relate to the changes in the 2020 unemployment, especially since it appears to be income based as well as the increased child tax credit with advanced payments being sent monthly unless a taxpayer opts out. He added there will most likely need to be a worksheet added to the 2020 tax returns to show the unemployment received and adjusting UE income down to the taxable amount.

Mankowski, immediate past president of NCCCPAP said the primary items for new FAQs include the unemployment and the income limit on the non-taxability, changes in the child tax credit; and changes in the Employee Retention Credit.

In response to an email seeking what the agency plans to do to help implement the pandemic relief measure, an IRS spokesman forwarded the following statement released on March 10:

"The IRS is reviewing implementation plans for the American Rescue Plan Act of 2021 that was recently passed by Congress. Additional information about a new round of Economic Impact Payments and other details will be made available on IRS.gov, once the legislation has been signed by the President."

Strengthening tax breaks to promote manufacturing received strong bipartisan support at a Senate Finance Committee hearing on March 16.

Strengthening tax breaks to promote manufacturing received strong bipartisan support at a Senate Finance Committee hearing on March 16.

Creating new incentives and making temporary ones permanent are particularly critical for helping American competitiveness in semiconductors, batteries and other high-tech products, Senate Banking Chair Ron Wyden (D-Ore) and Ranking Minority Party Member Mike Crapo (R-Idaho) stressed at the session.

Wyden said it is urgent business for elected officials to create conditions for the American semiconductor industry to thrive for years as part of a Congressional job creation toolkit. "I have seen too many short-term tax policies and mistakes," the Senate Finance Chair said. His sentiment was echoed by Crapo, the committee’s top Republican: "This is an area of bipartisan interest, and I welcome the opportunity to work with Chairman Wyden on this."

Crapo: Don’t Raise Corporate Rate

At the same time, Crapo cautioned Congress should not offset losses in federal revenue from increasing the stability of investment importance of protecting tax credit credits by raising the overall corporate tax rate. He said he is "very concerned" by reports he has heard that the White House is preparing to propose just that. Currently at 21 percent, the corporate tax rate was 35 percent before the 2017 Tax Cut and Jobs Act took effect.

Massachusetts Institute of Technology Sloan School Of Management Accounting Professor Michelle Hanlon told the hearing raising corporate tax rates would put American industry at a competitive disadvantage globally. She said the 2017 tax cuts should be built upon to expand manufacturing.

While saying expanding tax breaks for tech including clean energy is critical, Senator Tom Carper (D-Del) warned the federal government is looking at an avalanche of debt. To lessen that surge, he said it is important to go after the tax gap: money that taxpayers owe but they are not paying.

Senator Todd Young (R-Ind) warned that left unchanged, starting in 2022 companies will no longer be able to expense research and development expenses in the year incurred. "This would come at the expense of manufacturing jobs," he said. Young has introduced legislation to let businesses write up R&D as they are currently allowed.

If businesses are not allowed to continue to amortize their research and development expenses in the year they are incurred, it would significantly increase the cost to perform R&D in the U.S., Intel Chief Financial Officer George Davis warned the panel.

Ford Embraces Biden Proposal

Ford Motor Company Vice President, Global Commodity Purchasing And Supplier Technical Assistance Jonathan Jennings told the Senate that the auto maker embraces President Joe Biden’s proposal to provide a 10 percent advanceable tax credit for companies creating U.S. manufacturing jobs.

IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.

IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.

"There were trailers in June filled (with unopened paper returns). There are none today," Rettig said in an appearance before the House Appropriations Committee Financial Services Subcommittee.

When there was a delay in getting to a return, Rettig said that a taxpayer was credited on the date the mail was received, not the day the payment was processed.

The IRS leader stated that virtual currency, which is designed to be anonymous, has probably significantly increased the amount of money taxpayers owed but have not paid since the last formal figure of $381 billion was estimated in 2013.

To close the gap between money owed and money paid, Rettig said there has to be an increase in guidance as well as enforcement. "The two go together," said Rettig, who pointed out that the IRS must support the people who are working to get their tax payments right as well as working against those who are trying to thwart the agency’s efforts.

Rettig cited high-income/high-wealth taxpayers, including high-income non-filers, as high enforcement priorities. "We have not pulled back enforcement efforts for higher income individuals during the pandemic. We can be impactful," said Rettig. He added that the IRS is using artificial intelligence and other information technology (IT) advances to catch wealthy tax law and tax rule breakers. "Our advanced data and analytic strategies allow us to catch instances of tax evasion that would not have been possible just a few years ago," said the IRS leader.

