Archive for Tax Guidance & Preparation
IRS Publication 3 – Armed Forces Tax Guide
According to IRS Publication 3, Armed Forces’ Tax Guide, the Armed Forces Tax Council (AFTC) oversees the military tax programs offered worldwide. AFTC partners with the IRS to conduct outreach to military personnel and their families. This includes the Army, Air Force, Navy, Marine Corps and Coast Guard
Military-based Voluntary Income Tax Assistance (VITA) sites staffed with IRS-trained volunteers provide free tax help and tax return preparation. Volunteers receive training on military tax issues, such as combat zone tax benefits, filing extensions and special benefits that apply to the Earned Income Tax Credit. To receive free tax assistance, bring the following records to your military VITA site:
Valid photo identification
Social Security cards for you, your spouse and dependents, or a Social Security number verification letter issued by the Social Security Administration
Birth dates for you, your spouse and dependents
Wage and earning statement(s), such as Forms W-2, W-2G, and 1099-R
Interest and dividend statements (Forms 1099)
A copy of last year’s federal and state tax returns, if available
Checkbook for routing and account numbers for direct deposit of your tax refund
Total amount paid for day care and day care provider’s identifying number. This is usually an Employer Identification Number or Social Security number.
Other relevant information about income and expenses
If you are married filing a joint return and wish to file electronically, both you and your spouse should be present to sign the required forms. If both cannot be present, you usually must bring a valid power of attorney form along with you. You may use IRS Form 2848, Power of Attorney and Declaration of Representative for this purpose.
There is a special exception to this rule if your spouse is in a Combat Zone. The exception allows a spouse to prepare and e-file a joint return with a written statement stating the other spouse is in a combat zone and unable to sign. Also be sure to check out:
IRS Notice 2008-1 Health Insurance Costs of 2% Shareholder-Employees
Under IRS Notice 2008-1, if you are an owner of more than 2% of an S corporation and you have a health insurance policy in your name with premiums paid by the corporation basically a plan has been established by the corporation for you the shareholder. This is not a self insured plan. It is simply health insurance premiums paid or furnished by an S corporation.
Also the premium payments are included in the wages for income tax withholding purposes on your Form W-2, but are not considered wages subject to social security and Medicare taxes if the requirements for exclusion under §3121(a)(2)(B) are satisfied meaning that medical or hospitalization expenses were incurred in connection with sickness or accident disability.
Currently there are no discrimination provisions under §106 dealing with contributions by employers to accident and health plans. As a shareholder you are allowed an exclusion from gross income for the insurance cost if you meet the requirements of §162(l) which states as follows:
“In the case of a taxpayer who is an employee within the meaning of section 401 (c)(1), there shall be allowed as a deduction under this section an amount equal to the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer spouse or dependent children … No deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer’s earned income (within the meaning of section 401 (c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.”
How to calculate stock and loan basis in an S Corp for tax purposes
If you are a shareholder of an S corporation you are responsible for keeping track of your own basis (investment value) in the S corporation of which you own shares. Tracking shareholder basis is usually not the S corporation’s responsibility.
You can have stock basis and loan basis, which are usually adjusted each year based on the S corporation’s operations.
It is important to annually calculate your shareholders basis in the S corporation stock you own for the following reasons:
• You can claim losses and deductions passed through on Schedule K-1 to the extent of their stock and loan basis [§1366(d)(1)].
• If you receive a non-dividend distribution from the S corporation, it’s nontaxable to the extent of you stock basis [§1368(b)(1)].
• When you disposes of the S corporation stock, gain or loss on the disposition is calculated using you stock basis.
Stock basis starts with your initial contribution of capital to the S corporation’s capital account or the price paid for the stock. This amount is adjusted annually, as of the last day of the S corporation year, in the following order [Reg. §1.1367-1(f)]:
(1) Increased by all income including tax-exempt income reported on Schedule K-1 and excess depletion.
(2) Decreased by property distributions including cash made by the S corporation that are reported on Schedule K-1 in Box 16 with code D.
(3) Decreased by nondeductible non capital expenses, such as illegal bribes, kickbacks, fines and penalties, expenses and interest related to tax-exempt income, and the nondeductible portion of meals and entertainment.
(4) Decreased by deductible losses and deductions reported on Schedule K-1.
Stock basis can never go below zero.
If non dividend distributions exceed stock basis, the excess is taxed as capital gain on your personal return [§1368(b)(2)].
If deductible losses and deductions exceed stock basis, they can be deducted to the extent you have loan basis and any amount in excess of loan basis is suspended and carried over to the succeeding tax year.
You can elect to reduce your stock basis by deductible losses and deductions before decreasing their basis by non deductible expenses [Reg. §1.1367-1(g)]. If this election is made and nondeductible expenses exceed your stock and loan basis, the excess retains its character and is carried over to the succeeding tax year. If the election is not made, any excess nondeductible expenses are lost, not suspended and not carried over.
