1

Monthly Newsletter for ncpeFellowship Members Vol. 9 No. 7 July 2018

1

Remarks from Beanna

Where Does the Month of June Go?

Mr. Jerry, Mr. Wayne and I hit the "road" the first of June teaching the Tax Cuts and Jobs Act.

We were welcomed from coast to coast by great tax professionals, many of them members of the Fellowship.

As prepared as we thought we were, the questions asked clearly indicated that none of us know all we need to know and we anxiously await guidance and regulations from the Internal Revenue Service as well as a Technical Corrections Act.

While we wait, Congress is marching ahead to enact law that will make the TCJA permanent, instead of the current temporary measure. Additionally Congress is talking about a secondary tax act to address issues of retirement and student loan payments with a potential credit to employers who pay their employees student loans. We wait!

The TCJA brings great benefits to many taxpayers but some taxpayers will not benefit, the complexity of such a law affecting every taxpayer.

Code Section 199A, better known as the 20%, was masterfully presented by Mr. Jerry with worksheets to assist in understanding the complexity of the law.

Mr. Wayne covered individual and business issues, the changes in tax law we have not seen in over 30 years, delivered with outstanding clarity and purpose.

I am fascinated by what the TCJA will do for our practices. I am excited about the opportunities afforded us to grow our practices,

Happy4th Of July

Independence Day

Happy4th Of July

Independence Day

2

WebinarsOn-Demand

With Concinued Education Hoursncpefellowship.com

Today's Internal Revenue Service2 CE Hours

Where Do You Keep Your Ethics?2017 2 CE Hours

The § 754 Election2 CE Hours

The New Offer In Compromise2 CE Hours

Tangible Property Regulations2-CE HOURS WEBINAR

Estate And Gift Tax1-CE HOUR

The Incredible LLCLimited Liability Company

2-CE HOURS

Identity Theft1-CE HOUR

Taxation Of Ministers1-CE HOUR

IRS Audits1-CE HOUR

as it is projected that over 20 per cent of tax professionals will leave the profession rather than learn this new and complex law. That is business for us!

Additionally, over 24 per cent more of individuals will not itemize there deductions. This means the time consuming efforts of Schedule A can be spent on new clients. Just think of the time you spent completing the non-cash charitable deductions forms. Spend time now on that new client.

From AMT recapture being available due to taxpayers no longer exposed to AMT with higher thresholds, to assisting taxpayers with the loss of Schedule A, Miscellaneous Itemized Deductions subject to 2%, we will be challenged as the Tax Professionals of the 21st Century.

But we will meet that challenge - first with education and second with experience.

Go to www.ncpeseminars.com to book your Corporate, Partnership and LLC seminar - let's talk that 20%, or call 800-682-2163 to register.

Happy 4th of July - America!

Stay well and finish well.

Beanna

Beanna@ncpefellowship.com or 877-403-1470

Use Resources and Toolsfor Tax Professionals

On Our Website ncpeFellowship.com

On-Demand WebinarsncpeFellowship.com

website

Renew Your Membership OnlineIf Your Membership is due

in June and July

3

Remarks From Beanna (1)

Tax News (5)Treasury Says New Postcard-Size Tax Return To Be Released (5)Social Security Wage Base Could Increase to $132,300 for 2019 (5)AICPA Asks IRS for FAQs On Taxation of Virtual Currency (6)Kiddie Tax Changes in 2018 (6)The Tax Cuts and Jobs Act Includes Changes to Moving, Mileage and Travel Expenses (7)New Tax Law - How Farm Losses are Treated (8)Bitcoin Options And Other Tax Dangers (8)New Deferral Election for Employees Receiving Stock-based Compensation From Privately Held Corporations (9)Tax Reform Allows People with Disabilities to Put More Money Into ABLE Accounts, Expands Eligibility for Saver’s Credit (12)Tax Court Approves Of Consultant As Statutory Employee - Tax Act Makes Case Significant (12)Divorce: What Tax Reform Means for Alimony Deduction (13)

Question of the Month (14)That's Entertainment (14)

Tax Practice (14)Managing In the Gray (14)

Military Taxes (16)Reserve, Guard Members Lose Travel-expense Tax Deduction (16)

Estates and Trusts (16)Beat the Medicaid Income Limit: Can a Miller Trust Help Your Clients with Medicaid Eligibility? (16)

News from Capitol Hill (17)Tax-Law Typo Risks Bankrupting #MeToo Victims Without GOP Fix (17)What Should Republicans Include In Their Second Tax Bill? (18)Revenue Enhancement: Preparers’ Suggestions for IRS Reform (19)

People in the Tax News (20)H&R Block Plans to Close 400 Tax Prep Offices (20)'Jersey Shore' Star Mike 'The Situation' Sorrentino Will Face Tax Evasion Sentencing This Fall (21)H.I.G. Bayside Capital Announces the Sale of Jackson Hewitt® (21)

IRS News (22)Big Changes Coming At the IRS with New Commissioner (22)IRS Budgets $291M On Technology for Tax Reform (23)Prop Regs: All Info Returns Count Towards 250-return e-file threshold (24)More Than 2 Million ITINs to Expire This Year; Renew Soon to Avoid Refund Delays (25)Interest rates remain the same in the third quarter of 2018 (26)Info Release Highlights Recent Changes to Rules for Challenging Wrongful IRS Levies (27)IRS Creates Webpage On Understanding "Letter 227" (27)Scam Prevention; IRS Sets Out How It Does and Does Not Contact Taxpayers (28)Truckers Can Electronically File Form 2290, Heavy Highway Vehicle Use Tax Return (29)Taxpayers Should Look Out for Disaster Scams During Hurricane Season (29)

Table Of Contents (page)

4

IRS Issues Draft 2019 Form W-4 and Instructions (29)Proposed reliance regs restore prior rules on allocating partnership liabilities in disguised sales (30)Guidance Instructs IRS Attorneys On Sec. 6751(b) Penalty Approval Issues (32)Automatic Consent for Accounting Method Change to Deduct Post-casualty Citrus Replanting Costs (34)Final "May Company" Regs Prevent Corporate Partners From Avoiding Gain in Partnership Transactions (35)IRS Clears Up Error In Training Materials On Employment Tax Adjustments vs Claims (39)10% Alaska Settlement Trust Amount Is Tax, Not Penalty (40)More Disaster Victims In Indiana Qualify for Tax Relief (41)Spring 2018 Statistics of Income Bulletin (42)

Tax Pros in Trouble (42)Former IRS Agent Convicted of Filing False Tax Returns (42)Texas Tax Return Preparer Sentenced to Prison for Tax and Identity Theft Crimes (42)Sixto Rodriguez, Operator of North Jersey Tax Preparation Business Convicted of Tax Fraud (42)Tax Return Preparers Charged with Filing False Tax Returns (43)Tax Fraud Blotter: Semi-gloss Guilt (43)Justice Department Seeks to Shut Down Louisiana Tax Return Preparer (45)Frequent EITC-abusing Preparers Permanently Enjoined From Preparing Returns (45)Aurora Man Gets 12 Years In Prison for $328,000 in Tax Fraud (46)California Resident Convicted of Tax Crimes (46)

Ragin Cagin (47)Social Security Combined Trust Fund Reserves Depletion Year Remains 2034 Says Board of Trustees, Disability Fund Improves by Four Years (47)

Taxpayer Advocacy (47)IRS Addresses Applicability of Penalties Where It Freezes Taxpayer's Refund (47)What Taxpayers Should Know About Tax Return Copies and Transcripts (47)

Foreign Taxes (50)Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns (50)

State News of Note (60)Does Your State’s Individual Income Tax Code Conform with the Federal Tax Code? (60)

Wayne's World (62)IRS Updates Priority Guidance Report for TCJA Implementation Issues (62)

Letters to the Editor (63)

Tax Jokes and Quotes (63)Tax Facts (63)

Sponsor of the Month (64)National Center for Professional Education NCPE (64)

Table Of Contents (page)

5

Tax News

Treasury Says New Postcard-Size Tax Return To Be Released

Speaker of the House Rep. Paul Ryan (Republican-Wis.; center) holds up a postcard-size tax return form during a news conference on the tax reform legislation November 2, 2017 on Capitol Hill in Washington, DC.

The Republicans promised that tax reform would yield a new, postcard-size form 1040, and now Treasury Secretary Steven Mnuchin says they will deliver. A new form 1040 will be released.

“It will be a postcard, as we have promised,” he said. “Hardworking taxpayers won’t have to spend nearly as much time filling out their taxes.”

What he didn’t say: It depends on what sort of hardworking taxpayer you are.

The current form 1040 for filing individual taxes is two pages long and looks like in right column picture.

There are also variations on the form 1040, including the 1040-EZ and the 1040A.

Taxpayers who file using a form 1040 typically have to file more than the two reconciliation pages. There are additional schedules including those for itemized deductions (Schedule A); interest and dividend income (Schedule B); business income (Schedule C); capital gains and losses (Schedule D); and rental and royalty income (Schedule E). Additional forms also exist for home-office deductions (still valid for business taxpayers), mileage (business and charity), charitable gifts that exceed specific amounts or require additional documentation, and more.

The Tax Cut and Jobs Act (TCJA) made some aspects of filing taxes more straightforward—for example, more taxpayers will claim the increased standard deduction. With

no Pease limitations and fewer itemized deductions available (unreimbursed job expenses are gone, for example), the chances are that Schedule A will be more simple.

But the mechanics surrounding the deduction for businesses, including for sole proprietors, are complicated and there is no doubt that Schedule C will be more complicated for many taxpayers.

The TCJA also added some tax breaks, like a temporary $500 nonrefundable credit for other qualifying dependents in addition to the child tax credit. Since the child tax credit is subject to income phaseouts and requires certain information, it’s likely that form will be longer.

And some behemoths, like the Alternative Minimum Tax (AMT), stayed in place. The secondary tax for some taxpayers will still require a separate form.

Social Security Wage Base Could Increase to $132,300 for 2019

The Social Security Administration's Office of the Chief Actuary (OCA) is projecting that the Social Security wage base will increase from $128,400 for 2018 to $132,300 for 2019.

Background. The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-

6

employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

The Social Security tax rate, for both the tax on employees and the tax on employers, is 6.2% of a set maximum amount of the employee's compensation (i.e., the wage base in effect for that year, as calculated under section 230 of the Social Security Act). The Medicare tax rate, for both the tax on employees and the tax on employers, is 1.45%. There's no ceiling on the amount of compensation subject to the Medicare tax. (Code Sec. 3101(b)) Employees are also subject to a 0.9% additional Medicare tax on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return). (Code Sec. 3101(b)(2))

The self-employment tax also consists of Social Security and Medicare tax. The social security tax rate is 12.4%, imposed on net earnings from self-employment up to the wage base in effect for that year. (Code Sec. 1401(a)) The Medicare tax rate is 2.9% of the taxpayer's self-employment income, with the additional 0.9% Medicare tax imposed on self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return). (Code Sec. 1401(b)(2))Self-employed workers deduct half of their self-employment tax above-the-line in arriving at adjusted gross income.

2018 wage base. The wage base in effect for 2018 is $128,400.

Projections for 2019 and onward. The 2019 projections were included as part of the annual report to Congress by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Fund programs (The 2018 OASDI Trustees Report).

The OCA provides three kinds of forecasts for Social Security wage bases (intermediate, low cost, and high cost). All three forecasts predict that the Social Security wage base will increase from $128,400 in 2018 to $132,300 in 2019.

The SSA intermediate forecasts through 2026 are as follows:

• 2019 — $132,300• 2020 — $137,100• 2021 — $142,800• 2022 — $149,400• 2023 — $156,000• 2024 — $162,900• 2025 — $170,100• 2026 — $177,600• 2027 — $185,100

Actual annual increases to the wage base are announced in October of the preceding year and are based on then-current economic conditions. As a result, the OCA's forecasts, especially the longer-range ones, are subject to change. Last year, the OCA predicted that the Social Security wage base would increase to $130,500 but it only increased to $128,400.

The OCA is also projecting that the Social Security trust fund will become insolvent in 2034, and that the Disability Insurance (DI) trust fund will become insolvent in 2032.

AICPA Asks IRS for FAQs On Taxation of Virtual Currency

The American Institute of CPAs has sent a letter to the Internal Revenue Service asking for additional information in the form of questions of answers about the tax treatment of virtual currency, such as Bitcoin, to supplement the IRS’s existing guidance.

The additional FAQs would supplement the IRS’s guidance back in 2014 in Notice 2014-21.

The 27 FAQs proposed by the AICPA deal with a dozen different areas:

• Expenses of obtaining virtual currency• Acceptable valuation and documentation• Computation of gains and losses• Need for a de minimis election• Valuation for charitable contribution purposes• Virtual currency events• Virtual currency held and used by a dealer• Traders and dealers of virtual currency• Treatment under section 1031 of the tax code• Treatment under section 453• Holding virtual currency in a retirement account• Foreign reporting requirements for virtual currency

“The rapid emergence of virtual currency has generated several new questions on how the tax rules apply to various transactions involving virtual currency and activities and assets related to it,” wrote AICPA Tax Executive Committee chair Annette Nellen in a letter to the IRS Wednesday. “Moreover, the development in the number of types of virtual currencies and the value of these currencies make these questions both timely and relevant to a growing number of taxpayers and tax practitioners.”

She noted that the additional guidance would address items from the IRS’s original Notice 2014-21, along with some new issues that are more relevant to the 2017 tax year, such as chain splits, that have arisen since the original notice was released.

“Virtual currency transactions, in which taxpayers increasingly engage, add a new layer of complexity to the analysis of a client’s reporting requirements,” Nellen added. “The issuance of clear guidance in this area will provide confidence and clarity to preparers and taxpayers on application of the tax law to virtual currency transactions.”

Kiddie Tax Changes in 2018

The new federal tax law made changes to the so-called "kiddie tax" that could impact how some advisers handle their clients'

7

financial plans.

While experts say lawmakers largely simplified the kiddie tax, the changes may change how some clients finance a child's college education and, in rare circumstances, cause some low- to middle-income families to pay more in tax.

"This is a big deal," said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. "I think it creates all sorts of traps for the unwary."

The kiddie tax is a tax on a child's net unearned income — essentially, income excluding wages and business income. It primarily affects income from investment assets — such as interest and dividends from mutual funds, or capital gains from the sale of a stock — but could also affect things like income from inherited retirement plans, experts said.