Rettig contended that the agency’s IT improvement efforts are being hampered by a shortage of funding. According to Rettig, three years into a six-year business modernization plan, the IRS has received half of the money it requested from Congress for the initiative.

One of the impacts of the pandemic on the IRS and the taxpayers and tax professionals it serves, said Rettig, is the average length of phone calls has risen to 17 minutes from 12 minutes because the issues have been more complex.

On another issue related to COVID-19, Rettig said the IRS has been diligently working to alert taxpayers and tax professionals to scams related to COVID-19, especially calls and email phishing attempts tied to the Economic Impact Payments (EIPs). He said people can reduce the chances of missing their EIP payments through lost, stolen or thrown-away debit cards by filing their tax returns electronically.

The Commissioner told the panel that the delay in starting the tax filing season this year will not add to any additional delays to refunds on returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC).

Rettig also noted that taxpayers who interact with an IRS representative now have access to over-the-phone interpreter services in more than 350 languages.

The Tax Court ruled that rewards dollars that a married couple acquired for using their American Express credit cards to purchase debit cards and money orders—but not to purchase gift cards—were included in the taxpayers’ income. The court stated that its holdings were based on the unique circumstances of the case.

The Tax Court ruled that rewards dollars that a married couple acquired for using their American Express credit cards to purchase debit cards and money orders—but not to purchase gift cards—were included in the taxpayers’ income. The court stated that its holdings were based on the unique circumstances of the case.

Background

During the tax years at issue, each taxpayer had an American Express credit card that was part of a rewards program that paid reward dollars for eligible purchases made on their cards. Card users could redeem reward dollars as credits on their card balances (statement credits). To generate as many reward dollars as possible, the taxpayers used their American Express credit cards to buy as many Visa gift cards as they could from local grocery stores and pharmacies. They used the gift cards to purchase money orders, and deposited the money orders into their bank accounts. The husband occasionally purchased money orders with one of the American Express cards.

The taxpayers also occasionally paid their American Express bills through a money transfer company. Using this method, they paid the American Express bill with a reloadable debit card, and the money transfer company would transmit the payment to American Express electronically. The taxpayers used their American Express cards to purchase reloadable debit cards that they used to pay their American Express bills, and the purchase of debit cards and reloads also generated reward dollars.

All of the taxpayers' charges of more than $400 in single transactions with the American Express cards were for gift cards, reloadable debit cards, or money orders. On their joint tax returns, the taxpayers did not report any income from the rewards program.

The IRS determined that the reward dollars generated ordinary income to the taxpayers. When a payment is made by a seller to a customer as an inducement to purchase property, the payment generally does not constitute income but instead is treated as a purchase price adjustment to the basis of the property ( Pittsburgh Milk Co., 26 TC 707, Dec. 21,816; Rev. Rul. 76-96, 1976-1 CB 23). The IRS argued that the taxpayers did not purchase goods or property, but instead purchased cash equivalents—gift cards, reloads for debit cards, and money orders—to which no basis adjustment could apply. As a result, the reward dollars paid as statement credits for the charges relating to cash equivalents were an accession to wealth.

Rebate Policy; Cash Equivalency Doctrine

The Tax Court observed that the taxpayers' aggressive efforts to generate reward dollars created a dilemma for the IRS which was largely the result of the vagueness of IRS credit card reward policy. Under the rebate rule, a purchase incentive such as credit card rewards or points is not treated as income but as a reduction of the purchase price of what is purchased with the rewards or points ( Rev. Rul. 76-96; IRS Pub. 17). The court observed that the gift cards were quickly converted to assets that could be deposited into the taxpayers’ bank accounts to pay their American Express bills. According to the court, to avoid offending its long-standing policy that card rewards are not taxable, the IRS sought to apply the cash equivalence concept, but that concept was not a good fit in this case.

The court stated that a debt obligation is a cash equivalent where it is a promise to pay of a solvent obligor and the obligation is unconditional and assignable, not subject to set-offs, and is of a kind that is frequently transferred to lenders or investors at a discount not substantially greater than the generally prevailing premium for the use of money ( F. Cowden, CA-5, 61-1 ustc ¶9382, 289 F2d 202). The court found that the three types of transactions in this case failed to fit this definition.

The court ruled that the reward dollars associated with the gift card purchases were not properly included in income. The reward dollars taxpayers received were not notes, but instead were commitments by American Express to allow taxpayers credits against their card balances. The court found that American Express offered the rewards program as an inducement for card holders to use their American Express cards.

