Learn to Recognize Phishing Emails and Phone Scams

TXCPA's Federal Tax Policy Committee supports the IRS and Security Summit initiative to remind individuals to take these basic steps to protect personal data:

Know that email scams often:

  • Pose as companies people know and trust, and
  • Tell an urgent story to trick victims into opening a link or attachment.

Watch out for scam phone calls, too. Remember:

  • The IRS does not call demanding payment with threats of jail or lawsuit.
  • The IRS does not demand payment via gift or debit cards; the IRS does not accept tax payments by iTunes cards.
  • The IRS does not send unsolicited emails about refunds or payments, or requesting login credentials, Social Security numbers or other sensitive information.

IRS Announces Program of Face-to-Face Meetings with Taxpayers to Ensure Compliance

Last month, the IRS issued Fact Sheet (FS) 2019-15 to announce a program in which revenue officers will visit taxpayers with ongoing tax issues to gather financial information and to potentially request payment.

The FS states: “The IRS routinely conducts these face-to-face visits. The primary factors of these visits are to make contact with taxpayers who have a previously known tax issue that wasn't resolved through mail contact. The first face-to-face contact from a revenue officer is almost always unannounced.”

CPAs with clients who have filing and payment issues should ensure that the taxpayers have current Powers of Attorney (POAs) on file to include all forms and years that might be of concern. These clients should be notified of the possibility that they may be visited unannounced by IRS personnel. If they are contacted by the IRS, the taxpayers should inform the IRS officer that they do have a POA on file and the officer must contact the taxpayer’s representative.

https://www.irs.gov/newsroom/special-irs-efforts-to-focus-on-tax-compliance-education-begin

 

 


Protect Personal and Financial Information Online

TXCPA's Federal Tax Policy Committee supports the IRS and Security Summit initiative to remind individuals to take these basic steps to protect personal data:

  • Use security software for computers and mobile phones – and keep it updated.
  • Protect personal information; don’t hand it out to just anyone.
  • Use strong and unique passwords for all accounts.
  • Use two-factor authentication whenever possible.
  • Shop only secure websites; look for the “https” in web addresses; avoid shopping on unsecured and public Wi-Fi in places like shopping malls.
  • Routinely back up files on computers and mobile phones.

Expect Greater IRS Focus on Alimony Deduction

By William Stromsem, CPA, J.D., Assistant Professor, George Washington University School of Business

 

With millions more taxpayers using the higher standard deduction instead of itemizing, IRS auditors may focus more on the reporting of income and deductions going towards adjusted gross income (AGI), particularly alimony. While many “above the line” items are supported by 1099 reporting, there is no 1099 reporting requirement for alimony payments and IRS procedures have been weak in identifying income reporting discrepancies by checking on reported payee taxpayer identification numbers (TINs) provided in the return.


In August, the Treasury Inspector General for Tax Administration (TIGTA) revealed a $3.2 billion tax gap in alimony reporting that has grown since the Tax Cuts and Jobs Act of 2017 (TCJA) changed the law regarding alimony. TIGTA recommends that the IRS modify its compliance strategies to include specific actions, including verifying recipient TINs and assessing penalties when necessary.


Prior to the TCJA, alimony could be deducted by the payor and had to be included in the income of the recipient. The act eliminated both the deduction and the inclusion for divorce or separation decrees executed after 2018 or executed before 2019, but later modified if the modification expressly states that the new law applies. Taxpayer confusion over the prior law may be compounded by this change and even in the past, any confusion seems to have been resolved by taxpayers overwhelmingly on the side of overstating deductions and underreporting income.


As the IRS focuses more on alimony, we need to do so as well to avoid possible taxpayer and return preparer penalties. Taxpayer organizers may have to be beefed up in this area. The organizer should include questions about the recipient, recipient’s Social Security number (SSN) and the amount; the date the divorce or separation instrument was executed; and whether there have been any changes since 2018.


This may take some follow-up questions and education of taxpayers, but the law has changed and taxpayers must comply or risk penalties.


https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf 
https://www.irs.gov/taxtopics/tc452 


Late Bonus Depreciation Elections

The Tax Cuts and Jobs Act (TCJA) increased the bonus depreciation deduction for qualified property, now including used property, from the previous 50% to 100% of the cost of the eligible property placed in service in a tax year that included Sept. 28, 2017. This provision begins phasing out after 2022.

The proposed regulations REG-104397-18 implementing this provision were not published until August 2018 after many taxpayers eligible for the additional depreciation had already filed their 2017 returns. Rev. Proc. 2019-33 clarifies that taxpayers can file amended returns to make a late election or file a Form 3115, Application for Change in Accounting Method, for the years the additional deduction was not claimed.

https://www.irs.gov/pub/irs-drop/rp-19-33.pdf


Bottom Dollar Regs Finalized

By David Donnelly, CPA-Houston and Barry Corbitt, CPA-Houston

 

On Oct. 5, 2019, the IRS issued final regulations under IRC Section 752 regarding ”bottom dollar” payment obligations and how these obligations affect a partner’s basis in a partnership.  

 

Essentially, the final rules do not allow recognition of basis as a result of a bottom dollar payment obligation. The intent is that no basis will be allowed in excess of the amount for which the partner has an economic risk of loss.

 

Bottom Dollar Obligation Defined

A bottom dollar obligation is an arrangement where a partner guarantees a liability in an amount less than the full face value of the liability.