The tax is meant to prevent parents and grandparents in high-income tax brackets from shifting investment assets to their children and therefore get a lower tax rate. It affects children under age 19, and full-time students under 24.

More than 215,000 tax returns were subject to the kiddie tax in 2011, generating $621.2 million in revenue for the federal government, according to the most recently available analysis from the Internal Revenue Service.

Under prior kiddie-tax rules, a child's unearned income exceeding $2,100 was taxed at the parents' marginal rate for income and capital gains. However, under new rules that unearned income is taxed at the rates for trusts and estates.

On its face, that may appear to be a big change from a tax-liability perspective, since the rates for trusts and estates increase much more quickly than those applying to income and capital gains.

In 2018, for example, a married couple pays the top 37% marginal income tax rate when their taxable income exceeds $600,000. However, for estate and trusts, the top 37% rate kicks in when income exceeds $12,500 — a much lower threshold.

In practice, though, most taxpayers — especially the children of affluent parents — will likely end up paying less tax as a result, experts said.

Take this example, provided by Tim Steffen, the director of advanced planning in Robert W. Baird & Co.'s private wealth management group. Let's say a child subject to the kiddie tax is the beneficiary of a grandparent's IRA, and takes a $10,000 distribution from the account. Assume the child's parents are subject to a 35% marginal tax rate.

Under prior rules, the child's total tax liability would be $2,870.

However, under the new law, that same child's liability is $1,644 — in other words, $1,226 less.

Here's another example, this time for a stock sale generating a $20,000 capital gain to the child. The parents' taxable income is such that they are subject to a capital gains rate of 15%.

The child's tax liability under former rules would have been $2,685; new rules provide a $2,555 liability – a $130 savings, Mr. Steffen said.

"For parents at the higher brackets, this change may actually benefit the kids," Mr. Steffen said. For parents at lower brackets, this change may end up costing the kids more because the child may find themselves at a higher tax rate than their parents are actually in." (The higher rate here refers to the trust and estate tax rate.)

That latter scenario — whereby a child would pay more — is "really at the margin" instead of the norm, said Beth Shapiro Kaufman, president of Caplin & Drysdale.

"That will be a pretty unusual situation, where a kid with substantial unearned income has parents in a lower tax bracket," she said.

Overall, Ms. Kaufman thinks the new rules simplify the tax calculation for many families. Now, the same kiddie-tax rates apply to all children, instead of having varying rates based on parents' income.

Mr. Steffen said $23,000 in capital gains is the rough tipping point for tax liabilities in 2018.

"For a child with capital gains this year of under $23,000, they'd probably pay the same or less tax this year than under the old rules, assuming the parent is at a 15% capital gains rate, which is where most people are," he said.

Financial advisers need to be careful about realizing large gains in children's accounts, Mr. Steffen said.

A grandparent, for example, may gift assets to a child early on, which may have subsequently grown a lot in value if held until later teenage years. Kids may sell such portfolio assets to help finance college costs, but advisers should consider having them starting the sell-down sooner to help manage gains — and reduce the kiddie tax.

Mr. Rosenthal of the Tax Policy Center said it could put pressure on parents to use 529 plans as much as possible.

The Tax Cuts and Jobs Act Includes Changes to Moving, Mileage and Travel Expenses

Move-related vehicle expense

The new law suspends the deduction for tax years beginning after Dec. 31, 2017, through Jan. 1, 2026. During the suspension, no deduction is allowed for use of an auto as part of a move using the mileage rate listed in IRS Notice 2018-03.This does not apply to members of the Armed Forces on active duty who move related to a permanent change of station.

8

Under the new tax law, the old excess farm loss rule does not apply; losses are now subject to “excess business loss” limitations. Excess business losses are carried forward as part of the taxpayer’s net operating loss (NOL) instead of claiming the loss on Schedule F.

So why does this matter? Under the old rules, excess farm losses offset farm income without limitation. Because it went on Schedule F, it also offset income subject to self-employment tax. That was a win-win!

Under the new tax law, an excess business loss is NOT deducted on the Schedule F and does NOT offset self-employment income. Also, post-2017 NOLs can only offset 80% of pre-NOL taxable income. That is, even if you have a substantial loss in 2018 followed by a substantial profit in 2019, you could offset no more than 80% of the 2019 taxable income. Farmers are allowed to carry back farm NOLs two years, giving some flexibility. However, due to the dynamics of the excess business loss rules, the farm NOL will be limited to $250,000 ($500,000 for married filing joint).

So what are some strategies? First and foremost, avoid creating NOLs. If losses are unavoidable, keep business losses less than $500,000 (if filing a joint return). Also consider the following:

1. Stop prepaying expenses.

2. Hold off equipment purchases.

3. Don’t elect to expense equipment purchases underSection 179 or bonus depreciation.

4. Sell assets you do not need to generate profits.

5. Elect out of deferred payment contracts.

6. Capitalize repair costs.

7. Capitalize fertilizer costs.

Under the new tax bill, there are tremendous opportunities and pitfalls. Right now, many of you are likely in the field and marketing crops. Tax planning probably isn’t on your radar. But don’t wait until the last minute to do tax planning. As you can see, even in loss years, tax planning is essential.

Bitcoin Options And Other Tax Dangers

Robert W. Wood

There is considerable talk today about crypto investments

Unreimbursed employee expenses

The Act also suspends all miscellaneous itemized deductions subject to the 2 percent of adjusted gross income floor. This change affects unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel.

For additional guidance, see IRS Notice 2018-42.

Standard mileage rates for 2018

The standard mileage rates for the use of a car, van, pickup or panel truck for 2018 remain:

• 54.5 cents for every mile of business travel driven, a 1cent increase from 2017.• 18 cents per mile driven for medical purposes, a 1 centincrease from 2017.• 14 cents per mile driven in service of charitableorganizations, which is set by statute and remainsunchanged.Increased depreciation limits

The recent legislation also increases the depreciation limitations for passenger autos placed in service after Dec. 31, 2017, for purposes of computing the allowance under a fixed and variable rate plan. The maximum standard automobile cost may not exceed $50,000 for passenger automobiles, trucks and vans placed in service after Dec. 31, 2017.

New Tax Law - How Farm Losses are Treated

The ag economy isn’t great and many producers are struggling to break even. In the past, farmers accepted losses and even looked at them as opportunities. Having good and bad years is just part of the rollercoaster called farming. However, the new tax law changed how we look at farm losses.

Under the old tax law and the 2014 Farm Bill, taxpayers who received a Commodity Credit Corporation (CCC) loan were restricted in the deductibility of a farm loss (this rule didn’t apply to C corporations). The disallowed portion of the loss was carried to the following year, tested again for limitation purposes and claimed on Schedule F (Form 1040).

9

for everyone, for individual retirement accounts, via index funds, and more. There are also plenty of crypto-related start-ups, some of which have gotten big and valuable. That means options, crypto bonuses, restricted crypto, etc. All of these raise tax issues, and they can be confusing. Before we address crypto itself that is awarded to workers in connection with services, let’s start with stock options, and options to acquire crypto.

Options can be either incentive stock options (ISOs) or non-qualified stock options (NSOs). ISOs (only for stock) are taxed the most favorably. There is generally no tax at grant, and no "regular" tax at exercise. When you sell your shares, you pay tax, but hopefully as long-term capital gain. The usual capital gain holding period is more than one year. But to get capital gain treatment for shares acquired via ISOs, you must: (a) hold the shares for more than a year after you exercise the options; and (b) sell the shares at least two years after your ISOs were granted. Even though exercise of an ISO triggers no regular tax, it can trigger alternative minimum tax (AMT).

Non-qualified options are not taxed as favorably as ISOs, but there is no AMT trap. There is no tax when the option is granted. But when you exercise, you owe ordinary income tax (and, if you are an employee, payroll tax) on the difference between your price and the market value. Example: You receive an option to buy stock at $5 per share when the stock is trading at $5. Two years later, you exercise when the stock is trading at $10 per share. You pay $5 when you exercise, but the value at that time is $10, so you have $5 of compensation income. If you hold the stock for more than a year and sell it, any sales price above $10 (your new basis) should be long-term capital gain.

Options to buy crypto are treated just like nonqualified options to buy stock. Usually the tax comes when you exercise the option, not when you are given the option. Restricted stock or crypto means delayed tax. Suppose you receive stock or other property—including crypto—from your employer with conditions attached? Say you must stay for two years to get it or to keep it. Special restricted tax rules in Section 83 of the Internal Revenue Code kick in.

As a carrot to stay with the company, your employer says if you stay for 36 months, you will be awarded $50,000 worth of crypto. You don't have to "pay" anything for them. You have

no taxable income until you receive the crypto. When you receive the crypto, you have $50,000 of income, or more or less, depending on how the crypto has done in the meantime. The income is taxed as wages.

With restrictions that will lapse with time, the IRS waits to see what happens before taxing it. Yet some restrictions will never lapse. With such "non-lapse" restrictions, the IRS values the property subject to those restrictions. Example: Your employer promises you crypto if you remain with the company for 18 months. When you receive it, it will be subject to permanent restrictions under a company buy/sell agreement to resell it for a fixed price if you ever leave the company's employ. The IRS will wait and see (no tax) for the first 18 months. At that point, you will be taxed on the value, which is likely to be stated fixed price in the resale restriction.

The restricted property rules generally adopt a wait-and-see approach for restrictions that will eventually lapse. Nevertheless, under what's known as an 83(b) election, you can choose to include the value of the property in your income earlier (in effect disregarding the restrictions). It might sound counter-intuitive to elect to include something on your tax return before it is required. Yet you might want to include it in income at a low value, locking in capital gain treatment for future appreciation. To elect current taxation, you must file a written 83(b) election with the IRS within 30 days of receiving the property. You must report on the election the value of what you received as compensation (which might be small or even zero).

Example: You are offered crypto by your employer at $5 per coin when it is worth $5. You must remain with the company for two years to be able to sell them. You are paying fair market value for the crypto. So filing an 83(b) election could report zero income. Yet by filing it, you convert what would be future ordinary income into capital gain. When you sell the crypto more than a year later, you'll be glad you filed the election.

If the restricted property rules and stock options rules were each not complicated enough, sometimes you have to deal with both sets of rules. You may be awarded options that are restricted--your rights to them "vest" over time if you stay with the company. The IRS generally waits to see what happens in such a case. But be careful, these rules can be complex.

New Deferral Election for Employees Receiving Stock-based Compensation From Privately Held Corporations

Many businesses use equity-based compensation plans to reward and retain employees. The most common forms of stock-based compensation are restricted stock, incentive stock options (ISOs), and nonqualified stock options (NQSOs). In a nutshell, restricted stock is taxable when the employee’s right to the stock is transferable or is not subject to a substantial risk of forfeiture, whichever occurs earlier (unless a Code Sec. 83(b) election is made to include in income for the tax year of the transfer the excess of the FMV of the property over

10

the amount paid for it). ISOs are generally taxable when the underlying shares are sold (subject to an Alternative Minimum Tax (AMT) adjustment), and NQSOs generally are taxable when exercised.

If the employer’s stock is publicly traded, an employee can sell some of the stock to provide funds to cover that tax liability, but that doesn’t work with a closely held startup that restricts the transferability of its stock, or whose stock isn’t listed yet on any exchange. In the case of stock options, the inability to pay the tax liability that would result from the stock received on exercise of the option may mean employees let options lapse, thus losing compensation they have already earned.

New, targeted relief. Code Sec. 83(i) was added to the Code by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017). According to the House Ways Committee Report on the TCJA (House Report 115-409; "the TCJA Committee Report"), the new-for-2018 Code Sec. 83(i) election addresses this problem by giving employees the opportunity to elect to defer recognition of income attributable to stock received on exercise of an option (or settlement of a restricted stock unit (RSU)) until an opportunity to sell some of the stock arises, but in no case longer than five years from the date that the employee’s right to the stock becomes substantially vested. The Code Sec. 83(i) election applies with respect to stock attributable to options exercised or RSUs settled after Dec. 31, 2017.

Transfers that qualify for the election. The Code Sec. 83(i) election may be made only with respect to a transfer of "qualified stock," which is stock received in connection with the exercise of an option, or in settlement of a restricted stock unit (RSU), to a qualified employee for the performance of services for an eligible corporation. According to the TCJA Committee Report, an RSU is an arrangement under which an employee has the right to receive at a specified time in the future an amount determined by reference to the value of one or more shares of employer stock. An employee’s right to receive the future amount may be subject to a conditions, such as remaining employed for a fixed number of years, or meeting performance goals. The TCJA Committee Report also says that RSUs are nonqualified deferred compensation (NQDC) and therefore subject to the rules that apply to NQDC. To be qualified stock, the stock must be from the corporation that's the employer of the qualified employee, and the employee must have received the option or RSU in connection with the performance of services. (Code Sec. 83(i)(2)(A)) However, stock isn't qualified if the employee has the right to either sell it back to the employer or receive cash in lieu of stock immediately upon vesting. (Code Sec. 83(i)(2)(B))

A stock option eligible for the Code Sec. 83(i) election can be an ISO, an Employer Stock Purchase Plan (ESPP), or an NQSO. If the election is made, the option is treated as a disqualifying distribution and the provisions of Code Sec. 422 and Code Sec. 423, which would normally apply to ISOs or ESPP options, don't apply when the options are exercised. Instead, the rules applicable to NQSOs under Code Sec. 83 apply. (Code Sec. 422(b), Code Sec. 423(d), TCJA Committee

Report)

Who is a qualified employee? A qualified employee, i.e., one eligible to make the Code Sec. 83(i) election, is generally any employee other than the following (Code Sec. 83(i)(3)(B)):

1. An individual who owns (either directly or constructively)more than 1% of the outstanding stock or total combinedvoting power of the corporation (a 1% owner). This includesany individual who was a 1% owner at any time during thelast 10 years.

2. Anyone who has ever been the company's CEO orCFO (including family members described in Code Sec.318(a)(1)).

3. The four highest compensated officers for the currentyear or any of the prior 10 years. This is determined basedon the shareholder disclosure rules for compensation underthe Securities Exchange Act of 1934.

What is an eligible corporation? To be eligible for the Code Sec. 83(i) election, the option or RSU must have been granted by a corporation during a calendar year in which it was an eligible corporation. (Code Sec. 83(i)(2)(A)(ii)(II)) This is a corporation whose shares (including any predecessor’s shares) are not tradable on an established securities market (i.e., a privately held company); and that has a written plan under which at least 80% of full-time employees are granted stock options or RSUs. (Code Sec. 83(i)(2)(C))

The written plan must grant employees options or RSUs with the same rights and privileges to receive qualified stock. However, employees may receive varying amounts of options or RSUs as long as they get the same type of award and more than a de minimis amount. (See Code Sec. 83(i)(2)(C)(ii).) For purposes of the 80% rule, part-time employees (i.e., those who usually work less than 30 hours per week) and individuals excluded from the definition of qualified employee aren't counted.

