IRS list of commonly used telephone numbers, fax numbers and helpful websites.
IRS list of commonly used telephone numbers, fax numbers and helpful websites.
By William R. Stromsem, CPA, JD
Almost all of our members' clients have the health care insurance required by the Affordable Care Act (ACA) and will just check the box next to line 61 on Form 1040. In rare situations, you may prepare a return for a client's family member who has health insurance issues, such as an older child who is a student or disabled.
However, members who serve the low-income community will have to deal with new complexities. The ACA provides a credit to help low-income and other eligible individuals pay for the required insurance. To claim the credit, the taxpayer must complete Form 8962, which has 15 pages of complex instructions and worksheets to calculate several numbers for the two-page form. Some taxpayers may have difficulty providing the detailed monthly insurance information required by the form. If the taxpayer has taken an advance payment of the premium tax credit during the year (generally paid to their insurance company to lower monthly premiums), the form reconciles the advance payment with the actual credit.
Some taxpayers either won’t understand or won’t want to pay the "shared responsibility payment" (penalty) for not having insurance and may just say that they are covered. While the preparer doesn't have to see proof of insurance and can generally accept the client's representation, the preparer can’t ignore information to the contrary. This contrary information might come up, for example, if a preparer knows that the taxpayer wasn’t employed to have insurance benefits and the taxpayer doesn’t want to give insurance information for claiming the premium tax credit. If the taxpayer doesn’t have coverage for the full 12 months for everyone in the household, Form 8965 and worksheets must be completed to calculate the extra tax to be reported on line 61. Individuals who did not have coverage at the beginning of 2014, but purchased coverage during the year, may need to file both forms. Taxpayers who fail to reconcile their tax credits for 2014 cannot claim tax credits for subsequent years.
Unfortunately, some preparers may not provide pro-bono return services because of these added complexities and issues. Those who provide paid services to qualifying taxpayers may have to increase their fees.
For future tax planning, advisers may wish to provide information to help low-income taxpayers get insurance and claim the premium tax credit next year.
By Mark Nash, CPA
Speaking at a national AICPA conference on November 5, 2014, Jim Clifford, a director in the Accounts Management, Wage & Investment Division of the IRS, indicated that the IRS has made enormous progress in dealing with identity theft cases. Clifford said the challenge was that the issue became too large for the IRS to deal with, spiraling from 40,000 cases to 400,000 cases in just 12 months. The IRS repositioned resources from other groups to work the caseload, but the number of cases and number of people working on them overwhelmed the infrastructure in terms of setting policy and developing best practices. With the caseload now down to 50,000, Clifford said the IRS is taking steps to put this infrastructure in place to provide policy and operational oversight. The average time to resolve a case is currently 120 days.
The steps being taken include starting up a “full-scale centralization” of the victim assistance network. The centralized unit will pick best practices from the specialty units. Case workers will have access not only to accounts management records, but to all of the taxpayer’s account documents. Clifford indicates the centralized department will be operational by next summer.
The reduced caseload is a result of several initiatives. First, Clifford believes the IRS is better at filtering fraudulent filings by using data analytics. Many fraudulent returns are filed very early in the filing season, before the IRS receives taxpayer wage data from W-2s filed with the Social Security Administration. Although it is impossible to know the genesis of tax identity theft, Clifford indicated the number of cases would suggest tax identity theft may be linked to some of the larger data breaches. Secondly, Clifford indicates caseload is down since the IRS has more and better trained resources to deal with cases today. Finally, the IRS believes the use of the identity theft PIN, or IPPIN, which is required for confirmed victims to file returns in the next three years, has curbed recurring instances of abuse. The IRS tested an “opt in” for use of the IPPIN on a volunteer basis in areas with the highest instances of identity theft; however, due to cost constraints, there are no plans to expand this program at this time.
Clifford reiterated that if a client is the victim of identity theft, the preparer should alert the client that their personal information could be used for other fraudulent purposes. Therefore, it is important that victims promptly file a police report and continue to monitor their credit reports for unauthorized activity.
