TSCPA Federal Tax Policy Blog

IRS Shutdown—Good News/Bad News

By William R. Stromsem, CPA, JD

Assistant Professor, George Washington University School of Business

 

The good news is the headlines that the tax season will start on time and that refunds will be issued. Originally, the IRS had planned to suspend issuing refunds during the government shutdown, but this was overturned to limit taxpayer frustration over the shutdown and to get refund dollars into the economy sooner.    

But the bad news is the uncertainty about other IRS services. Currently, only about 10,000 of the 80,000 IRS employees are working (without pay), and most of them were assigned to essential tasks like maintaining computers and investigating crimes. The IRS may bring back more employees to get the filing season started, but has not indicated what other functions might be staffed as “essential.”

Currently, there are no taxpayer information phone lines working and, in general, there is no one answering phones at the IRS (except for a recorded message that they are not available). Amended tax returns are not being processed. Audits have stopped, as have collections, other than those that are automated, and the loss of work days will either mean fewer audits or more superficial ones, with little time for much give and take with taxpayers or practitioners. Offers in compromise, processing of collections, 30- and 90-day letter deadlines and frozen bank accounts and liens—all not being addressed. General counsel has suspended operations, so no new rulings or regs. EINs are being issued online, but not for paper applications. Powers of Attorney forms apparently are not being processed. Transcript services are suspended.

It is tough to find out the status of services without anyone in the office or answering the phone—I called the Practitioner’s Priority Service hotline and was placed on hold, which was better than getting a recorded message; the hold was so long that I gave up, so it wasn’t much better.

The IRS contingency plan for a government shutdown assumed resumption of services by Dec. 31, and we are now weeks after that, with some adjustments from the plan being made, but no end in sight. The contingency plan gives some indication of problems and the IRS’ priorities as staffing is restored. 

Please join this blog to share your IRS shutdown experiences with other members and with our Relations with the IRS Committee currently scheduled to meet with the IRS and other tax professional organizations on Jan. 18.

https://home.treasury.gov/system/files/266/IRS-Lapse-in-Appropriations-Contingency-Plan_Nonfiling-Season_2018-12-03.pdf

Section 163(j) Real Property Safe Harbor

 

A safe harbor is provided in Rev. Proc. 2018-59 that allows taxpayers to treat infrastructure trades or businesses as an electing real property trade or business not subject to the business interest deduction limit of Section 163(j), but they must then use the alternative depreciation system for assets specified in the Tax Cuts and Jobs Act (TCJA).
https://www.irs.gov/pub/irs-drop/rp-18-59.pdf

 

 

Proposed Rules on New Business Interest Expense Guidance

 

The IRS issued proposed regulations for a provision of the Tax Cuts and Jobs Act (TCJA) that limits the business interest expense deduction for certain taxpayers. It incorporates new Form 8990, Limitation on Business Interest Expense Under Section 163(j), to calculate and report the deduction and amount of disallowed business interest expense to carry forward to the next tax year.

https://www.irs.gov/pub/irs-drop/REG-106089-18-NPRM.pdf

The Other Home Mortgage Interest Deduction Limit

 

With higher credit card interest rates and the end of deductible home equity loan interest, Fannie Mae just reported that in the last quarter 80 percent of mortgage refinancings were cash out transactions. Some taxpayers may be using the net proceeds to pay down credit cards, pay college bills, buy a car, or for other purposes unrelated to the acquisition or substantial improvement of a residence. Clients may believe that because it is just one payment and it is all secured by the residence, the interest is all deductible. However, the interest on cash taken out for non-home related expenses is not deductible. In effect, the refinancing is treated like two different loans, one for the original acquisition or for the substantial improvement of the residence and the other for debt that is not qualified for the deduction. 

The 2018 Schedule A will include a new box to check if not all proceeds from a home mortgage were used to buy, build or substantially improve a home. In order to be prepared to answer this question, it should be included in your organizer to the taxpayer. This may be bad news to clients who have already refinanced without knowing the consequences.    