Companies may be reluctant to establish plans eligible for Code Sec. 83(i) because they will have to offer options or RSUs to at least 80% of their full-time employees. However, companies are still free to grant more equity-based compensation to a smaller group of employees, provided 80% of the employees receive more than a de minimis amount. Note that neither the TCJA nor the TCJA Committee Report define what is considered a de minimis amount. Hopefully, IRS will provide guidance soon on what this term means.

Making the election. An employee must make the Code Sec. 83(i) election to defer income no later than 30 days after the earlier of the date the employee's rights in the stock are transferable or aren't subject to a substantial risk of forfeiture. (Code Sec. 83(i)(4)(A)) According to the TCJA Committee Report, the determination of when the stock is transferable or not subject to a substantial risk of forfeiture should be made using rules similar to those established by Code Sec. 83(c) and its related regs. IRS has yet to issue guidance on the

11

Code Sec. 83(i) election mechanics.

Limitations. A Code Sec. 83(i) election can't be made with respect to any qualified stock if (1) the qualified employee made a Code Sec. 83(b) election with respect to the same stock, or (2) any stock of the corporation that issued the qualified stock is readily tradable on an established securities market at any time before the election is made. (Code Sec. 83(i)(4)(B)) Additionally, if the corporation repurchased any stock in the preceding calendar year, a Code Sec. 83(i) election may not be available unless at least 25% of the total dollar amount of the stock repurchased is stock for which a Code Sec. 83(i) election is in effect, and the determination of the individuals from whom deferral stock is purchased is made on a reasonable basis. (Code Sec. 83(i)(4)(B)(iii)

Tax consequences of the election. An employee that makes a Code Sec. 83(i) election may defer income from an option, or an RSU, for a maximum of five years from the vesting date. However, the income must be recognized earlier upon the occurrence of any of the following events. (Code Sec. 83(i)(1)(B)):

1. The qualified stock becomes transferable (including tothe employer).

2. The employee becomes an excluded employee (i.e.,no longer qualified under Code Sec. 83(i)(3)(A)).3. Stock of the corporation becomes readily tradable onan established securities market.

4. The employee revokes the Code Sec. 83(i) election.

In general, the amount includible in income for the exercise of a stock option is the excess of the stock’s FMV at the time of exercise over the exercise price. For an RSU, the amount includible in income is the stock’s FMV at the time of exercise less the amount, if any, that the employee pays for the stock. The includible amount is determined when the Code Sec. 83(i) election is made, based on the value of the stock when the stock option was exercised or the RSU was settled, even though the income inclusion occurs in a later year. The employer can take an income tax deduction for the amount of income reported to the employee in box 1 of Form W-2 on its federal income tax return for the tax year that includes the end of the employee's tax year in which the income is recognized. (TCJA Committee Report)

Under Code Sec. 83(i)(1), the Code Sec. 83(i) election to defer income from qualified stock applies only for income tax purposes. Thus, the election has no effect on the application of social security and Medicare taxes under FICA and unemployment taxes under the Federal Unemployment Tax Act (FUTA). (TCJA Committee Report) Thus, for FICA and FUTA purposes, the income isn't deferred. Employers can withhold the FICA from other wages of the employee, have the employee remit the amount of the withholding to the employer from his or her own funds, or pay the FICA for the employee. This third alternative results in additional compensation to the employee.

Illustration 1: Jill works for XYZ Corp, a privately-held corporation. On May 1, 2018, XYZ adopts a written plan granting 90% of its full-time employees RSUs. Under the plan, Jill receives qualifying RSUs for 1,000 shares of ABC stock that vest after four years of employment. She is a qualified employee under Code Sec. 83(i)(3)(A) and isn't required to pay anything for the shares. On June 1, 2022, the shares vest and are worth $10,000 ($10 per share). On June 15, 2022, Jill makes a Code Sec. 83(i) election and, as a result, will defer recognition of $10,000 (the FMV of the RSUs at the time of settlement) until no later than the 2027 tax year. At that time, unless a triggering event (e.g., listing of the stock on an exchange) occurs earlier, XYZ treats the $10,000 as wages paid to Jill for income tax withholding. This is so even though the stock is worth $25,000 ($25 per share) at that time. The remaining $15,000 of value would be subject to long-term capital gains rates if Jill sells her shares at that time.

Illustration 2: The facts are the same as in Illustration 1, except that XYZ completes an initial public offering (IPO) on June 1, 2023. Since the XYZ stock is now readily tradable on an established securities market, Jill must include $10,000 in income for the 2023 tax year. If Jill sells her shares for $20,000 at that time ($20 per share), the remaining $10,000 of value would be taxed at long-term capital gains rates.

Caution: As with the Code Sec. 83(b) election, it can be risky to make the Code Sec. 83(i) election. This is particularly true if the stock's value declines during the 5-year deferral period. Since the employee's income inclusion is based on the stock's value as of the vesting date, the actual tax liability could be more than the stock's value at the end of the deferral period. This risk must be weighed against any benefits before making the election.

Notice and reporting requirements. An employer that transfers qualified stock to a qualified employee must provide a notice to the employee when the stock is transferred (or a reasonable time before) that contains the following information: (Code Sec. 83(i)(6))

• . . . Certification that the stock is qualified stock.

• . . . That the employee may elect to defer income bymaking a Code Sec. 83(i) election.

• . . . That if a Code Sec. 83(i) election is made, theincome recognized at the end of the deferral period will bebased on the stock's value on the earlier of when the stockfirst became transferable or not subject to a substantial riskof forfeiture (even if the stock declines in value during thedeferral period).

• . . . That the income, when recognized by the employeefor income tax purposes, will be subject to federal incometax withholding at the maximum rate in effect for individuals(37% for 2018).

• . . . That the employee must agree to ensure thewithholding requirements are met.

12

support services and other disability-related expenses.

Normally, contributions totaling up to the annual gift tax exclusion amount, currently $15,000, may be made to an ABLE account each year for an eligible person with a disability, known as a designated beneficiary. But, starting in 2018, if the beneficiary works, the beneficiary can also contribute part or all of what they make to their ABLE account.

This additional contribution is limited to the poverty line amount for a one-person household. For 2018, this amount is $12,140 in the continental U.S., $13,960 in Hawaii and $15,180 in Alaska. However, the designated beneficiary is not eligible to make this additional contribution if their employer contributes to a workplace retirement plan on their behalf.

In addition, starting in 2018, ABLE account beneficiaries can qualify for the Saver’s Credit based on contributions they make to their ABLE accounts. Up to $2,000 of these contributions qualify for this special credit designed to help low- and moderate-income workers. Claimed on Form 8880, Credit for Qualified Retirement Savings Contributions, this credit can reduce the amount of tax a person owes or increase their refund. Like other IRS tax forms, Form 8880 will be revised later this year to reflect changes made by the new law.

In addition, some funds now may be rolled into an ABLE account from the designated beneficiary’s own 529 plan or from the 529 plan of certain family members.

Tax Court Approves Of Consultant As Statutory Employee - Tax Act Makes Case Significant

What was known as the Tax Cuts and Jobs Act has raised the stakes on the issue of whether someone is an employee or an independent contractor. Unreimbursed employee business expense will no longer be deductible at all and new Section 199A may allow a 20% deduction for independent contractors. This all makes the partial taxpayer victory in the Judge Pugh's Tax Court decision in the case of Slawomir and Alicia Fiedziuszko more significant. Mr. Fiedziusko successfully argued that his consulting gig with Space Systems Loral did not make him a "common law employee", despite the W-2 he received.

What Is A Statutory Employee?

One theory is that the concept of "statutory employee" was

An employer failing to provide the required notice is subject to a penalty of $100 for each failure, up to a maximum of $50,000 for any calendar year (Code Sec. 6652(p)). No penalty will be assessed if the failure is due to reasonable cause and not willful neglect.

In addition to providing notice to employees, employers must report the following on each employee's Form W-2:

1. The amount includible in gross income under CodeSec. 83(i)(1)(A) with respect to a Code Sec. 83(i) electionfor both the year of deferral and the year the income isrequired to be included in income by the employee (CodeSec. 6051(a)(16)).

2. The aggregate amount of income that's being deferredunder Code Sec. 83(i) elections, determined as of the closeof the calendar year (Code Sec. 6051(a)(17)).

Wrapping it up. The new Code Sec. 83(i) election will help employees of private companies receiving stock-based compensation, but IRS will have to provide guidance for taxpayers, employers and practitioners to fully understand and properly apply the election.

Tax Reform Allows People with Disabilities to Put More Money Into ABLE Accounts, Expands Eligibility for Saver’s Credit

People with disabilities can now put more money into their tax-favored Achieving a Better Life Experience (ABLE) accounts and may, for the first time, qualify for the Saver’s Credit for low- and moderate-income workers, according to the Internal Revenue Service.

The Tax Cuts and Jobs Act, the tax reform legislation enacted in December, made major changes to the tax law for 2018 and future years, including increasing the standard deduction, removing personal exemptions, increasing the Child Tax Credit, limiting or discontinuing certain deductions and changing tax rates and brackets.

The new law also enables eligible individuals with disabilities to put more money into their ABLE accounts, qualify for the Saver's Credit in many cases and roll money from their 529 plans -- also known as qualified tuition programs -- into their ABLE accounts.

States can offer specially designed ABLE accounts to people who become disabled before age 26. Recognizing the special financial burdens faced by families raising children with disabilities, ABLE accounts are designed to enable people with disabilities and their families to save for and pay for disability-related expenses. Though contributions are not deductible, distributions, including earnings, are tax-free to the designated beneficiary if used to pay qualified disability expenses. These expenses can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal

13

created to aggravate income tax preparers like me. We have this pile of paper in front of us and we say to ourselves - some W-2s, no 1099-MISC or 1099-NEC, so no Schedule C - pieceof cake. Nah. That would be too easy. (One thinks of theRobin Williams routine in which the inventor of golf explainsthe game) Let's throw in a W-2 with a box checked that meansyou need a Schedule C. That is not actually it.

You need to go to Code Section 3121(d) where employee is defined under Chapter 21 of the Internal Revenue Code - Federal Insurance Contributions Act. (The Income Tax isin Chapter 1) The definition lists any officer of a corporation, any individual who "under the usual common law rules" is an employee and a third, any person who provides services for remuneration:

(A) as an agent-driver or commission-driver engagedin distributing meat products, vegetable products, fruitproducts, bakery products, beverages (other than milk), orlaundry or dry-cleaning services, for his principal;

(B) as a full-time life insurance salesman;

(C) as a home worker performing work, according tospecifications furnished by the person for whom theservices are performed, on materials or goods furnishedby such person which are required to be returned to suchperson or a person designated by him; or

(D) as a traveling or city salesman, other than as an agent-driver or commission-driver, engaged upon a full-timebasis in the solicitation on behalf of, and the transmissionto, his principal (except for side-line sales activities onbehalf of some other person) of orders from wholesalers,retailers, contractors, or operators of hotels, restaurants, orother similar establishments for merchandise for resale orsupplies for use in their business operations;

if the contract of service contemplates that substantially all of such services are to be performed personally by such individual;

So the "employer" pays FICA for those folks and sends them a W-2, but they are only employees for FICA purposes - Chapter21 - not for computing income tax - Chapter 1.

And that means that if there are expenses they get to deduct them on Schedule C as opposed to miscellaneous itemized deduction or from here on in not at all. And there is that Section 199A deduction to be thinking about. (We are still waiting for guidance on that)

About Those Common Law Employees

You got some people and you are paying them to do something for you. Are they employees? There is a lot more than this but probably the place to start is Revenue Ruling 87-41 which gives you a 20 factor test. Well we're not going to get into that. I'll give you the executive summary. If you are asking the question, they are probably employees.

Looking at things practically, I would argue that you might want to err on the side of them being employees, even though with payroll taxes and this and that, it is probably a better deal to have independent contractors. If the IRS successfully reclassifies, it gets real ugly.

Regardless, now there is a big incentive for the "employees" to push for independent contractor status. And Mr. Fiedziuszko might be their inspiration.

It Doesn't Take A Rocket Scientist, But That Doesn't Hurt

Mr. Fiedziuszko is a semiretired aerospace engineer. He worked for Space Systems Loral through a contract with West Valley Engineering Co. West Valley processed his pay for Loral withholding federal income iax as well as social security and medicare. On his 2011 W-2, they checked the statutory employee box, but not on his 2012 W-2. Regardless, Mr. Fiedziuszko claimed statutory employee status:

Petitioners claimed deductions on Schedule C of their Form 1040 for the following expenses related to Mr. Fiedziuszko's consulting business: $2,000 for supplies, $5,000 for travel (including meals and lodging), $9,500 for insurance (other than health), and $2,000 for advertising. In addition, they claimed a $29,540 deduction for self-employed health insurance on their 2012 Form 1040. The record contains no substantiation for these deductions other than “statements of fact” that outline Mr. Fiedziuszko's business expenses, which he prepared for trial.

Where Does He Fit?

I had a little trouble figuring out how Mr. Fiedziuszko fit into the statutory employee box. His work was described this way:He worked primarily from home on a satellite development project, Flexible Satellite, producing reports and components for Loral.

Judge Pugh saw that as fitting into as a home worker performing work, according to specifications furnished by the person for whom the services are performed, on materials or goods furnished by such person which are required to be returned to such person or a person designated by him

I haven't put the time in to trace down the legislative history on that definition, but it seems to go back to at least 1954 and brings to my mind images of garment workers rather than an aerospace engineer consultant. I'm wondering whether telecommuters might start using this decision as the new act makes the notion of being a statutory employee more attractive.

Divorce: What Tax Reform Means for Alimony Deduction

Are any of your clients planning to get divorced? They should get the paperwork started sooner rather than later if they intend to preserve the tax deduction for alimony payments under the new Tax Cuts and Jobs Act (TCJA). In fact, in some

14

states like California, the proceedings should be wrapped up before the end of this month.

Previously, divorced taxpayers were entitled to write of the full cost of qualified alimony payments above the line on a federal return. On the flip side, alimony recipients had to report the payments as taxable income. But child support payments, as well as most other payments pursuant to a divorce, were neither tax-deductible nor taxable.