By Jim Streets, CPA
In September 2013, the IRS issued final guidance regarding capitalization of expenditures related to tangible property for final regulations that became effective Jan. 1, 2014. The gist of the guidance seems to indicate all expenditures should be capitalized unless there is an exception or de minimis safe harbor rule to follow.
Under the guidance, material and supplies expenditures will need to be analyzed to determine if the expenditures are below the thresholds for capitalizing. If they are not, an accounting method change (Form 3115) will need to be filed along with the determination of a 481(a) adjustment. Routine maintenance expenditures will need to be analyzed as well to determine if the safe harbor rules are met for expensing, and an annual election will need to be filed each year the safe harbor rule applies. Repair costs will also need to be analyzed against the Betterment, Adaptation or Restoration (BAR) test to determine if the cost can be expensed or capitalized.
The guidance set safe harbor thresholds of $5,000 or $500 for acquisition or production of units of property. For taxpayers with an applicable financial statement (generally, an audited financial statement) and a written capitalization policy in place at the beginning of the year, the units of property acquired or produced for $5,000 or less can be expensed; taxpayers without an applicable financial statement have a $500 threshold.
Under the final regulations, a partial disposition of a unit of property can now be deducted in the year of disposition. For example, if a taxpayer replaces the roof of their building, they can deduct the remaining tax basis of the original roof in the year of replacement instead of continuing to depreciate the original roof cost over the life of the building.
In order for taxpayers to be compliant with the final regulations, they will need to analyze their tangible property expenditures against the final regulations, as well as determine if their 2014 tax return should include a safe harbor election, a change of accounting method Form 3115, or both.
Joseph D. Brophy, MBA, CPA/ABV, CVA, ABAR, CM&AA
On September 15, 2014, the Fifth Circuit ruled in favor of the Estate of James A. Elkins seeking a $14.4 million refund for estate taxes claiming that the fractional-ownership discount advanced was improperly rejected.
In the Estate of James A. Elkins, Jr. (deceased); Margaret Elsie Joseph, and Leslie Keith Sasser, Independent Executors v. Commissioner, No. 13-60472, the question before the court was primarily whether a Tax Court decision against the estate should be upheld or the petitioners granted relief.
Decedent and his wife during their lifetimes owned numerous valuable artworks, which they retained either individually or held in a Grantor Retained Income Trust or GRIT (trust) for their benefit during their lifetime. Upon the death of the second to die, Mr. Elkins, the estate claimed a 44.75 percent discount on the art because the decedent owned a fractional interest.
Decedent and his wife created a GRIT for three of the art pieces, which provided that upon the wife’s death, their three children would receive title to her 50 percent and the husband would retain his 50 percent interest in the trust.
Husband disclaimed some rights in other art, which further reduced his ownership. He gifted a minority interest in the art to their children during life, but the “decedent owned at his death an aggregate 73.055 percent interest in each of those 61 pieces (the disclaimer art) comprising his original 50 percent and the 23.055 percent interest from his wife’s bequest that remained after deducting the 26.945 percent interest that decedent disclaimed” on his wife’s death.
The IRS and the estate agreed in the Tax Court case as to the value of 64 art work pieces, which were appraised by Sotheby’s.
Deloitte, LLP, was retained by the estate to provide a report for use by the estate, which is mentioned in the Fifth Circuit decision. Presumably the report concluded the valuation discount should be 44.75 percent.
The Tax Court accepted the valuation of the art, but concluded without further evidence a discount should be applied even though the commissioner argued none should apply. The Tax Court selected a 10 percent discount ‘based on the preponderance of the evidence,” but the Fifth Circuit concluded the only evidence in the record was the report provided by the estate and the “preponderance of evidence” standard did not apply.