However, the court upheld the inclusion in income of the related reward dollars for the direct purchases of money orders and the cash infusions to the reloadable debit cards. The court observed that the money orders purchased with the American Express cards, and the infusion of cash into the reloadable debit cards, were difficult to reconcile with the IRS credit card reward policy. Unlike the gift cards, which had product characteristics, the court stated that no product or service was obtained in these uses of the American Express cards other than cash transfers.

As the court noted, the money orders were not properly treated as a product subject to a price adjustment because they were eligible for deposit into taxpayers' bank account from acquisition. The court similarly found that the cash infusions to the reloadable debit cards also were not product purchases. The reloadable debit cards were used for transfers by the money transfer company, which the court stated were arguably a service, but the reward dollars were issued for the cash infusions, not the transfer fees.

Finally, the court stated that its holdings were not based on the application of the cash equivalence doctrine, but instead on the incompatibility of the direct money order purchases and the debit card reloads with the IRS policy excluding credit card rewards for product and service purchases from income.

The IRS Office of Chief Counsel has embarked on its most far-reaching Settlement Days program by declaring the month of March 2021 as National Settlement Month. This program builds upon the success achieved from last year's many settlement day events while being shifted to virtual format due to the pandemic. Virtual Settlement Day (VSD) events will be conducted across the country and will serve taxpayers in all 50 states and the District of Colombia.

The IRS Office of Chief Counsel has embarked on its most far-reaching Settlement Days program by declaring the month of March 2021 as National Settlement Month. This program builds upon the success achieved from last year's many settlement day events while being shifted to virtual format due to the pandemic. Virtual Settlement Day (VSD) events will be conducted across the country and will serve taxpayers in all 50 states and the District of Colombia.

Settlement Day

Settlement Day events are coordinated efforts to resolve cases in the U.S. Tax Court by providing taxpayers who are not represented by counsel with the opportunity to receive free tax advice from Low Income Taxpayer Clinics (LITCs), American Bar Association (ABA) volunteer attorneys, and other pro bono organizations. Taxpayers can also discuss their Tax Court cases and related tax issues with members of the Office of Chief Counsel, the IRS Independent Office of Appeals and IRS Collection representatives. These communications can aid in reaching a settlement by providing taxpayers with a better understanding of what is needed to support their case.

The Taxpayer Advocate Service (TAS) employees also participate in VSDs to assist taxpayers with tax issues attributable to non-docketed years. Local Taxpayer Advocates and their staff can work with and inform taxpayers about how TAS may be able to assist with other unresolved tax matters, or to provide further assistance after the Tax Court matter is concluded. IRS Collection personnel will be available to discuss potential payment alternatives if a settlement is reached. For those who choose to take their cases to court, the VSD process can also give a better understanding of what information taxpayers need to present to the court to be successful.

Following its first announcement of virtual settlement days in May last year, the Chief Counsel and LITCs have successfully used VSD events to help more than 259 taxpayer resolve Tax Court cases without having to go to trial.

Registration and Information

The IRS proactively identifies and reaches out to taxpayers with Tax Court cases which appear most suitable for this settlement day approach, and invites them attend VSD events. The IRS also generally encourages taxpayers with active Tax Court cases to contact the assigned Chief Counsel attorney or paralegal about participating in the March VSD events.

This year, the IRS has included the following locations where these events have never been offered: Albuquerque, Billings, Buffalo, Cheyenne, Cleveland, Denver, Des Moines, Indianapolis, Little Rock, Milwaukee, Nashville, Peoria, Omaha, Reno, Sacramento, San Diego and San Jose.

LITCs can contact their local Chief Counsel offices about the event in their area. If additional information is needed, individuals can reach out to Chief Counsel’s Settlement Day Cadre, or contact Sarah Sexton Martinez at (312) 368-8604. Pro bono volunteers are encouraged to contact Meg Newman (Megan.Newman@americanbar.org) with the American Bar Association Tax Section.

An individual who owned a limited liability company (LLC) with her former spouse was not entitled to relief from joint and several liability under Code Sec. 6015(b). The taxpayer argued that she did not know or have reason to know of the understated tax when she signed and filed the joint return for the tax year at issue. Further, she claimed to be an unsophisticated taxpayer who could not have understood the extent to which receipts, expenses, depreciation, capital items, earnings and profits, deemed or actual dividend distributions, and the proper treatment of the LLC resulted in tax deficiencies. The taxpayer also asserted that she did not meaningfully participate in the functioning of the LLC other than to provide some bookkeeping and office work.