To qualify as deductible alimony, the following requirements must be met:

• The spouses don't file a joint return with each other.

• The payment is in cash (including checks or moneyorders).

• The payment is to or for a spouse or a former spousemade under a divorce or separation instrument.

• The divorce or separation instrument doesn't designatethe payment as not being alimony.

• The spouses aren't members of the same householdwhen the payment is made. (This requirement applies onlyif the spouses are legally separated under a decree ofdivorce or of separate maintenance.)

• There's no liability to make the payment (in cash orproperty) after the death of the recipient spouse.

• The payment isn't treated as child support or a propertysettlement.

But these requirements will soon become a moot point. Under the TCJA, alimony will no longer be deductible by payors and, accordingly, such payments won’t be taxable to recipients. The changes generally apply to divorce and separation agreements executed after December 31, 2018 and prior agreements modified on January 1, 2019 and thereafter. What’s more, unlike most other TCJA provisions for individual taxpayers that are effective only for 2018 through 2025, these new rules are a permanent part of the tax code.

Why the sense of urgency? Some states, including California, require a six-month “waiting period” after papers are finalized for a divorce to take effect. Therefore, if a client is counting on alimony deductions, the agreement should be signed before the end of June. In New Jersey, the waiting period for a no-fault divorce is six months if both spouses consent to it and 18 months if they don’t. Check into the applicable state laws for any clients in this situation.

Also, the tax law changes will likely shift the dynamics at the bargaining table. If a payor won’t be able to deduct alimony in the future, he or she may not be willing to pay as much. One possibility is to arrange for a lump-sum payment before 2019 instead of providing the usual ongoing payments. As a result, the full amount will be deductible.

Similarly, someone who expects to be on the receiving end may use stalling tactics to avoid being taxed on alimony income. If the recipient is forced to give in, some concessions may have to be made by the payor.

Finally, ex-spouses might revisit prior agreements to reflect the new law changes. For instance, if you signed a prenuptial agreement in the past based on the assumption that any alimony would be deductible, you may seek to have the agreement modified. Undoubtedly, the new rules will inspire many taxpayers and their professional advisors – including accountants and attorneys -- to review existing documents.

Question of the Month

That's Entertainment

I am hearing that Entertainment is no longer deductible. Does Entertainment "sunset" on December 31, 2025 and will be back for 2016?

No, entertainment as an expense is removed as a deduction with the Tax Cuts and Jobs Act beginning January 1, 2018.Mr. Wayne cautions that regulations are needed to clarify the definition of entertainment.

Tax Practice

Managing In the Gray

Several years ago, TASC was faced with the kind of decision we don’t encounter every day.

It concerned a regulation that left a lot of room for interpretation. We wanted to act in a way that would bring the most benefit to our customers. And we saw a lot of potential upside to going in a certain direction. But there was also a potential downside.

15

Many CEOs and business owners might be tempted to answer Badarraco’s second question—“What are my core obligations?”—with a single word: “profitability.” But the author insists (and I agree) that it’s essential to be able to look hard at the economics involved and past them. The same applies to your concern for stakeholders. The picture needs to be bigger. Maybe there’s something wrong that you feel needs to be addressed. How about the perspective of someone on the outside? Is there a decision outsiders might find extremely objectionable, even hateful? This question is all about examining your obligations not only as a business executive but also as a human being. All the while we need to remind ourselves that we’re not doing this exercise for its own sake. Our objective is to gain actionable insights.

Question three is “What will work in the World.” This is about realism and pragmatism. That includes recognizing that while most of the people around you are “solid citizens,” you could well run up against the “brilliantly devious” and “inept and confused.” You have to look honestly at the self-interest of all concerned (yourself included). You also have to ask how resilient you and your plan will be in the face of pushback or controversy. You want to stay flexible, but also be willing to play “hardball,” even if you’d prefer not to.

“Who are we?” is the author’s fourth question. This is another way of asking: “Is it Defensible?” In short, can you stand up before a group of people and defend your decision with conviction and in a way that’s consistent with your values both as a company and an individual?

Badaracco’s last question is “What can I live with?” This acknowledges that your best possible option might not be ideal. What can you live with as a leader? As a manager? As a person? “Gray area problems,” writes the author, “…test competence and character. They are the intersection of work and life.” Although to this point you have been working collaboratively with your team, you will probably find it valuable to spend time alone, examining your answers to the previous questions. Then you “make the decision, explain it, and move ahead.”

I’m convinced that business leaders can benefit from this kind of process. Policy makers probably could as well. Many of our most pressing social and political problems are gray area challenges. The first step in finding answers could be asking the right questions.

The best course of action just wasn’t clear.

What was clear, however, was that our usual decision-making process wouldn’t cut it. Navigating this “Gray Area” required a more innovative approach. We had to weigh risk and benefit, consider how we would position our decision to stakeholders and others, and more.

After a lot of thinking about this challenge, I came up with a short list of questions to help guide us. These proved so valuable that from that point forward they became ingrained as part of the TASC process for making what I termed “gray area decisions.”

So imagine my surprise when recently I discovered a book that recommended a nearly identical approach. In Managing in the Gray: 5 Timeless Questions for Resolving Your Toughest Problems at Work, Joseph L. Badaracco, a professor of business ethics at Harvard Business School, explains how the right questions can help CEOs and other business leaders navigate tricky terrain where it seems every possible decision is potentially problematical.

Badaracco confirmed my belief that working through gray area problems requires us to go beyond traditional business thinking and to wrestle with “hard profound insights about human nature, our common life together, and what counts as a good life.”

His first question, “What are the net consequences?” asks leaders to consider which decision would promote “the greatest happiness for the greatest number of people.” To do that, we have to understand our own limitations. When it comes to a gray area problem, no one can “quickly see” how things will play out or “the full consequences of a complex, uncertain decision.” We have to put aside our impulse to “forecast the future” and focus on process. That involves getting the right people in the room and banishing both groupthink and bossthink.

Use Resources and Toolsfor Tax Professionals

On Our Website ncpeFellowship.com

Renew Your Membership OnlineIf Your Membership is due

in June and July

16

Military Taxes

Reserve, Guard Members Lose Travel-expense Tax Deduction

Reserve and National Guard members who travel long distances to drill are losing out on a tax break under the new tax legislation. Here, National Guard Soldiers from 1st Battalion, 258th Field Artillery, train at Fort Drum, N.Y. Reserve and Guard members who travel less than 100 miles from home to military duty won’t be able to deduct any unreimbursed travel expenses thanks to the tax reform signed into law in December.

This won’t affect tax returns being filed this year, but will apply to all 2018 travel and to 2019 filings.

“The Tax Cuts and Jobs Act suspended all miscellaneous itemized deductions, which included the itemized deduction reserve-component members could take for unreimbursed employee expenses on Schedule A” of their Internal Revenue Service Form 1040, said Army Lt. Col. David Dulaney, executive director of the Armed Forces Tax Council.

Although itemized deductions will be suspended, the standard deduction will increase in tax year 2018 under the new law — from $6,350 to $12,000 for single taxpayers and from $12,700 to $24,000 for couples.

“It would seem that most would probably come out better, but not all,” said John Goheen, spokesman for the National Guard Association of the United States. “The bottom line is this: NGAUS is not in favor of anything that forces National Guardsmen to dig further into their pockets to serve.”

Estates and TrustsBeat the Medicaid Income Limit: Can a Miller Trust Help Your Clients with Medicaid Eligibility?

In the world of long-term care Medicaid, a nursing home patient can get assistance if they meet certain basic eligibility requirements. One of the most confusing requirements is the income limit.

In essence every state imposes an income limit. In the majority of the states, the basic premise is that the nursing home patient doesn’t have enough monthly income to cover the cost of care. If you have enough income each month to pay the nursing home, you don’t need or qualify for assistance. If you don’t and you meet all the other eligibility requirements (i.e., your assets are spent down below the state reserve limit) then you can get help.

There are a certain number of states that use an income limit much lower than the cost of care. These are known as “income cap” states. In an income cap state, if the applicant’s income exceeds the state income limit for Medicaid, they are automatically disqualified and cannot get Medicaid to help pay for their long-term care expenses, even if they are completely broke and do not have enough income to cover those expenses directly.

The state income cap is set at 300% of the federal poverty income. For 2018 this amount is $2,250. In every state with an income cap, the cost of a nursing home is more than double (and in most cases more than triple) the state income cap.

Many seniors have incomes that exceed the income cap, but do not have enough income to cover the cost of a nursing home once they have depleted all other resources. Fortunately, there is a way to beat the Medicaid income cap!

Federal laws on the creation of trusts under Medicaid allow for defeating the income cap for everyone and here is how it’s done.

There is a special type of trust formally called a “Qualified Income Trust.” Most states do not use that term. Instead it is known as either and “Income Cap Trust” or a “Miller Trust.” The later name as a result of a court case in Colorado (Miller v. Ibarra) that established the right of Medicaid applicants touse the trust as a way to overcome the limitations imposed bya state income cap when faced with the high cost of long-termcare.

The biggest problem with the Income Cap Trust is that most people don’t know they exist or how they are used. This was highlighted recently when I received a question from someone who asked what other help they could get with nursing home expenses since they didn’t qualify for Medicaid because their income was too high. They had never heard of an income cap trust. Once they learned about what it was, they wished that they had learned about it when the couple had spent down

17

enough to be asset-eligible for Medicaid.

How the income cap trust works, depends on the state in which you use it. All follow a basic format for their trusts and nearly all states provide a template form for Medicaid applicants to use to create the trust. They are typically 3 or 4 pages in length. Once the trust is executed, the trustee of the trust creates a trust checking account where funds can be deposited. Whoever is in charge of the patient’s finances either takes income from the patient’s regular checking account and deposits it into the trust or arranges to have the source of income (i.e., Social Security check, pension, etc.) directly deposited into the income cap trust.

In most states, you must only put the amount of income that exceeds the income cap into the trust. For example, if the Medicaid applicant has $2,750 a month in income, they would need to contribute the difference between the income cap and the monthly income to the trust. After the applicant deposits $500 into the trust, the applicant is considered “income eligible” for Medicaid. Alternately, in a state like Arkansas, they require that all of the applicant’s income be placed into the trust.

Ultimately, the funds in the trust are spent on the patient’s monthly share of cost or diverted to the patient’s spouse as part of the family allowance, the same as in non-income cap trust states. While it’s more work to achieve Medicaid eligibility, the good news is that the income cap is truly nothing more than a harmless scarecrow only meant to make you think you can’t get help when you really can.

News from Capitol Hill

Tax-Law Typo Risks Bankrupting #MeToo Victims Without GOP Fix

Republicans are considering a fix to a provision in their new tax law that they acknowledge could inadvertently penalize victims of sexual harassment in the workplace.

But congressional gridlock before midterm elections in November means there’s no guarantee that the problem will be corrected quickly, if at all.

President Donald Trump’s tax overhaul eliminates the deduction companies used to be able to take when they settled sexual harassment cases and included non-disclosure agreements, which generally keep details secret as a condition of the payout. A misplaced word by Republican tax writers may mean that victims of accused sexual predators like Hollywood producer Harvey Weinstein also lose the ability to deduct their legal expenses.

A senior House Republican aide who works on tax policy acknowledged the provision has unintended outcomes and is being discussed as a so-called technical correction to the tax law. A senior Senate Republican aide said lawmakers are

examining the issue. Both aides were granted anonymity to discuss private conversations.

In the meantime, plaintiffs attorneys are buzzing about how the law’s ambiguity is worrying their clients, who fear that coming forward about sexual harassment could come at a much greater cost.

“There’s this concern that because of the 2017 tax act, that somehow we’re going to get back to that original system which obviously penalizes, to an extraordinary extent, against the victim,” said Genie Harrison, who represents one of Weinstein’s formal personal assistants in a sexual harassment lawsuit.

That’s not what the law was supposed to do. Republican lawmakers on the Senate Finance Committee agreed in mid-November to include an amendment from Senator Bob Menendez, a New Jersey Democrat, to help make the use of NDAs less attractive following a flurry of sexual misconduct allegations.

The backlash against NDAs has been fueled by examples such as Weinstein and former Fox News anchor Bill O’Reilly where the contracts helped hide ongoing harassment. Alaska, California, and Washington are among more than a dozen states considering laws that prohibit confidential settlements entirely or add new limits.

So far, about 300 executives and other high profile leaders, mostly men, have been accused of sexual harassment or other improper behavior related to the so-called #MeToo movement, according to New York crisis counseling company Temin & Co., based on an ongoing count of actions pulled from media coverage and other public information. That doesn’t include actions taken that weren’t made public, according to Temin.

The original provision made clear that the deduction change only applied to the company, not the victim, according to Steven Sandberg, a spokesman for Menendez. Republican tax writers used the word “chapter” rather than “section” in the amendment, which could be interpreted as broadly applying the elimination to victims.

Senate Finance Chairman Orrin Hatch, a Utah Republican, is continuing to meet with members to address any concerns with the new law and examine potential technical corrections, should they be needed, said Julia Lawless, a spokeswoman for the panel.

Menendez is trying to get an amendment through the Finance Committee or a new law passed to make that clear, Sandberg said in an email. The proposed bill to clarify that victims’ write offs are exempt is called the “Repeal the Trump Tax Hike on Victims of Sexual Harassment Act of 2018.”

With the midterm elections looming, the prospects of a technical revision to the tax law -- passed without a single Democratic vote -- are far from certain. The Republicans control 51 seats in the Senate, and 60 votes would be required for a bill to

18

longer deduct its settlement and attorney fees, they might be more likely to roll the dice and proceed with litigation even if attorney fees will be more expensive. They can have the option of being vindicated in court and deduct all their fees.”

What Should Republicans Include In Their Second Tax Bill?

The Trump Administration and some congressional Republicans, including Ways & Means Committee Chair Kevin Brady (R-TX), are promising Tax Bill 2.0 later this year—perhaps in late summer or in the fall. That bill may include some fixes to the Tax Cuts and Jobs Act (TCJA), make some provisions permanent, or even add new ideas that were excluded from the 2017 law.

Let’s assume Republicans want a second bill that isn’t just a political exercise aimed at sending a message. Rather, imagine they want to draft a measure that would improve the code, either by fixing mistakes in the TCJA or addressing issues that were ignored last year.

I’m not trying to predict what will be in the bill. Indeed, most of what I’m suggesting probably won’t ever make it into the next revenue measure. And I’m limiting the ideas to proposals that could win the support of at least some Republicans even a few Democrats. No bill will please everyone in the deeply-divided GOP but these ideas have had Republican support in the past.