Loan basis starts with a loan substantiated with loan documentation from you the shareholder of the S corporation to the S corporation. In other words, it includes a traditional, written note with a reasonable stated rate of interest. It does not include third party loans to the S corporation that you guarantee or co-signs.
Loan basis is adjusted as follows:
• Losses and deductions (deductible and nondeductible) passed through on Schedule K-1 reduce stock basis before they reduce loan basis.
• Loan basis can never go below zero. If deductible losses and deductions exceed your stock and loan basis, the excess is suspended and carried over.
• If there are different types of losses and deductions, the allowable loss and deduction items must be prorated.
• If loan basis has been reduced by pass-through losses and deductions, any net increase in a subsequent year restores the reduced loan basis before it increases your stock basis [Reg. §1.1367-2(c)].
A net increase is the amount by which the increases to stock basis exceed the decreases to stock basis including non dividend distributions.
• Non dividend distributions are not taxable if there is a “net increase” for the year, even if you have no stock basis.
• Reduced loan basis is restored by any “net increase” for the year before any loan repayments during the year are taken into account [Reg. §1.1367-2(d)(1)].
These loan repayments must be allocated in part to a return of your basis and in part to the receipt of income. If the loan is a written note, the note is a capital asset and the income will be capital gain.
As an S corporation shareholder you must establish that you have enough basis in the S corporation before you can claim any pass-through losses or deductions. Basically S corporation shareholders usually tend to get into trouble when they assume that non dividend distributions from an S corporation are entirely nontaxable. Be sure to verify that the distribution does not exceed your stock basis. Also be sure to be aware of the various ordering rules for adjusting stock and loan basis in an S corporation.
Denver Colorado IRS Stakeholder Meeting Notes
Bessie Castro-Zepeda, Colorado Department of Revenue
Tax Practitioners only helpline; M-F 8am – 430pm (303) 232-2419
Capital Gain Subtraction: For 2012 returns, the department will make every effort to verify required documentation was included in the filing of the return before contacting the taxpayer for more information. That is why it is important the following supporting documents be submitted with the return.
□ A DR 1316 form, “Colorado Source Capital Gain Affidavit” must be completed and included with the return (electronic or paper). With e-filed returns, attaching the form to the electronic return or submitting it as an E-Filer Attachment in Revenue Online is not sufficient. For electronic returns, the information must be data entered on the DR 1316 portion of the return.
□ A copy of the closing statements for both the purchase and sale of the property, or official documentation from the county detailing purchase date and price and sale date and price
□ Copies of the first two pages of the corresponding federal return, Schedule D and any Schedule D attachments
□ If the capital gain was received via a pass-through entity, documentation that the interest in the underlying business satisfies the required five-year holding period
□ If the capital gain is claimed on a 2009 or prior year return and was due to the sale of stock or ownership interest, documentation verifying it was held for at least five years prior to the sale, that the company was a Colorado company for at least five years prior to the sale, and that the stock was acquired after May 9, 1994.
If form DR 1316 is included, and the capital gain subtraction claimed is $100,000 or less, the department will continue its practice of reviewing the capital gain subtraction claim two to three years after the return is originally filed, when the IRS provides federal return information to Colorado’s Discovery Section.
For more information, see publication FYI Income 15.
Kenneth Cooper, IRS Examination
Western Area has a lot of priority projects and initiatives coming up in the future. The work plan has expanded exponentially, yet the resources are getting smaller. With this type of blueprint, there is a sense of urgency to close cases.
Our return preparer visits have decreased. This year we did less than half of what we did last year. The visits were more educational visits than audits. We have completed the return preparer visits for this filing season.
Our high income non-filer program consists of individuals with an income of more than $200,000. There is a high non-response from these types of high income non-filers.
1099K information reporting is up tremendously.
Goretti Lysek and Tamara Hobson, Automated Collection Site (ACS)
There are currently three new changes to ACS.
Individual cases that can be worked in ACS have increased from $100,000-$250,000.
ACS is no longer asking for substantiation on financials unless the account will not be paid within the statute of limitations.
BMF/trust fund accounts have increased from $10,000 to $25,000 and now if a client can pay within 120 days they can be setup on an installment agreement for $999,999, or less than $1 million.
Question: Is there a change of when liens are filed?
Response: Liens are filed and starting at $10,000 and up. If you’re on a direct debit installment agreement the amount increases to $50,000. And of course a lien can be withdrawn if less than $25,000.
Comment: An ACS letter was received two weeks after the date on the letter. Practitioner will send the information to Debbie, who will forward it to Goretti.
Comment: Financial review on partial pay installment agreement letter not received then it is defaulted before we get the paperwork for the financial information.
Comment: Direct debit installment agreement payments coming out two to three days late creates a default on the installment agreement
Response: There were some issues in late June with direct debit installment agreements going to Collection. About 54% were deemed late and now the program is being analyzed.
Comment: There seems to be a disconnect when we contact ACS and speak to three different people and receive three different answers about an installment agreement.