An individual who owned a limited liability company (LLC) with her former spouse was not entitled to relief from joint and several liability under Code Sec. 6015(b). The taxpayer argued that she did not know or have reason to know of the understated tax when she signed and filed the joint return for the tax year at issue. Further, she claimed to be an unsophisticated taxpayer who could not have understood the extent to which receipts, expenses, depreciation, capital items, earnings and profits, deemed or actual dividend distributions, and the proper treatment of the LLC resulted in tax deficiencies. The taxpayer also asserted that she did not meaningfully participate in the functioning of the LLC other than to provide some bookkeeping and office work.

However, the taxpayer, a high school graduate, testified that she had “a little bit of banking education,” indicating that she had some familiarity with bookkeeping. Her ex-spouse added during trial that the taxpayer had worked at a bank for a few years. Regarding her role in the LLC, the taxpayer maintained the business' books and records, prepared and signed sales tax returns and unemployment tax contribution forms on its behalf, and worked with an accountant to prepare its tax returns. Nothing in the record indicated that her ex-spouse tried to deceive or hide anything from her.

Further, the taxpayer’s joint ownership of the LLC, her involvement in maintaining its books and records, her role in preparing and signing tax-related documents on behalf of the business, and her cooperation with an accountant to prepare the LLC’s tax returns, showed that she had actual knowledge of the factual circumstances that made the deductions unallowable. Thus, she also was not entitled to relief under Code Sec. 6015(c).

The taxpayer was not eligible for streamlined determination under Rev. Proc. 2013-34, 2013-43 I.R.B. 397, because no evidence corroborated her testimony that her former spouse had abused her in any sense to which the tax law or common experience would accord any recognition. The history of acrimony between the taxpayer and her ex-spouse called into question the weight to be given to her claims of spousal abuse. Finally, the taxpayer was unable to persuade the court that she was entitled to equitable relief under Code Sec. 6015(f). She was intimately involved with the LLC, knew or had reason to know of the items giving rise to the understatement, and failed to make a good-faith effort to comply with her income tax return filing obligations.

A married couple’s civil fraud penalty was not timely approved by the supervisor of an IRS Revenue Agent (RA) as required under Code Sec. 6751(b)(1). The taxpayers’ joint return was examined by the IRS, after which the RA had sent them a summons requiring their attendance at an in-person closing conference. The RA provided the taxpayers with a completed, signed Form 4549, Income Tax Examination Changes, reflecting a Code Sec. 6663(a) civil fraud penalty. The taxpayers declined to consent to the assessment of the civil fraud penalty or sign Form 872, Consent to Extend the Time to Assess Tax, to extend the limitations period.

A married couple’s civil fraud penalty was not timely approved by the supervisor of an IRS Revenue Agent (RA) as required under Code Sec. 6751(b)(1). The taxpayers’ joint return was examined by the IRS, after which the RA had sent them a summons requiring their attendance at an in-person closing conference. The RA provided the taxpayers with a completed, signed Form 4549, Income Tax Examination Changes, reflecting a Code Sec. 6663(a) civil fraud penalty. The taxpayers declined to consent to the assessment of the civil fraud penalty or sign Form 872, Consent to Extend the Time to Assess Tax, to extend the limitations period.

Thereafter, the RA obtained written approval from her immediate supervisor for the civil fraud penalty, and sent the taxpayers a notice of deficiency determining the same. The taxpayers contended that the civil fraud penalty was not timely approved by the RA’s supervisor because the revenue agent report (RAR) presented at the conference meeting embodied the first formal communication of the RA’s initial determination to assert the fraud penalty.

Due to the use of a summons letter requiring the taxpayers' attendance, the closing conference at the end of the taxpayers’ examination process carried a degree of formality not present in most IRS meetings. The closing conference was, like an IRS letter, a formal means of communicating the IRS’s initial determination that taxpayers should be subject to the fraud penalty. Therefore, the RA communicated her initial determination to assert the fraud penalty when she provided the taxpayers with a completed and signed RAR at the closing conference. The RA had also informed the taxpayers during the closing conference that they did not have appeal rights at that time, which was incomplete and potentially misleading.

The completed RAR given to the taxpayers during the closing conference, coupled with the context surrounding its presentation, represented a "consequential moment" in which the RA formally communicated her initial determination that the taxpayers should be subject to the fraud penalty.