One other self-imposed constraint: I’m assuming any bill would be roughly revenue neutral. There is no chance the GOP and the Trump Administration will increase taxes, and Republicans have not passed a new budget resolution that would allow for additional tax cuts without 60 votes in the Senate. I’ve focused on some big ideas that have been raised by Brady as well as some other possibilities. Here are four potential elements of a second tax bill:

Retirement savings. Although there was lots of chatter about changing the tax treatment of retirement savings in the buildup to the TCJA, the House and Senate bills barely touched this issue. Brady, however, has raised it as a possible subject for a second bill.

correct any errors. Democrats have signaled they’re reluctant to approve any legislation that would fix a tax bill they never signed on for -- much like Republicans did after Democrats tried to modify the Affordable Care Act. Or they may ask for something in return that Republicans are unwilling to provide.

Another option may be tacking a fix onto the government funding bill that has to pass by the end of September to avert a government shutdown. The previous funding bill, which Trump signed in March, included a correction to a measure in the tax law affecting farmers -- so far, the only other time Republicans have highlighted a specific provision in need of a change. Some Democrats agreed to back the spending bill since it included other changes viewed as policy victories for both parties.

If the rule isn’t clarified soon, there’s a risk future victims will stay silent, said Harrison, who practices in Los Angeles. There’s less incentive if winning the case means an untenable tax burden, she added.

For example, in a $100,000 settlement, costs and fees might take $45,000 with $55,000 going to the victim. Without the deduction, the victim would pay taxes on the entire $100,000, which may mean a tax bill equal to or larger than their payout, she said. Defendants this year have said they aren’t willing to add additional money to compensate for the potential added tax penalty, she said.

It’s also unclear what happens in cases that include both sexual harassment and other claims, such as pay bias or gender discrimination, said Bruce Schwartz, a benefits and tax law attorney at Jackson Lewis in White Plains, New York. Legal costs associated with settlements for other forms of bias should still be tax deductible, but the ratio may be unclear, he said.

Trying to change behavior through tax law isn’t a new idea, nor is it usually very effective, said Schwartz. When voters were upset about the high salaries paid to chief executive officers, lawmakers limited the deductibility of CEO pay to the first $1 million. Companies then just shifted more of the compensation away from salary, he said.

“It’s what I would I would call Congress legislating in response to newspaper headlines and using the internal revenue code to enforce social policy,” Schwartz said. “To use the internal revenue code to do that is useless.”

Even if the non-disclosure ambiguity is fixed by Congress, the broader rule could still keep many victims quiet. That’s because it will be more expensive for a company to keep the details of the case confidential -- an option some victims may actually prefer, said Elisa Lintemuth, an employment lawyer at Dykema Gossett in Grand Rapids, Michigan, who represents companies in cases.

“I do think it will change how cases are litigated and settled,” said Lintemuth, who discussed uncertainty on a recent conference call with company clients. “If a company can no

19

Big changes are not in the cards. But Congress could enact an idea that has been around at least since the George W. Bush administration: Consolidate the many tax-advantaged savings plans into just two or three. It would make life easier for taxpayers, employers, and the IRS. Most important, behavioral science tells us that people are more likely to participate in savings plans when confronted with fewer choices or when given a single clear default option.

Charitable giving. By significantly reducing the number of itemizers, the TCJA effectively limited the tax benefits of charitable giving to a relative handful of high-income households. As my TPC colleague Gene Steuerle has written, such a subsidy may hurt non-profits that rely on middle-income givers and may be politically unsustainable since only about one-in-ten taxpayers will now claim the deduction. One alternative: Create an above-the-line tax deduction for charitable gifts above a threshold. Or replace the deduction with a modest tax credit. Either way, those taking the standard deduction as well as itemizers would get a tax benefit for giving to non-profits.

Capital Gains. Some in the White House are toying with indexing capital gains for inflation—a terrible idea. Instead, they could consider a proposal that was in the House leadership’s 2016 blueprint: Repeal the special tax rate for capital gains and, instead, tax gains at ordinary income rates but exclude a portion of investment profits from tax.

Congress also could end the practice of stepping-up basis at death. Currently, the cost basis of an unrealized capital gain is set at an asset’s value at the time its owner dies, rather than when it was acquired or improved. The proposal, which was included in the House leadership bill as well as in some of President Trump’s campaign plans, would end a long-standing tax windfall for heirs. Republicans might pair this change with repeal of the estate tax that now affects fewer than 4,000 of the very wealthiest decedents. It wouldn’t be my choice, but they could go in that direction.

Taxing pass-through businesses. The TCJA’s 20 percent deduction for qualified income of pass-through businesses such as partnerships is deeply flawed. I understand that Republicans felt the need to reduce taxes on pass-through businesses after they cut income tax rates for corporations. But the 20 percent deduction is an administrative mess.

The problem: Once Congress chose to tax pass-through business income at a lower rate than labor income, it created new incentives for taxpayers to game the system. So it had to build guardrails to protect the fisc. The idea behind those protections was sound but the implementation? Ugh.

My colleague Eric Toder has suggested an alternative way to create rough parity between corporations and noncorporate businesses. His idea: Tax nearly all businesses as pass-throughs, end the special deduction, and reduce individual income tax rates.

All publicly-traded companies would be taxed as they are today.

Firms would pay the new low corporate rate and shareholders would be taxed when corporate profits are distributed, either through dividends or when investors sell shares. However, all other businesses would be taxed as pass-throughs. Thus, tax would be paid at the higher individual rate, but corporate profits of non-publicly-traded firms would be taxed only once. The model of taxing business profits one time has long been backed by Republicans and by many in the business community.

At the same time, Congress would repeal the TCJA’s 20 percent deduction but, as a sweetener, cut individual income tax rates by about 4 percentage points.

Each of these ideas is ambitious and controversial. But they’d improve the tax system. And they might win the support of some Republicans and even a few Democrats.

Revenue Enhancement: Preparers’ Suggestions for IRS Reform

On the heels of the largest tax reform in a generation has come a second proposal: reform the IRS. Those in the front lines of dealing with the agency have no shortage of opinions on what to change.

“I’d like it to become easier for us to assist taxpayers,” said Laurie Ziegler, an Enrolled Agent and managing member at Sass Accounting, Saukville, Wis. “This is a no-brainer: It would be far simpler for the IRS to deal with tax professionals than the taxpayers themselves.”

Morris Armstrong, an EA and registered investment advisor with Armstrong Financial Strategies in Cheshire, Conn., would also like to see greater ease for professionals to work with the IRS and individual clients in both preparation and representation. “The IRS has a taxpayer’s Bill of Rights and it seems to contain hollow words,” he said. “Considering the amount of money that the IRS collects for our government, I wish that they were better funded and subject to less partisan BS.”

‘Baby steps’

The IRS revamp, a long-term bipartisan effort in Congress billed as creating a “taxpayer-first” agency, looks at a full menu of upgrades, including establishing an appeals office; requiring the IRS to submit to Congress a plan to improve customer service and efficiency; maintaining Free File; and ensuring that taxpayers have access to the same information as the IRS during dispute resolution, among others.

The redesign, say practitioners, presents a good chance to tune specific aspects of interaction with the IRS. “Health care is a pain point for me,” said Becky Neilson of Neilson Bookkeeping & Tax Services in Sheridan, Calif. “So many clients had issues getting 1095s timely. We had some clients’ returns on hold because the IRS was requesting copies of 1095s that clients never received and evidently IRS had still not received by filing deadline. The waiving/extension

20

exemption, and regionalization of rates (if you keep itemized deductions) based on a cost-of-living adjustment for economic parity, among others.

Perhaps one change involves inserting what wasn’t used in passing the TCJA: time. “Force all tax legislation to have a two-fiscal year cooling-off period before implementation,” Morris added, “to allow study, rules, regulations and planning.”

Editor's Note: The Taxpayer's First Act calls for an Administrator of the IRS, rather than a Commissioner. An administrator that will be responsible to the United States Congress on how the money allocated to the IRS is spent in "service to America's Taxpayers".

People in the Tax News

H&R Block Plans to Close 400 Tax Prep Offices

H&R Block intends to close 400 of its company-run outlets, as the tax prep chain foresees fewer customers coming in to have their returns prepared as a result of the new tax law.

Shares in the Kansas City, Missouri-based company plummeted Wednesday after Block cut its guidance during an earnings call, even though it reported mostly positive results for the quarter (see H&R Block shares plunge as simpler tax code weighs on forecast).

“For 2019, we have a number of initiatives that are planned or in process,” said Block CEO Jeffrey Jones during the call, according to a transcript from Seeking Alpha. “We will make investments to modernize our key technology platform to enable more innovation and reduce our IT run rate spend over time. Additionally, we will invest to improve cross-channel client experiences and enhance our marketing and advertising capabilities. We’ll improve the service quality and consistency in our offices. This work is in process and we’ve already started to make some changes, including our decision to consolidate 400 smaller company-run offices. This action will help optimize our footprint and enable us to more effectively manage our field operations, elevate our talent and deliver more consistent quality to our clients.”

The Tax Cuts and Jobs Act that Congress passed last December doubles the amount of the standard deduction and either eliminates or sharply limits many popular tax deductions in an effort to simplify the tax prep process. That is expected to encourage more taxpayers to claim the standard deduction instead of itemizing.

H&R Block, like many tax practitioners, tends to charge larger fees for more complex returns. Jones said Block may need to adjust its pricing accordingly. “Additionally, we will focus on improving the value proposition by evaluating how we price for tax preparation taking into account the recent tax legislation,” he said. “These changes will require an investment in fiscal

of deadlines for timely filing of W-2s, 1099s and other forms required to be filed and sent by employers is a joke.”

“Why set deadlines,” she added, “if they keep changing the requirements every year?”

Armstrong would like to see “the individual being held responsible and subject to harsher penalties when fraud is committed. Incorrect filing status, bogus deductions and phony dependents are often used to get large, undeserved refunds,” he said. “Effectively, these people are stealing from all of us.”

“Let’s take baby steps,” said EA John Dundon, president of Taxpayer Advocacy Services in Englewood, Colo. “I’ll be happy with an actual commissioner.”

Congress in session

IRS reform was dropped as part of the TCJA. But to some, reform of the federal tax agency and reform of federal tax remain connected; some practitioners want new rules changed.

“My two items relate to uncertainty of business meal deductibility under the new law, as well as finding a way to increase the $10,000 deduction limitation on SALT – it’s a concern around here,” said CPA Brian Stoner, in Burbank, Calif., referring to the high property taxes of his state.

“Unfortunately, from what I have heard, even though the business meal rules are not really what Congress intended, the cost to revenue of a technical correction may not be in the cards at this time. The cost to increase the state tax deductions has the same problems,” Stoner said

CPA Daniel Morris, a senior partner at Morris + D’Angelo in San Jose, Calif., thinks true reform will come when all members of Congress and the executive branch “must file their returns, self-prepared, without software, without advisors, on or before April 15.”

Morris would like to see a territorial tax system to protect “unrepresented ex-pats” that FACTA locks out of family accounts, dropping the corporate rate to 15 percent, capping of Social Security taxable income at 50 percent, removal of all itemized deductions and granting of a $20,000 per person

21

2019.”

However, the new tax law also promises to bring many taxpayers to tax professionals for advice on how to adjust their tax planning and take advantage of favorable provisions in the new tax code.

“As a great example of how our tax pros help clients, this season we offered personalized assessments of the future impact of the new tax law,” said Jones. “Our clients learn whether they would have paid more or less if the new tax law had been in effect for 2017, which helped them determine how to appropriately adjust their withholdings for 2018. We know due to lower withholdings it’s likely many consumers will now receive lower refunds and they can turn to us throughout the year with any questions they have.”

He noted that while Block didn’t see the growth it would have wanted in new clients, it is continuing to see millennials turning to H&R Block, with over half of its new assisted clients under the age of 35. “From an overall mix and pricing perspective, our net average charge grew 2 percent, which translated to growth in assisted revenues, as expected,” said Jones.

One of H&R Block’s competitors in the tax franchise space, Happy Tax CEO Mario Costanz, had a different perspective on millennial tax prep customers. “Store fronts were down 28 percent in terms of market share from 2011 through 2017,” he said. “The reason for this is that millennials and Gen X consumers don't want to be inconvenienced by having to go somewhere and sit in a waiting room for hours on end. Independents have gained share vs. store fronts and now prepare 82 percent of the returns on the assisted side of the industry vs. 76 percent that they prepared in 2011. None of that has to do with tax reform. It has to do with changing consumer behaviors. What we don't see in standard store front business models is that they are not embracing the new ways taxpayers want to interact with their service providers. Service providers are not going away.”

'Jersey Shore' Star Mike 'The Situation' Sorrentino Will Face Tax Evasion Sentencing This Fall

Mike “The Situation” Sorrentino caught another break in his tax evasion case.

He had originally been scheduled to be sentenced on April 25, which then got pushed back to Aug. 18. Now, Page Six confirms that the sentencing hearing has been delayed again, this time to Sept. 7.

The latest delay came after his attorney, Henry Klingeman, filed a letter requesting a new date because the August time frame “conflicts with a long-planned family vacation,” read the letter, obtained by Page Six.

Sorrentino, 35, pleaded guilty to tax evasion in January and agreed to a deal that could put him behind bars for up to five years.

His brother Marc Sorrentino is facing up to three years in prison for aiding in the preparation of a false and fraudulent tax return. Both men could pay up to $250,000 in fines.

The legal trouble hasn’t appeared to affect his life too much, as he and longtime girlfriend Lauren Pesce announced their engagement in April, despite his potential jail time.

H.I.G. Bayside Capital Announces the Sale ofJackson Hewitt®

H.I.G. Bayside Capital (“Bayside”), the credit-oriented affiliateof H.I.G. Capital, a leading global private equity investmentfirm with over $25 billion of equity capital under management,announced today the sale of its portfolio company, JacksonHewitt Tax Service Inc.® (“Jackson Hewitt” or the “Company”),to funds managed by Corsair Capital.

Based in Jersey City, NJ, Jackson Hewitt is an innovator in the U.S. tax industry, with a mission to provide its hard-working customers access to simple, low-cost solutions to manage their taxes and tax refunds. Jackson Hewitt maintains a vast franchise and company-owned nationwide footprint of approximately 6,000 locations. The Company has led the industry in product innovation, and has developed a unique and comprehensive suite of related services tailored specifically to hard-working American taxpayers.