Stephanie Valencia, Taxpayer Advocate
Nina Olson’s report to Congress was released this week.
The alternative minimum tax patch has been fixed permanently.
Taxpayer Advocate office will not accept any return cases until March. Hardship cases will get looked at individually.
An open house will be held in Denver in March or April with case advocates and managers. Debbie Rodgers will receive the information to forward to all practitioners.
Andrea Ventura, Collection
Collection has a new Area Director Tom Mathews who reports to the Western area on January 14.
Trust fund recovery protests – If we receive new information within 60 days we can revisit the claim. The taxpayer uses Form 1153W to reopen the case.
Collection has new Form 433A and 433B Collection Information Statements. Form 433A has more details about wage earner/self-employed individuals. Section 5 includes monthly income and expenses. We can use the old forms until June 1, 2013.
Some issues with direct debit installment agreements are that the revenue officer did not get an original signature on the direct debit application, and the bank information was incorrect.
Question: The new collection information statement forms don’t ask for supporting information, why?
Response: Substantiation is still necessary in most cases. A priority of the area Director is to reduce defaults on installment agreements. The Revenue Officer determines what type of supporting documents may be required after making contact with the taxpayer or their representatives.
New IRS Procedures for Obtaining Individual Taxpayer Identification Numbers (ITIN)
First of all make sure you find an IRS Certifying Acceptance Agent (CAA) that has completed the newly required forensic training. The required forensic training should aid in identifying fraudulent identification documents.
CAAs will be allowed to certify documents for the primary and secondary applicant (spouse) using Form W7 Certificate of Accuracy that they have reviewed the original documentation or a certified copy from the issuing agency of those documents, either through face-to-face or video electronic interviews. They will have to attach and send to the IRS copies of all documentation reviewed. For dependents, CAAs will be required to submit the original documents or copies certified by the issuing agency.
The links below provides information regarding these requirements.
http://www.irs.gov/Individuals/Revised-Application-Standards-for-ITINs
http://www.irs.gov/uac/IRS-Implements-Interim-Changes-to-ITIN-Application-Requirements-1
You can also find the news release and other information on IRS.gov. or click these links:
http://www.irs.gov/Individuals/New-ITIN-Acceptance-Agent-Program-Changes or
http://www.irs.gov/uac/2012-ITIN-Review-Frequently-Asked-Questions-1
The direct contact at the IRS for these matters is:
Tonya White
ITIN Policy Office, Tax Analyst
Internal Revenue Service
401 W. Peachtree Street NW
Mail Stop 97WI
Atlanta, GA 30308
Phone:(404) 338-7160
Email: itinprogramoffice@irs.gov
Centennial Anniversary of the 16th Amendment to the US Constitution is approcahing
Most anniversaries are celebrated with joy and jubilation. But on February 3rd, 2013, I doubt that anyone will be celebrating this anniversary or should I say centennial – after all, it is the 100th anniversary of the 16th Amendment to the US Constitution, the amendment that gave the federal government the right to impose the dreaded income tax and it was ratified on February 3, 1913.
In 1913, the collection of income tax was not intended to be collected from the masses, only from the rich, only those making $20,000 or more. How much did the average American family make in 1913? I would suspect that, just as today, it would depend upon where in the country you live. Some resources claim average salaries as low as $750/year and some as high as around $3,000/ yr. In either case, back in 1913 the average family in the United States was living far, far below the threat of paying income tax. And that was the intent of the government back then. The government was very concerned that the ‘little people’ be able to feed their families, pay their bills and save for their retirement.
The Internal Revenue Service now processes more than 145 million tax returns each year. The Internal Revenue Code is now more than 3.4 million words. If printed 60 lines to a page, it would fill more than 7,500 letter size pages.
So perhaps while we fill out our tax returns this year, we should fill our glass with our favorite drink and ponder what it will take to get back to the intent of the 16th amendment
Loving v. IRS deals blow to IRS Regulation of Tax Return Preparers
In Loving v. IRS the IRS’ authority to regulate commercial tax return preparers has been successfully challenged. United States District Court for the District of Columbia Judge James E. Boasberg granted Loving’s motion for summary judgment describing the IRS Rules as “Ultra Vires.”
“Ultra Vires” as I understand is a legal term meaning “beyond the powers” referring to an activity that exceeds the powers granted to the person (or entity) engaging in that activity creating what the opinion calls “an invalid regulatory regime.”
As I further understand this means that tax return preparers who have not yet taken the competency test do NOT have to take it. It also means that there will be no Registered Tax Return Preparers (RTRPs) with the IRS and that the industry goes back to the way things were in 2009, before the Tax Return Preparer Initiative was launched. The wild, wild west where incompetency and fraud ran rampant. The only exception noted is that all tax return preparers still must register for and receive an annually renewable practitioner tax identification number or PTIN.
How will the IRS respond? This will be interesting to watch develop. Check out The Original Complaint.