 

 

IRPAC Recommends Practitioner Authentication Changes

 

In its October 2018 report, the IRS Information Reporting Advisory Committee (IRPAC) made these recommendations to the IRS:

• The IRS should immediately withdraw the requirement of the practitioner to verbally provide his/her personal tax identification number (TIN) and date of birth (DOB) when calling on behalf of a client. Given security concerns, effective January 2018, the IRS required tax practitioners to verbally provide personal TINs and DOBs instead of using centralized authorization file (CAF) numbers or employer identification numbers (EINs). While IRPAC understands that the change in procedure is due to valid security concerns, the requirement to verbally provide a practitioner's TIN or DOB exposes the practitioner to information security risk and identity fraud if overheard or recorded by third parties despite the best efforts of the practitioner to prevent any compromises.

• In the interim, the IRS should return to the prior procedure of requiring CAF numbers and EINs until they can implement a method that does not compromise the practitioner’s personal information.

• The following alternative requirements should be considered to address the IRS' security concerns with using CAF numbers and EINs:
  • Create a PIN associated with the CAF number to enhance security;
  • Request verbal statement of only the last four digits of the practitioner's TIN or first four digits of the practitioner's DOB;
  • Create the ability for the practitioner to enter the last four digits of the TIN or first four digits of the DOB by using the telephone keypad; or
  • Create an online account for use by the tax practitioner.

 https://www.irs.gov/pub/irs-pdf/p5315.pdf

 

Proposed Rules Expand HRA Options

 

In REG-136724-17, the Departments of the Treasury, Labor, and Health and Human Services issued proposed regulations on health reimbursement arrangements (HRAs). These regulations would relax the conditions to increase eligibility and accessibility to employer HRAs, especially small businesses.

 

The proposed rules would remove the prohibition on integrating an HRA with individual health insurance coverage, if certain conditions are met, and propose requirements that an HRA must meet to be integrated with individual health insurance coverage.

 

They also provide how employees whose employers have HRAs that may or may not be integrated with individual health insurance coverage may quality for the premium tax credit.

 

https://www.journalofaccountancy.com/news/2018/oct/health-reimbursement-arrangement-rules-201819968.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=26Oct2018

https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-23183.pdf

 

Statutory Employee Classification has New Importance After TCJA

 

Statutory employees, defined in IRC Section 3121(d)(3), are able to deduct their business expenses on Schedule C, not Form 2106, Employee Business Expenses. The definition includes certain commissioned salespersons and full-time insurance salespersons. Many employers are reluctant to use this classification, as it complicates federal tax withholding and certain employee benefits. However, given the total lack of deductibility for business expenses for other employees, employers should revisit this classification to determine if their sales force can benefit. See IRC 3121(d)(3) and Rev. Rul. 90-93.

 

New Tax Transcript Format and Procedures

 

The IRS is hoping a redacted tax transcript and a new customer file number will prevent fraudsters from gaining access to valuable taxpayer data.

This new transcript partially masks the personal identifiable information listed on the federal tax return. For example, only the last four digits of the Social Security number (SSN) or the employer identification number (EIN) are shown. Also, you only see the first four letters of the taxpayer’s name and first six characters of the street address. There is no city or state listed. All money amounts are still visible. This new format is for individual transcripts only.

Since the taxpayer’s SSN is redacted, third parties can create an optional 10-digit identifier—a customer file number—to match a transcript to a taxpayer. Form 4506-T, Request for Transcript, has a new Line 5b to accommodate this new number. Tax professionals authorized to access transcripts through the e-Services Transcript Delivery System (TDS) can enter the 10-digit customer file number to automatically populate on the transcript. Beginning January 2019, taxpayers may also assign a 10-digit number to their own transcript through “Get Transcript Online” or “Get Transcript by Mail.”

Sometime in January 2019, the IRS plans to stop faxing transcripts to taxpayers and third parties. This applies to both individual and business taxpayers. These transcripts will be mailed to the taxpayer’s address on record, but not to the practitioners. Practitioners can obtain available transcripts through the TDS. The IRS plans to stop all mailing of transcripts to third parties listed on Line 5a of Forms 4506-T and 4506T-EZ sometime in May 2019.

A taxpayer or Power of Attorney can request an unredacted transcript at a Taxpayer Assistance Office. However, it must be mailed to the taxpayer’s address on record.