Bayside recapitalized the Company in 2011, and over the last seven years has supported the Company’s significant investments in its new unit buildout, new products, technology and marketing. These investments have enabled Jackson Hewitt to grow its tax preparation footprint and create partnerships to offer innovative related services to its nearly 2 million customers.

Roman Krislav, Bayside Managing Director, said, “We are proud to have supported CEO Alan Ferber and the talented Jackson Hewitt team during a critical transition period for both the Company and industry. Jackson Hewitt has emerged as the market leader in product innovation and overall customer value proposition. Our investments, coupled with management’s execution, have resulted in a successful outcome for management, Bayside, and its investors. We believe the Company has a bright future and wish Jackson Hewitt continued success with Corsair.”

22

Advocate Nina Olson and IRS Criminal Investigation chief Don Fort were among the speakers, along with one of Rettig’s partners at his law firm, Steven Toscher.

National Taxpayer Advocate Nina Olson (left) is interviewed by Diana Erbsen, a partner at DLA Piper, at the NYU Tax Controversy Forum

Olson noted that she plans to release her annual report to Congress on June 28, the same day that Rettig will be undergoing his confirmation hearing. She noted that she has regular conversations with Congress and sometimes her proposals make it into law. One taxpayer complained to her office about an erroneous tax levy that was being taken out of her individual retirement account since 1985, but there was a statute of limitations for restoring the funds. That has been partially fixed with legislation. “Something is resonating,” said Olson.

Her most important constituency, though, is IRS officials, and she will likely be working with Rettig if he’s confirmed. “We see IRS guidance before it’s published,” she said. “We spend a lot of time trying to look at those to prevent problems occurring, because guidance and instructions are just that. If you can get that right, you can avoid problems showing up later on.”

Olson said she has concerns with some provisions of the new tax law, like the new Section 199(A) deduction of qualified business income of pass-through entities, and she has been talking with the IRS’s Wage and Investment Division about how it is implemented. “I am very concerned about the spending of the IRS in implementing this,” she said. “We had the same thing with ACA and FATCA, just the IT side of it. We stop everything else in IT in order to deliver this. We just sort of dug ourselves out of that and started getting back to being able to pay attention to some things that affect all taxpayers, which we should be doing, and now we’re back to putting it on hold to be able to implement tax reform. At some point, you have to say the IRS has to have core people in IT who focus on the day-to-day stuff because we get further and further behind, and it’s pretty embarrassing.”

However, her powers are limited to issuing taxpayer assistance orders for specific cases and delegation orders for groups of taxpayers. Most recently she has been issuing orders related to the IRS’s new private debt collection program and passport revocation program, but her orders are often simply ignored

Ferber, CEO of Jackson Hewitt, said, “Bayside has provided tremendous support to Jackson Hewitt over the years. Bayside’s investments and guidance have enabled us to hone our product offering, real estate, marketing, and technology strategies to meet the specific needs of our customers, which has laid the groundwork for continued growth for years to come.”

Jackson Hewitt Tax Service Inc. is an innovator in the tax industry, with a mission to provide its hard-working clients access to simple, low-cost solutions to manage their taxes and tax refunds. Jackson Hewitt is devoted to helping clients get ahead with Maximum Refund and 100% Accuracy Guarantees. With close to 6,000 franchised and company-owned locations, including 3,000 in Walmart stores, and online and mobile tax solutions, Jackson Hewitt makes it convenient for clients to file their taxes.

Bayside Capital is the credit-oriented affiliate of H.I.G. Capital. Focused on middle market companies, Bayside invests across several segments of the primary and secondary debt capital markets with an emphasis on long term returns. With eight offices throughout the U.S. and Europe and over 300 investment professionals to draw upon, Bayside has the experience, resources, and flexibility required to provide capital solutions quickly, and the strategic and operational expertise to help support its investments.

IRS News

Big Changes Coming At the IRS with New Commissioner

The Senate Finance Committee plans to hold a confirmation hearing for the nominee for Internal Revenue Service commissioner, Charles “Chuck” Rettig, a Beverly Hills tax attorney.

If confirmed, Rettig would be replacing David Kautter, who is Assistant Secretary of the Treasury for Tax Policy in addition to filling in as acting commissioner of the IRS since the term of the last IRS commissioner, John Koskinen, ended last November. President Trump nominated Rettig as full-time commissioner back in. Rettig has worked for 35 years for the Beverly Hills law firm Hochman, Salkin, Rettig Toscher & Perez. Senate Finance Committee chairman Orrin Hatch, R-Utah, complained that it was taking a long time for Rettigto finish turning in his disclosure forms, but now that thepaperwork has been filed, the confirmation hearing has beenscheduled for Thursday, June 28. If confirmed, he will betasked with carrying out the wide-ranging Tax Cuts and JobsAct that Congress passed last December along with a set ofIRS reform legislation that was passed earlier this year.

Rettig’s nomination was announced by Hatch and also at the beginning of the morning session of New York University’s 10th annual Tax Controversy Forum. National Taxpayer

23

by the IRS.

“The problem with it is it’s a delegation order,” said Olson. “A lot of times, they are ignored, and I get back from the deputy commissioner a half-page order basically saying we’re not doing it because we say so. That’s not OK. That’s not an explanation.”

Olson is pleased, however, with the Taxpayer Bill of Rights that the IRS finally adopted in 2014 after she proposed for many years that it provide one. Even though the Taxpayer Bill of Rights basically just collected together a number of rights that were already enshrined in law, many taxpayers were unaware of them. Olson pointed out that before TBOR was adopted, only 11 percent of taxpayers knew they had any rights, but now it’s up to 76 percent. She would like to see them codified in Section 1 of the tax code.

Shortages in Criminal Investigation

Don Fort, chief of the IRS’s Criminal Investigation unit, discussed some of the challenges with the declining number of IRS employees in his division, including the closing of four field offices. To fill the gap, Criminal Investigation is starting to leverage data analytics technology like the federal government’s Palantir program.

“I am a tax and a CPA nerd so I am deep in the weeds on data and analytics, and I look at that stuff very closely,” he said. “We track the number of cases that we send over to the Department of Justice Tax Division. We monitor that closely. It’s one of the things we use to determine our success. Last year, we sent less than 800 cases that were authorized by the Department of Justice Tax Division on tax cases. That is a startling number. It may still seem like a lot, but if you break it down by 94 judicial districts and 25 (soon to be 21) field offices, it’s not a lot of cases. Historically if you go back, that number was much closer to 1,200 cases. When you think about that number, less than 800, that has to influence taxpayer behavior for the hundreds of millions of U.S. citizens that file tax forms.”

IRS Criminal Investigation chief Don Fort (right), is interviewed by Josh O. Ungermann, a partner at Meadows, Collier, Red, Cousins, Crouch & Ungerman, at the NYU Tax Controversy Forum

Years of budget cuts and attrition have thinned the ranks at the IRS, and Fort said there was still a hiring freeze going

on in his division, with some exceptions for high-ranking openings, as well as unpaid summer intern positions. “The staffing situation, like the rest of the IRS, is not great,” said Fort. “We are in the process of closing down four field offices. That doesn’t mean we’re pulling agents out of cities. It just means the number of agents we have can’t support the existing structure. Without some reinforcements, I fear that we’re going to have to continue along those lines. I refer to it as a perfect storm. In the last five years, we’ve lost a total of 500 special agents. That’s to retirement. It’s not them leaving for another agency or quitting. It’s folks that are eligible for retirement, and during that time, we’ve devoted a lot of our time to enforcing identity theft, about 18 percent of our time. So you have a lot of agents working on identity theft, a lot of agents unfortunately walking out the door, and no new resources coming in. It’s a challenge.”

Fort is hoping that data analytics technology can help with those overstretched resources. “The silver lining is when your resources are down, it forces you to look at every single corner of the organization for efficiency,” he said. “That’s why I’m really encouraged about some of the things with data analytics and some of the exciting work we are doing. I do think we’ve squeezed every possible efficiency as we can, getting as many agents as possible in back to work on cases. Using data analytics to select the cases we’re working on is one of the ways we’re doing this.”

He noted that the IRS has a staggering amount of data to analyze with all the millions of tax returns it receives, along with information from banks, giving it access to probably more data than any other government agency. The Palantir program is helping IRS Criminal Investigation cull through that data looking for areas of noncompliance, particularly in the area of international tax enforcement and employment taxes. The IRS has been able to reduce identity theft by 8 to 10 percent, which helps focus resources better. Fort said his division also has a close working relationship with the Department of Justice, while maintaining its independence. “Having that close relationship is critical,” he added.

After his speech, Accounting Today asked Fort about how some states are trying to work around the limits in the new tax law on deductibility of state and local taxes, which the IRS has indicated it would object to in future guidance, and whether Criminal Investigation might eventually get involved. He didn’t want to say anything specific on the workarounds, but noted, “No matter what new provisions of the tax law are out there, there are always going to be schemers out there trying to circumvent them.”

IRS Budgets $291M On Technology for Tax Reform

The Internal Revenue Service plans to spend close to $300 million to implement the new tax law, including approximately $20 million for an estimated 450 new forms, instructions and publications.

24

Prop Regs: All Info Returns Count Towards 250-return e-file threshold

IRS has issued proposed regs that would require all information returns, regardless of type, to be taken into account in determining whether a person meets the 250-return threshold and thus must file the returns electronically. The proposed regs would also require any person required to file information returns electronically to file corrected information returns electronically, regardless of the number of corrected information returns being filed.

Background. Code Sec. 6011(e)(1) grants IRS authority to prescribe regs determining which returns must be filed on magnetic media (which includes electronic filing, or "e-filing"). However, IRS is prohibited from requiring any person to file returns on magnetic media “unless such person is required to file at least 250 returns during the calendar year.” (Code Sec. 6011(e)(2)) Under Code Sec. 6011(e)(2)(B), in prescribing regs, IRS is to consider the taxpayer's ability to comply with the regs' requirements at a reasonable cost.

Reg. § 301.6011-2 requires persons filing 250 or more information returns (e.g., Forms W-2 and 1099-MISC) in a year to file the returns on magnetic media.

Reg. § 301.6011-2(c)(1)(i), Reg. § 301.6011-2(c)(1)(iii), and the Examples in Reg. § 301.6011-2(c)(1)(iv) provide that the 250-return threshold applies separately to each type of information return and each type of corrected information return filed. Therefore, under the existing rules, different types of forms are not aggregated for purposes of determining whether the 250-return threshold is satisfied ("non-aggregation rule").

Under Reg. § 301.6011-2(c)(2), the requirement to file electronically can be waived by IRS if the waiver request demonstrates hardship and provides that the principal factor in determining hardship will be the extent, if any, to which the cost of electronic filing exceeds the cost of filing on other media.

Code Sec. 6721 imposes penalties for failing to file correct or timely information returns.

Reason for change. As described by IRS in the Preamble to the prop regs, when the rules for determining the 250-return threshold were originally published, electronic filing was in the early stages of development, and the rules helped to reduce cost and ease burden on taxpayers in light of the existing limits on and accessibility to e-filing technology.

Since then, significant advances in technology have made electronic filing more prevalent and accessible—with approximately 98.5% of information returns filed electronically in tax year 2016—such that it is now less costly and most often easier than paper filing. Accordingly, IRS has determined that the non-aggregation rule is no longer necessary to relieve taxpayer burden and cost.

According to a spending plan posted by The Wall Street Journal, the IRS intends to update 140 of its computer systems to handle the Tax Cuts and Jobs Act. The agency is estimating it will require 542 additional hours of employee effort to modify its existing tax-processing systems to incorporate the many changes to tax credits, deductions and brackets, as well as establish new system functionality and workflows, manage programs and integrate services, and facilitate tax reform human capital planning, acquisitions, and financial planning. Congress set aside $320 million of the IRS's budget of $11.4 billion this year in order to handle the new tax law. The IRS is estimating that its customer service assistors will need to answer 4 million additional phone calls to maintain their current level of service, representing a 17 percent increase over fiscal year 2017.

Training and familiarizing employees to answer questions about the tax overhaul will be key. For taxpayer-facing employees who answer the phones and handle walk-in appointments at Taxpayer Assistance Centers, the IRS expects to conduct approximately 40,000 hours of training on the various provisions and changes at a cost of about $1.8 million. The estimate also includes costs for the IRS Chief Counsel to review the training materials and provide interpretative advice, the IRS noted.

The IRS also plans to conduct extensive outreach to help prepare small businesses and tax preparers, in addition to training its employees about the new tax rules. The IRS typically holds more than 1,000 outreach events a year to educate thousands of taxpayers and tax professionals. “We expect the number of events and participants to significantly increase as a result of tax reform,” said the IRS.

The IRS intends to do outreach through both traditional media and social media. The agency anticipates increased interest and participation at its main events this year. It noted that early registration at this summer’s IRS Nationwide Tax Forums is already running 10 to 15 percent ahead of last year. “We anticipate requests for face-to-face events will increase 25 to 30 percent, particularly after more published legal guidance comes out in the weeks and months ahead,” said the IRS.

In the meantime, the IRS is continuing to consolidate its processing centers in response to continued increases in electronic filing. According to a new report from the Treasury Inspector General for Tax Administration that was released, IRS management announced plans in 2016 to further consolidate Tax Processing Centers from five to two by the end of fiscal year 2024 as a result of the continued decreases in paper-filed tax returns. The IRS anticipates using the projected five-year cost savings of about $266 million to focus on taxpayer service, tax enforcement and information technology.

25

New proposed regs. The proposed regs would (i) remove the non-aggregation rule in Reg. § 301.6011-2(c)(1)(iii), and (ii) add a new paragraph to Reg. § 301.6011-2(b) providing that if a person is required to file a total of 250 or more information returns of any type covered by Reg. § 301.6011-2(b) during the calendar year, the person is required to file those information returns electronically. Corrected information returns would not be taken into account in determining whether the 250-return threshold is met. (Prop Reg § 301.6011-2(b)(4))

The proposed regs would also provide that corrected information returns covered by Reg. § 301.6011-2(b) must be filed electronically if the information returns originally filed for the calendar year are required to be filed electronically. (Prop Reg § 301.6011-2(b)(5))

A corresponding change would also be made to Reg. § 301.6721-1(a)(2)(ii) (regarding the penalty for failure to file correct or timely information returns) to remove references to the rules in effect prior to the above changes. (Prop Reg § 301.6721-1(a)(2)(ii))

IRS noted that the existing regs, under which persons who are required to file electronically may request a waiver of that requirement, would remain unchanged. (Preamble to prop regs)

Effective date. The proposed regs are proposed to be effective on the date they are published as final regs. However, to give information-return filers sufficient time to comply, they will not apply to information returns required to be filed before Jan. 1, 2019.