The Fifth Circuit concluded the evidence offered by the estate was credible and that the Tax Court could not without expert testimony conclude the 10 percent discount was more reasonable. Specifically, it concluded that:
[W]e (1) affirm the Tax Court’s rejection of the Commissioner’s insistence that no fractional-ownership discount may be applied in determining the taxable values of Decedent’s undivided interests in the subject art work; (2) affirm the Tax Court’s holding that the Estate is entitled to apply a fractional-ownership discount to the Decedent’s ratable share of the stipulated FMV of each of the 64 works of art; (3) reverse the Tax Court’s holding that the appropriate fractional-ownership discount is a nominal 10 percent, uniformly applied to each work of art, regardless of distinguishing features; (4) hold that the correct quantums of the fractional-ownership discounts applicable to the Decedent’s pro rata share of the stipulated FMVs for the various works of art are those determined by the Estate’s experts and itemized on Exhibit B to the Tax Court’s opinion; and (5) render judgment in favor of the Estate for a refund of taxes overpaid in the amount of $14,359,508.21, plus statutory interest in the sum to be agreed upon by the parties…
As for the 10 percent discount the U.S. Tax Court used, the Fifth Circuit held that “there is no viable factual or legal support for the court’s own nominal 10 percent discount.” The Fifth Circuit added that “This is particularly ironical when viewed in the light of the Tax Court’s correct distinction of this case from, among others, Estate of Scull v. Commissioner, 67 T.C.M. (CCH) 2953 (1994), and Stone v. United States, No. 06-0259, 2007 WL 2318974, at *3 (N.D. Cal. Aug. 10, 2007). The courts in both of those cases awarded nominal discounts, but as the Tax Court noted, they were only awarded “because of a lack of proof by the taxpayer] that any greater discount was warranted.” But the exact opposite situation is present here…”
For those wanting to read the case, the link is http://www.ca5.uscourts.gov/opinions%5Cpub%5C13/13-60472.0.pdf
Reprinted from the October 23, 2014, QuickRead issue with permission from the National Association of Certified Valuators and Analysts™ and the Consultants’ Training Institute™.
Joseph D. Brophy, MBA, CPA/ABV, CVA, ABAR, CM&AA, is a former member of the AICPA IRS Practice and Procedures Committee and former chair of the Texas Society of CPAs’ Relations with the IRS Committee. He is frequent writer for tax and valuation publications. He can be reached at email@example.com or (214) 522-3722.
By Tom Ochsenschlager, CPA, JD
The Adell case (Estate of Franklin Z. Adell et al. v. Commissioner; T.C. Memo. 2014-155; No. 1188-11) dealt with the issue of personal versus corporate goodwill. The father who owned the stock of a corporation died and the IRS argued the valuation of the corporation in the estate should include a computation of the goodwill. The estate argued the goodwill was not the corporation’s or the father's, but was personal and belonged to the son who had managed the business for several years before the father's death. The court, in essence, said the son did not have a non-compete agreement with the company and had the right to go out and start a competing business using the connections and goodwill he had personally developed. Accordingly, the value of the stock in the estate was significantly reduced from the IRS's valuation. This would be fairly common occurrence for a family-owned business where the founder of a small business continued his or her ownership, but had passed the management responsibility on to his or her second generation.
By Ryan Bartholomee, CPA
With the battle for talent in Texas due in large part to the thriving oil and gas industry and supporting industries, employers have to be creative in how they attract, retain and motivate experienced talent. Some employers may consider providing ownership opportunities in an affiliated entity to key employees in exchange for services contributed. In the case of an LLC taxed as a partnership, a profits interest could be provided in which the employees could share in the future profits and appreciation in value of the LLC going forward after the interest was granted (if fully vested). In general, receiving a profits interest is not a taxable event (see Rev. Proc. 93-27, clarified by Rev. Proc. 2001-43 for additional information regarding exceptions). Making an IRC section 83(b) election (discussed further below) after receiving a profits interest may still be recommended despite these safe harbor rules so as to protect against the violation that would occur from disposing of the profits interest within two years of receipt.