 

A typical arrangement might have a partner guarantee the last $1 million of a $20 million bank note; for instance, the guarantee would only be paid if the bank foreclosed on the property and suffered a loss in excess of $19 million ($20 million less the $1 million guarantee). Absent these regs, the bottom dollar guarantee would be treated as recourse debt and provide basis to the partner.

 

The final regulations define a bottom dollar obligation as one of the following:

  1. A guarantee or similar arrangement where the partner is not liable up to the full amount of the liability if the liability is not otherwise satisfied;
  2. An indemnity with the same economic effect as the guarantee listed in No. 1 above; or
  3. A tiered partnership structure, which produces the same economic effect as No. 1 above.

The regs explain that an obligation will not be treated as a bottom dollar obligation if the partner is liable for at least 90% of the underlying obligation. The regs also exclude arrangements where a partner is responsible for the partner’s proportionate share of a liability, or responsible for a percentage or fixed amount of an obligation—these are not by definition bottom dollar obligations.

 

Capital Contribution Obligations and Deficit Restoration Obligations

The regs also provide that a bottom dollar obligation includes a capital contribution obligation or a deficit restoration obligation that does not require full payment of the capital or full payment of the restoration obligation.

 

In the situation where a capital contribution obligation or a deficit restoration obligation does not expressly require the payment by the partner, the partner can provide a promissory note to the partnership to provide the basis otherwise excluded. The regs address the terms that must be present in such a note in order to provide basis.

 

Anti-Abuse Rules

Given the complexities of this issue, Reg. Section (1.752-2(j)(3) has a catch-all, which represents the factors that are relevant to whether an arrangement has economic risk of loss:

  • The partner is not subject to commercially reasonable restrictions to protect the likelihood of payment.
  • The partner is not required to provide documentation regarding the partner’s financial condition as part of the obligation.
  • The term of the obligation ends before the partnership liability ends or if the partner can terminate the obligation. There are exclusions to this factor if there is a valid economic reason for the termination, such as leasing of a building.
  • The primary obligor holds assets that limit the likelihood of the obligation being called.
  • The obligation does not permit the creditor to promptly pursue the partner in the event of default.
  • The terms of the partnership’s liability would be the same without the guarantee.
  • There is a lack of executed documents with respect to the obligation within a commercially reasonable period of time.

 

Transition Rule

The final regs do provide a transition rule—if a partner has, on Oct. 5, 2016, a recourse liability that provided basis under the rules in effect at that time, there is some relief from the new rules. This relief expires in seven years.

 

Tax Return Disclosure

The partnership must disclose the following on Form 8275 for the year that the bottom dollar obligation is undertaken:     

  • A caption identifying the disclosure as a bottom dollar payment obligation under Section 752;
  • An identification of the type of obligation – guarantee, indemnity, reimbursement or obligation to restore capital;
  • The amount;
  • The parties;
  • If the obligation is recognized in Reg. Section 1.752(b)(3), which covers the exception (the 90% rule, proportionality, etc.); and
  • The facts and circumstances that allow the obligation to be recognized as providing basis.

 

Where do we go from here?

These bottom dollar regs appear to be comprehensive and effective in limiting basis to those circumstances where partners truly have an economic risk of loss. Practitioners should be aware of these final rules and advise their clients accordingly. Most importantly, practitioners should be aware of the requirement for disclosure on Form 8275 when these bottom dollar payment obligations arise. The Form 8275 is particularly important when the exceptions to the bottom dollar characterization apply.

 

The overall 752 regs are more comprehensive than the discussion above, which only relates to the final regs regarding bottom dollar payment obligations. Given the new requirement for tax basis capital accounts to be presented on the Form K-1 for Form 1065, tax professionals should be aware of all aspects of the 752 regs when advising their clients.

https://www.federalregister.gov/documents/2019/10/09/2019-22031/liabilities-recognized-as-recourse-partnership-liabilities-under-section-752


It’s Time for PTIN Renewals

The preparer tax identification number (PTIN) system is open for 2020 renewals or new registrations. Something new this year on the renewal page is a data security responsibilities statement – when completing your PTIN renewal, a checkbox will be available to confirm your awareness of your data security responsibilities.

https://www.irs.gov/newsroom/irs-urges-tax-professionals-to-renew-ptins-now-for-2020 


These ITINs Set to Expire in 2019

Taxpayers with any individual taxpayer identification number (ITIN) with middle digits 83, 84, 85, 86 or 87 will expire at the end of this year. Also, any ITIN not used on a tax return in the past three years will expire.

To renew an expiring ITIN, you must submit a completed Form W-7, Application for IRS Individual Taxpayer Identification Number along with required documentation. Nearly 2 million households are impacted so taxpayers should apply now to avoid any potential 2020 processing delays.

https://www.irs.gov/newsroom/millions-more-itins-set-to-expire-in-2019-irs-says-renew-early-to-prevent-refund-delays


TXCPA Committee Urges the IRS to Engage Tax Professionals When Implementing the Taxpayer First Act

This week, TXCPA’s Federal Tax Policy Committee issued a letter to Commissioner Rettig that urges the IRS to consider engaging the tax professional community before implementing provisions of the Taxpayer First Act. Tax professionals are in a unique position to assist taxpayers with understanding and voluntarily complying with the tax law. The attached letter describes how the IRS and the tax professional community can work together to produce a mutually beneficial result from this meaningful legislation.

https://www.tscpa.org/docs/default-source/comment-letters/federal-tax-policy/2019/irs-taxpayer-first-act-oct2019.pdf?sfvrsn=354ac7b1_2