Accordingly, Prop Reg § 301.6011-2(b)(4) and Prop Reg § 301.6721-1(a)(2)(ii) are proposed to be effective for information returns required to be filed after Dec. 31, 2018, and Prop Reg § 301.6011-2(b)(5) is proposed to be effective for correctedinformation returns filed after Dec. 31, 2018. (Prop Reg §301.6011(g)(2))

The corresponding change to the regs governing failure to file correct or timely information returns is also proposed to be effective for information returns required to be filed after Dec. 31, 2018. (Prop Reg § 301.6721-1(h))

More Than 2 Million ITINs to Expire This Year; Renew Soon to Avoid Refund Delays

With more than 2 million Individual Taxpayer Identification Numbers (ITINs) set to expire at the end of 2018, the Internal Revenue Service today urged affected taxpayers to submit their renewal applications soon to beat the rush and avoid refund delays next year.

In the third year of the renewal program, the IRS has increased staffing to handle the anticipated influx of W-7 applications for renewal. This third wave of expiring ITINs is expected to affect as many as 2.7 million taxpayers. To help taxpayers, the renewal process for 2019 is beginning earlier than last year.“Even though the April tax deadline has passed, the IRS

encourages people affected by these ITIN changes to take steps as soon as possible to prepare for next year’s tax returns,” said Acting IRS Commissioner David Kautter. “Acting now to renew ITIN numbers will help taxpayers avoid delays that could affect their tax filing and refunds in 2019. The IRS appreciates the help from partner groups across the nation sharing this information with those with expiring ITIN numbers.”

Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2018. In addition, ITINs with middle digits 73, 74, 75, 76, 77, 81 or 82 will also expire at the end of the year. These affected taxpayers who expect to file a tax return in 2019 must submit a renewal application as soon as possible.

ITINs are used by people who have tax filing or payment obligations under U.S. law but who are not eligible for a Social Security number. ITIN holders who have questions should visit the ITIN information page on IRS.gov and take a few minutes to understand the guidelines.

Once again, the IRS is launching a nationwide education effort to share information with ITIN holders. To help taxpayers, the IRS offers a variety of informational materials, including flyers and fact sheets, available in several languages on IRS.gov.The IRS will continue to work with partner groups and others in the ITIN community to share information widely about these important changes.

Who should renew an ITIN

• Taxpayers whose ITIN is expiring and who need to filea tax return in 2019 must submit a renewal application.Others do not need to take any action. ITINs with the middledigits 73, 74, 75, 76, 77, 81 or 82 (For example: 9NN-73-NNNN) need to be renewed even if the taxpayer has usedit in the last three years. The IRS will begin sending theCP-48 Notice, You must renew your Individual TaxpayerIdentification Number (ITIN) to file your U.S. tax return, inearly summer to affected taxpayers. The notice explainsthe steps to take to renew the ITIN if it will be included ona U.S. tax return filed in 2019. Taxpayers who receive thenotice after taking action to renew their ITIN do not needto take further action unless another family member isaffected.

• ITINs with middle digits of 70, 71, 72, 78, 79 or 80 havepreviously expired. Taxpayers with these ITINs can stillrenew at any time.

• Spouses or dependents residing inside the UnitedStates should renew their ITINs. However, spouses anddependents residing outside the United States do not needto renew their ITINs unless they anticipate being claimedfor a tax benefit (for example, after they move to the UnitedStates) or if they file their own tax return. That’s becausethe deduction for personal exemptions is suspended for taxyears 2018 through 2025 by the Tax Cuts and Jobs Act.

26

Consequently, spouses or dependents outside the United States who would have been claimed for this personal exemption benefit and no other benefit do not need to renew their ITINs this year.

Family option remains available

Taxpayers with an ITIN that has middle digits 73, 74, 75, 76, 77, 81 or 82, as well as all previously expired ITINs, have the option to renew ITINs for their entire family at the same time. Those who have received a renewal letter from the IRS can choose to renew the family’s ITINs together, even if family members have an ITIN with middle digits that have not been identified for expiration. Family members include the tax filer, spouse and any dependents claimed on the tax return.

How to renew an ITIN

To renew an ITIN, a taxpayer must complete a Form W-7 and submit all required documentation. Taxpayers submitting a Form W-7 to renew their ITIN are not required to attach a federal tax return. However, taxpayers must still note a reason for needing an ITIN on the Form W-7. See the Form W-7 instructions for detailed information.

There are three ways to submit the W-7 application package. Taxpayers can:

• Mail the Form W-7, along with original identificationdocuments or copies certified by the agency that issuedthem, to the IRS address listed on the Form W-7 instructions.The IRS will review the identification documents and returnthem within 60 days.

• Work with Certified Acceptance Agents (CAAs)authorized by the IRS to help taxpayers apply for anITIN. CAAs can authenticate all identification documentsfor primary and secondary taxpayers, verify that an ITINapplication is correct before submitting it to the IRS forprocessing and authenticate the passports and birthcertificates for dependents. This saves taxpayers frommailing original documents to the IRS.

• In advance, call and make an appointment at adesignated IRS Taxpayer Assistance Center to haveeach applicant’s identity authenticated in person insteadof mailing original identification documents to the IRS.Applicants should bring a completed Form W-7 along withall required identification documents. See the TAC ITINauthentication page for more details.

Avoid common errors now and prevent delays next year

Federal tax returns that are submitted in 2019 with an expired ITIN will be processed. However, certain tax credits and any exemptions will be disallowed. Taxpayers will receive a notice in the mail advising them of the change to their tax return and their need to renew their ITIN. Once the ITIN is renewed, applicable credits and exemptions will be restored and any refunds will be issued.

Additionally, several common errors can slow down and hold some ITIN renewal applications. These mistakes generally center on missing information or insufficient supporting documentation, such as name changes. The IRS urges any applicant to check over their form carefully before sending it to the IRS.

As a reminder, the IRS no longer accepts passports that do not have a date of entry into the U.S. as a stand-alone identification document for dependents from a country other than Canada or Mexico, or dependents of U.S. military personnel overseas. The dependent’s passport must have a date of entry stamp, otherwise the following additional documents to prove U.S. residency are required:

• U.S. medical records for dependents under age 6,

• U.S. school records for dependents under age 18, and

• U.S. school records (if a student), rental statements,bank statements or utility bills listing the applicant’s nameand U.S. address, if over age 18.

IRS continues to encourage more applicants for the Acceptance Agent Program to expand ITIN services

To increase the availability of ITIN services nationwide, particularly in communities with high ITIN usage, the IRS is actively recruiting Certified Acceptance Agents and accepting applications year-round. Interested individuals are encouraged to review all CAA program changes and requirements and submit an application to become a Certified Acceptance Agent.

Interest rates remain the same in the third quarter of 2018

The Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning July 1, 2018, as they were in the quarter that began on April 1. The rates will be:

• 5 percent for overpayments, 4 percent in the case of acorporation;

• 2.5 percent for the portion of a corporate overpaymentexceeding $10,000;

• 5 percent for underpayments; and

• 7 percent for large corporate underpayments.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2

27

immediately. This will allow the taxpayer to make arrangements to pay the liability, instead of having IRS proceed with the levy. Taxpayers file an administrative wrongful levy claim by sending a letter to the IRS Advisory Group in the area where the levy was made. Recently revised IRS Publication 4528 contains information on how to file an administrative wrongful levy claim.

IRS cautions employers and other parties that receive an IRS levy to comply with the levy or they may be subject to personal liability.

IRS Creates Webpage On Understanding "Letter 227"

IRS has created a webpage on understanding "Letter 227," which certain applicable large employers (ALEs) may receive in connection with the assessment of employer shared responsibility penalties under Code Sec. 4980H.

Background. Code Sec. 4980H, which was added by the Affordable Care Act (ACA, or Obamacare) provides that an ALE (generally, an employer that employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year) is required to pay an assessable payment if it doesn't offer health coverage to its full-time employees (generally, employees averaging at least 30 hours of service per week during a given month) and at least one full-time employee purchases coverage through the Marketplace and receives the Code Sec. 36B premium tax credit. Code Sec. 4980H is often referred to as the “employer shared responsibility” or “employer mandate” provision.

IRS uses Letter 226-J to notify an ALE of a proposed penalty assessment. ALEs have 30 days to respond, using Form 14764 to indicate their agreement or disagreement with the proposed penalty amount.

Letter 227 acknowledges the ALE’s response to Letter 226-J, and explains the outcome of IRS’s review and the next steps available to fully resolve the penalty assessment.

There are five different versions of the letter:

• Letter 227-J states that the proposed penalty amountwill be assessed because the ALE agreed with the proposedpenalty. No response is required to this version of the letter,and the case is deemed closed.

• Letter 227-K shows that the penalty amount has beenreduced to zero. No response is required to this version ofthe letter, and the case is deemed closed.

• Letter 227-L shows that the proposed penalty amounthas been revised. This version of the letter includes anupdated Form 14765 (Employee Premium Tax Credit (PTC)Listing) and revised calculation table. The ALE can agreewith the revised penalty amount, request a meeting withIRS, or appeal the determination.

percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus 0.5 of a percentage point.

The interest rates announced today are computed from the federal short-term rate determined during April 2018 to take effect May 1, 2018, based on daily compounding.

Info Release Highlights Recent Changes to Rules for Challenging Wrongful IRS Levies

IR 2018-126, 5/25/18

In an Information Release, IRS has summarized the rules for challenging wrongful IRS levies, with particular emphasis on the changes to those rules made by the Tax Cuts and Jobs Act of 2017 (TCJA; P.L. 115-97, 12/22/2017).

Background. Individuals who fail to pay their federal income taxes may have their wages and other income seized by IRS via a tax levy. (Code Sec. 6331)

IRS is authorized to return property that has been wrongfully levied upon. (Code Sec. 6343(b)) Under pre-TCJA law, monetary proceeds from the sale of levied property could generally be returned within nine months of the date of the levy.

The TCJA provides that, for levies made after Dec. 22, 2017—and for levies made on or before Dec. 22, 2017, if the 9-month period has not expired as of Dec. 22, 2017—the 9-month period during which IRS may return the monetary proceeds from the sale of property that has been wrongfully levied upon is extended to two years. (Code Sec. 6343(b))

IRS summarizes wrongful levy rules. IRS has now summarized the wrongful levy rules as changed by the TCJA.

If an administrative claim for return of the property is made within the 2-year period, the 2-year period for bringing suit is extended for 12 months from the date of filing the claim, or for six months from the disallowance of the claim, whichever is shorter. The change in law applies to levies made after Dec. 22, 2017, and on or before that date if the previous 9-month period hadn’t yet expired.

The timeframes apply when IRS has already sold the property it levied. As under prior law, there is no time limit for the administrative claim if IRS still has the property it levied. Also, as under prior law, taxpayers may not file a wrongful levy claim or bring a wrongful levy suit, as the law only applies to those other than the taxpayer. Usually, wrongful levy claims involve situations where an individual or business believes that either the property belongs to them, or they have a superior claim to the property that IRS is not recognizing.

IRS advises taxpayers who received a Final Notice of Intent to Levy and Notice of Your Right to a Hearing to contact IRS

28

• Letter 227-M shows that the penalty amount did notchange. This version of the letter also includes an updatedForm 14765 and revised calculation table. The ALE canagree with the revised penalty amount, request a meetingwith IRS, or appeal the determination.

• Letter 227-N acknowledges the decision reached bythe IRS appeals office, and shows the resulting penaltyamount. No response is required to this version of theletter, and the case is deemed closed.

Only Letters 227-L and 227-M call for a response, which must be provided by the date stated in the letter. IRS stresses that Letter 227 is not a bill. Notice CP220J is used to collect the employer shared responsibility penalty payment.

With the 2015 penalty assessment process underway, it is important for ALEs and their advisors to be on close lookout for all correspondence from IRS relating to employer shared responsibility. In addition, it is advisable to confirm that copies of previously filed Forms 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns) and 1095-C (Employer-Provided Health Insurance Offer and Coverage) are readily available to expedite a response to IRS.

Scam Prevention; IRS Sets Out How It Does and Does Not Contact Taxpayers

Fact Sheet 2018-12, May 31, 2018

In order to help taxpayers avoid scams in which criminals impersonate IRS employees, IRS has issued a Fact Sheet in which it sets out the ways that it does and does not contact taxpayers.

Background. For several years now, IRS has been publishing, in various formats, information and warnings about scams that involve taxpayers and IRS and about how taxpayers can protect themselves from such scams.

Ways in which legitimate IRS employees contact taxpayers. Here are various ways that legitimate IRS employees contact taxpayers.

IRS initiates most contacts with taxpayers through regular mail delivered by the U.S. Postal Service. However, there are special circumstances in which IRS will call or come to a home or business, such as:

• When a taxpayer has an overdue tax bill,

• To secure a delinquent tax return or a delinquentemployment tax payment, or

• To tour a business, for example, as part of an audit orduring criminal investigations.

Even then, taxpayers will generally first receive a letter or

sometimes more than one letter, often called notices, from IRS in the mail.

IRS employees may make official and sometimes unannounced visits to discuss taxes owed or returns due as a part of an audit or investigation. Taxpayers generally will first receive a letter or notice from IRS in the mail. If a taxpayer has an outstanding federal tax debt, IRS will request full payment but will provide a range of payment options.

All IRS representatives will always provide their official credentials, called a pocket commission and a HSPD-12 card. The HSPD-12 card is a government-wide standard form of reliable identification for federal employees and contractors. Taxpayers have the right to see these credentials. IRS employees can provide an additional method to verify their identification. Upon request, they're able to provide a toll-free employee verification telephone number.

IRS employees may call taxpayers to set up appointments or discuss audits but not without first attempting to notify taxpayers by mail.

Calls from IRS-contracted private collection agencies. IRS assigns certain overdue tax debts to private debt collection agencies (PCAs). Here are the facts about this program:

…IRS will send a letter to the taxpayer letting them know IRS has turned their case over to one of the four PCAs. The PCA will also send the taxpayer a letter confirming assignment of the taxpayer's account to the agency.

…IRS will assign a taxpayer's account to only one of these agencies, never to all four. IRS authorizes no other private groups to represent IRS.