In contrast to a profits interest, a capital interest entitles the member to receive the proportionate share of the net proceeds of a complete liquidation of the LLC as of the grant date (if fully vested). If a capital interest is earned by the employee and a vesting period is applied, then an IRC section 83(b) election might be worth considering. This election has to be made within 30 days of receiving the capital interest even though the vesting has not yet occurred. It allows the member of the LLC to pay tax on the full fair market value of the membership interest as if it was entirely vested at this time. This is beneficial if the LLC’s assets (such as undeveloped leasehold costs) have a significantly lower value at that time than they are expected to have in the future after assets are developed.
For example, if a membership interest (a capital interest in this case) of 1 percent was granted with a five-year vesting period to an employee, the employee could make a section 83(b) election within 30 days. Let’s say the capital interest had a value of $100,000 (with assets made up largely of leasehold costs associated with undeveloped leases) after discounts for lack of marketability and lack of control. The employee would need to pay ordinary income taxes on the $100,000. If, after five years, the 1 percent capital interest was worth $500,000, then the employee would have paid taxes on $100,000 in order to eventually receive an asset worth $500,000. There are obviously significant assumptions and risks to consider when evaluating this election. Remember that time is of the essence in making an 83(b) election. The 30 days passes quickly. Consistent communication with your clients and knowledge of their plans early on could help these members make wise tax-planning decisions. This could ultimately prevent the LLC in this example from having to distribute too much cash to its members for tax purposes during a phase when capital for asset development is critical.
For definitions and a comparison of capital interests versus profits interests, please see the following link on the IRS website: http://www.irs.gov/publications/p541/ar02.html.
By Miguel Reyna, CPA
Normally, we all treat stock distributions as taxable in the year received. However, my firm recently met with a client in a situation where the taxation of the stock distribution was deferred to the next year. This is a technical example that is not seen every day, but it is an interesting example that CPAs may find handy.
The taxpayer received a 2012 Schedule K-1 from an LLC taxed as a partnership. This Schedule K-1 reported $1 on lines 6a ordinary dividends and 6b qualified dividends. Line 19A distributions indicated $1 in cash distributions. Line 19C distributions indicated $223,395 in other property distributions.
The partner footnotes included:
"A distribution of the above number of shares of ABC company stock distributed to you in liquidation of your interest in XYZ, LLC. Please see the accompanying letter for additional information on determining your tax basis and holding period in the aforementioned shares.”
The accompanying letter states:
"It appears that the member owned only Class B Units in XYZ, LLC and as such, the member should have zero tax basis in these units as these units represent profits interests issued for services for which IRC Sec. 83(b) elections were made at issuance. As such, it would appear that the member should receive zero tax basis in the distributed shares of ABC.
Under IRC Sec. 735, the member's holding period for the distributed shares of ABC is deemed to begin on Jan. 18, 2007, which is the same date that XYZ, LLC's holding period began. This date should be used as your acquisition date for the distributed shares of ABC for purposes of determining your holding period irrespective of the date(s) you were issued units in XYZ, LLC.”
Generally, under IRC section 731 (c), a marketable security like the described stock distribution on the taxpayer's Schedule K-1 is taxed in that year. A significant exception to section 731(c) is the exception for "investment partnerships." Section 731(c) does not apply to the distribution of marketable securities by an investment partnership to an "eligible partner." A partnership qualifies as an investment partnership if it has never engaged in a trade or business and substantially all of its assets have always consisted of certain specified assets, including money, stock, bonds, notes, plus some other very specific assets.
XYZ, LLC is deemed to be a qualifying investment partnership and has met the exception to IRC section 731(c). This allows the taxpayer receiving the distribution of shares to not pay taxes when received in 2012, but in the year when they are sold. The taxpayer was then able to wait until the share’s fair market value increased in 2013 before selling the shares at a higher profit than if the shares were sold in 2012.
This sale qualifies for long-term capital gain treatment.
In the U.S., bitcoin has become a regulatory hot potato, attracting the attention of a number of federal agencies trying to figure out their particular level of responsibility. The accounting profession needs to watch how the regulatory activity develops going forward. See article from Today’s CPA. TSCPA’s Federal Tax Policy Committee is considering drafting comments to IRS Notice 2014-21 on the treatment of virtual currency. Today's CPA article