Unfortunately, the new procedures may make it more cumbersome for tax professionals to serve their clients. TSCPA’s Federal Tax Policy Committee is reviewing the changes’ impact on daily tax administration.

https://www.irs.gov/newsroom/irs-to-introduce-new-tax-transcript-to-better-protect-taxpayer-data

https://www.irs.gov/newsroom/coming-soon-a-new-tax-transcript-to-better-protect-taxpayer-data

https://www.irs.gov/individuals/about-the-new-tax-transcript-faqs

https://www.irs.gov/pub/irs-utl/New_Tax_Return_Transcript.pdf

Think Twice Before Trading That Truck

Julie Dale, CPA-Austin

(correction 11-1-18)

Changes to the like-kind exchange rules in the Tax Cuts and Jobs Act (TCJA) will have a major impact on the vehicle trade-in process. Under prior law, trading a vehicle in on the purchase of another vehicle triggered the like-kind exchange rules and resulted in the deferral of any gain or loss recognized on the old vehicle. Now that like-kind exchanges are restricted to real estate only under the TCJA, there is no like-kind exchange treatment for vehicle trade ins.

For passenger automobiles used in businesses, this change will potentially result in a tax benefit. The limits placed on depreciation on these vehicles almost guarantee a loss will be recognized when traded in to purchase a new vehicle. This loss will now be recognized when it would have been deferred under the old rules. There are still other limitations that may defer current recognition, such as the passive loss or at-risk basis limits.

For business trucks, the law change will result in a tax liability that many will not expect. Trucks with a gross vehicle weight rating 6,000 pounds or more are not subject to the passenger automobile depreciation limits. This can lead to a potential deduction in the year of purchase equal to the total cost of the truck if bonus depreciation applies or a Section 179 election is made.

For example, a corporation purchases a 2017 Ford F-250 on Oct. 1, 2017 for $60,000. Since 100 percent bonus depreciation applies to this purchase, the corporation deducts the entire $60,000 as depreciation expense in 2017. On Oct. 22, 2018, the corporation trades the 2017 Ford F-250 in on a purchase of a 2018 BMW M5. The trade-in allowance given is $45,000. This results in ordinary income of $45,000 to the corporation on the trade-in allowance, an $18,000 depreciation deduction for the BMW, and a tax liability increased by $5,670 (21 percent of the difference). Under prior law, there would have been no gain recognized and no federal income taxes owed on this transaction.

This is a good example of why it is so important that taxpayers seek tax advice when considering a transaction even as mundane as trading in a vehicle. If this trade in was not truly necessary, then the tax bill of $5,670 could be avoided by seeking advice in advance. If the trade in was necessary, at least the corporation would be able to plan for the tax bill early instead of finding out when the 2018 tax return is prepared.

https://www.irs.gov/newsroom/the-highlights-of-tax-reform-for-businesses

https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act

https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips

Private Foundations with Expiring Carryovers

Generally, a private foundation is subject to a 30 percent tax on its income that is not distributed by the following year end. Where the foundation distributes more than its income in a given year, the excess can be carried over for five years thereby reducing the required distribution in those future years. The issue raised by a recent IRS announcement was whether a private foundation can elect to treat its distributions in that fifth year as coming from corpus rather than income. If available, doing so would utilize some or all of the carryover before it expires to offset that year’s income and the amount covered by the distribution out of corpus would “freshen up” the carryover. 

For example: Can a private foundation with a $100 carryover that will expire at the end of this year “elect” to distribute $100 of its current year income out of corpus? If that were appropriate, the $100 carryover would offset all the income and the $100 distribution out of corpus would create a “fresh” $100 carryover.   

 

The IRS announcement says the carryover cannot be refreshed by an “election” to treat distributions out of corpus. The announcement cites Code Section 4942 and Regulation Section 53.4942(a)-3(e)(2), which it interprets to limit the ability of the foundation that has income to elect that a distribution is out of corpus unless the distributions for the year exceed the foundation’s income. In effect, the IRS takes the position that, for purposes of utilizing a carryover, a distribution is deemed to be first applied against income and only if distribution exceeds the income can it be considered a distribution of corpus.

 

https://www.irs.gov/charities-non-profits/private-foundations/refreshing-expiring-distribution-carryovers-of-private-foundations

https://www.irs.gov/forms-pubs/about-form-990-pf