…It's important to know that PCA representatives: will identify themselves and will ask for payment to “U.S. Treasury”; will not ask for payment on a prepaid debit or gift card; and will not take enforcement action.

Ways in which legitimate IRS employees will not contact taxpayers. Here are types of contacts that IRS will not make.

IRS does not:

• Demand that people use a specific payment method,such as a prepaid debit card, gift card or wire transfer. IRSwill not ask for debit or credit card numbers over the phone.People who owe taxes should make payments to theU.S. Treasury or review IRS.gov/payments for IRS onlineoptions.

• Demand immediate tax payment. Normalcorrespondence begins with a letter in the mail andtaxpayers can appeal or question what they owe. Alltaxpayers are advised to know their rights as a taxpayer.

• Threaten to bring in local police, immigration officers

29

or other law enforcement agencies to arrest people for not paying. IRS also cannot revoke a license or immigration status. Threats like these are common tactics scam artists use to trick victims into believing their schemes.

Collection employees won't demand immediate payment to a source other than “U.S. Treasury.”

IRS employees conducting criminal investigations are federal law enforcement agents and will never demand money.

Scammers may, but IRS will not, ask taxpayers about refunds or filing status or ask them to confirm personal information, order transcripts, or verify personal identification numbers.

IRS does not use email, text messages, or social media to discuss tax debts or refunds with taxpayers.

Truckers Can Electronically File Form 2290, Heavy Highway Vehicle Use Tax Return

The tax year for Form 2290 is July 1 through June 30. For vehicles first used on a public highway in July, file Form 2290 between July 1 and August 31.

You don’t need to visit an IRS office to file Form 2290. Most truckers can file Form 2290 online and pay any tax due electronically. Take advantage of filing Form 2290 electronically and:

•Electronically file and electronically pay 24/7 withoutvisiting or calling the IRS.

•Print the watermarked Schedule 1 within 24 hours of filingand provide it to the Department of Motor Vehicles in yourstate.

•Find Form 2290 e-file providers with prices starting at lessthan $10.

You must e-file your Form 2290 if you are filing for 25 or more vehicles, but we recommend e-filing for anyone required to file Form 2290 and who wants to receive quick delivery of their watermarked Schedule 1. With e-file, you’ll get it almost immediately after we accept your e-filed Form 2290.

All Taxpayer Assistance Centers provide service by appointment.

Taxpayers Should Look Out for Disaster Scams During Hurricane Season

With hurricane season running through November 30, taxpayers should remember that criminals and scammers often try to take advantage of generous taxpayers who want to help disaster victims. Everyone should be vigilant, because scams often pop up after a hurricane.

These disaster scams normally start with unsolicited contact

in several ways. The scammer contacts their possible victim by telephone, social media, email or in-person. Scammers also use a variety of tactics to lure information out of people.

Here are some things for people to know so they can recognize a scam and avoid becoming a victim:

• Some thieves pretend they are from a charity. Theydo this to get money or private information from well-intentioned taxpayers.

• Bogus websites use names that are similar to legitimatecharities. They do this scam to trick people to send moneyor provide personal financial information.

• Scammers even claim to be working for ― or on behalfof ― the IRS. The thieves say they can help victims filecasualty loss claims and get tax refunds.

• Disaster victims can call the IRS toll-free disasterassistance telephone number at 866-562-5227. Phoneassistors will answer questions about tax relief or disaster-related tax issues.

• Taxpayers who want to make donations can getinformation to help them on IRS.gov. The Tax ExemptOrganization Search helps users find or verify qualifiedcharities. Donations to these charities may be tax-deductible.• Taxpayers should always contribute by check or creditcard to have a record of the tax-deductible donation.

• Donors should not give out personal financialinformation to anyone who solicits a contribution. Thisincludes things like Social Security numbers or credit cardand bank account numbers and passwords.

IRS Issues Draft 2019 Form W-4 and Instructions

IRS has issued a draft version of Form W-4 (Employee's Withholding Allowance Certificate) and instructions for that form for the 2019 tax year. The form is more complex than in previous years due to tax law changes in the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017) that nearly doubled the standard deduction, eliminated personal exemptions, increased the child tax credit, limited deductions for state and local taxes, limited the deduction for home mortgage interest, and changed the tax rates and brackets.

Instructions, help in completing the form. IRS states that if the employee has a simple tax situation, the employee may be able to use the brief instructions on the back of the W-4 form. Otherwise, they will need to look at the detailedW-4 instructions which are 11 pages long. IRS also advisesemployees that they can use the IRS Withholding Calculatorto complete the form.

The form itself.The draft version of the 2019 Form W-4 is now one full page with 13 lines. The 2018 Form W-4 only has 10 lines. The 2019 draft Form W-4 no longer includes a personal

30

A spokesperson for IRS said that IRS is working on examples and other guidance to help employees make the calculation.

30-day comment period. IRS is giving taxpayers 30 days tocomment on the draft form.

Proposed reliance regs restore prior rules on allocating partnership liabilities in disguised sales

Preamble to Prop Reg REG-131186-17; Prop Reg § 1.707-5, Prop Reg § 1.707-9

IRS Notice of Proposed Rulemaking: Proposed Removal of Temporary Regulations on a Partner's Share of a Partnership Liability for Disguised Sale Purposes (6/18/2018)

IRS has issued proposed regs under Code Sec. 707 regarding allocations of partnership liabilities for disguised sale purposes. The proposed regs would generally withdraw and remove earlier proposed and temporary regs issued in 2016 and reinstate the final regs that were previously in effect.

Background—disguised sales. Under Code Sec. 707(a)(2)(B), the so-called "disguised sale" rule, if transfers of property between a partner or partners and a partnership, when viewed together, are properly characterized as a sale or exchange of property, the transfers are treated as either transactions between the partnership and one who is not a partner or between two or more partners acting other than in their capacity as partners.

Under the rules in effect prior to the issuance of the 2016 regs (designated as "former" regs throughout this article), a transfer of property by a partner to a partnership, followed by a transfer of money or other consideration from the partnership to the partner, was, with limited exceptions, generally treated as a sale of property by the partner to the partnership if, based on all the facts and circumstances, the transfer of money or other consideration would not have been made but for the transfer of the property and, for non-simultaneous transfers, the subsequent transfer is not dependent on the entrepreneurial risks of the partnership. (Former Reg. § 1.707-3)

Background—determining a partner's share of liability for disguised sale purposes. In determining a partner's share of a partnership liability for disguised sale purposes, the former regs under Code Sec. 707 prescribed separate rules for a partnership's recourse liability and a partnership's nonrecourse liability (i.e., a liability for which no partner or related person bears the conomic risk of loss).

Under former Reg. § 1.707-5(a)(2)(i), a partner's share of a partnership's recourse liability equalled the partner's share of the liability under Code Sec. 752 and the regs thereunder. A partnership liability was a recourse liability under Code Sec. 707 to the extent that the obligation was a recourse liability under Reg. § 1.752-1(a)(1). Under former Reg. § 1.707-5(a)(2)(ii), a partner's share of a partnership's nonrecourse liability

allowance worksheet. Lines 1-4 on the draft version of the 2019 form are the same as on the 2018 form (name, address, Social Security Number, line 4 box that should be checked if the employee's last name differs from that shown on the employee's Social Security card).

Employees enter on line 5 the amount, if any, of nonwage income not subject to withholding, such as interest and dividends. On line 6, they enter the amount, if any, of itemized and other deductions. On line 7, they enter the amount, if any, of tax credits, such as the child tax credit.

Taxpayers who have multiple jobs. Line 8 should only be completed if the employee: a) has multiple jobs at the same time; or b) files as married filing jointly and both the employee and the employee's spouse work. Employees who complete this line should enter the total wages for all other jobs that are lower paying than the job for which they are filing the Form W-4. Employees should follow this approach on Form W-4for each job in the household. The employee should leaveline 8 blank for the lowest paying job. The instructions on theback of the 2019 draft Form W-4 have an example on how tocomplete lines 5-8 of Form W-4 for a couple that has threejobs.

On line 9, employees enter any additional income tax they want withheld from their pay each pay period.

IRS notes that if employees don't want to complete lines 5, 6, 7, or 8 on Form W-4, they can instead enter a dollar amount from the IRS Withholding Calculator .

Exemption from withholding. Line 10 is completed by employees who wish to claim an exemption from withholding. Employees may claim an exemption from withholding for 2019 if: (1) in 2018, they had a right to a refund of all federal income tax withheld because they had no tax liability, and (2) in 2019, they expect a refund of all federal income tax withheld because they expect to have no tax liability.

Employer information. Employers complete line 11 (employer name) and line 13 (Employer identification number, or EIN) of Form W-4 if they are sending the form to IRS. They must complete lines 11-13 if they are sending the form to the State Directory of New Hires.

June 7 payroll industry telephone conference. A spokesperson for IRS said on the June 7 payroll industry telephone conference call that Form W-4 is being redesigned for 2019 to fully implement the changes in the TCJA and to improve withholding accuracy. The focus of the form is moving away from the number of withholding allowances to reporting adjustments to income more directly. He noted that employees will not be required to amend W-4 forms already on file, but that IRS will encourage employees to complete a new form.

It was brought to IRS's attention during the payroll industry telephone conference call that it will be difficult to do a 2019 withholding tax calculation after the 2019 Form W-4 is finalized unless IRS releases 2019 withholding tables as well.

31

While IRS received comments in favor of the approach taken by the temporary regs, it also received comments that were critical of that approach being adopted by temporary regs, without giving taxpayers the ability to comment prior to their going into effect.

For more details on the 2016 temporary, final and proposed regs under Code Sec. 707 and Code Sec. 752 on when liabilities are treated as recourse, including rules on so-called "bottom dollar" guarantees.

Background—regulatory burden. In 2017, President Trump adopted Executive Order (EO) 13789, “Executive Order on Identifying and Reducing Tax Regulatory Burdens,” which directed the Secretary to review all significant tax regs issued on or after Jan. 1, 2016, and to take concrete action to alleviate the burdens of regs that (i) impose an undue financial burden on U.S. taxpayers; (ii) add undue complexity to the Federal tax laws; or (iii) exceed IRS's statutory authority.

The temporary regs described above were among those identified in Notice 2017-38, 2017-30 IRB 147, as meeting these criteria.

In a subsequent report, IRS stated that the approach taken in the temporary regs merited "further study," that such a change should be "studied systematically," and that IRS would consider whether they should be removed and withdraw.

IRS reinstates prior rules. IRS is now proposing to (i) withdraw the 2016 proposed regs issued under Code Sec. 707, (ii) remove the 2016 temporary regs issued under Code Sec. 707, and (iii) reinstate the prior rules under former Reg. § 1.707-5(a)(2), as previously in effect. (The 2016 proposed regs under Code Sec. 752, and the 2016 final and temporary regs regarding "bottom dollar" guarantees, still remain in effect.)Accordingly, in determining a partners’ share of a partnership liability for disguised sale purposes, the proposed regs would adopt the rules set out in former Reg. §1.707-5(a)(2) for a partnership’s recourse liability and a partnership’snonrecourse liability.

Prop Reg § 1.707-5(a)(2)(i) would reinstate former Reg. § 1.707-5(a)(2)(i) and would provide that a partner’s share of a partnership’s recourse liability would equal the partner’s share of the liability under Code Sec. 752 and the regs thereunder. A partnership liability is a recourse liability to the extent that the obligation is a recourse liability under Reg. § 1.752-1(a)(1).

And, Prop Reg § 1.707-5(a)(2)(ii) would restore former Reg. §1.707-5(a)(2)(ii) and thus would provide that partner’s shareof a partnership’s nonrecourse liability is determined by applying the same percentage used to determine the partner’s share of the excess nonrecourse liability under Reg. § 1.752-3(a)(3) (see below).

In addition, former Reg. § 1.707-5(a)(2)(i) and former Reg. § 1.707-5(a)(2)(ii) provided that a partnership liability isa recourse or nonrecourse liability to the extent that theobligation would be a recourse liability under Reg. § 1.752-

was determined by applying the same percentage used to determine the partner's share of the "excess nonrecourse liabilities" under Reg. § 1.752-3(a)(3)) (see below).

Background—allocation of Section 752 excess nonrecourse liabilities.Reg. § 1.752-3(a)(3) provides various methods to determine a partner's share of excess nonrecourse liabilities (i.e., nonresource liabilities that are not allocated to partners under Reg. § 1.752-3(a)(1) and Reg. § 1.752-3(a)(2)). Under one method, a partner's share of excess nonrecourse liabilities of the partnership is determined in accordance with the partner's share of partnership profits, which takes into account all facts and circumstances relating to the economic arrangement of the partners. For this purpose, the partnership agreement may specify the partners' interests in partnership profits so long as the interests so specified are reasonably consistent with allocations (that have substantial economic effect under the Code Sec. 704(b) regs) of some other significant item of partnership income or gain (the “significant item” method).

Alternatively, excess nonrecourse liabilities may be allocated among partners in a manner that deductions attributable to those liabilities are reasonably expected to be allocated (the “alternative method”). Additionally, the partnership may first allocate an excess nonrecourse liability to a partner up to the amount of built-in gain that is allocable to the partner on Code Sec. 704(c) property (as defined under Reg. § 1.704-3(a)(3)(ii)) or property for which reverse Code Sec. 704(c) allocations are applicable (as described in Reg. § 1.704-3(a)(6)(i)) where such property is subject to the nonrecourse liability, to the extent that such built-in gain exceeds the gain described in Reg. § 1.752-3(a)(2) with respect to such property (additional method). The significant item method, alternative method, and additional method do not apply in determining a partner's share of a liability for disguised sale purposes. (Reg. § 1.704-3(a)(3)(ii))

Background—2016 regs. In October 2016, IRS issued final, temporary, and proposed regs concerning the allocation of liabilities for Code Sec. 707 purposes. In general, the temporary regs adopted a new approach under which: (i) a partner had to apply the same percentage used to determine the partner’s share of excess nonrecourse liabilities under Reg. § 1.752-3(a)(3) (with certain limitations; see below) in determining the partner’s share of all partnership liabilities for disguised sale purposes; and (ii) a partner’s share of a partnership liability for Code Sec. 707 purposes could not exceed the partner's share of the partnership liability under Code Sec. 752 and applicable regs.

Reg. § 1.752-3(a)(3) provides various methods to determine a partner's share of excess nonrecourse liabilities, but specifies that certain of these methods do not apply in determining a partner's share of a liability for disguised sale purposes. For that purpose, a partner’s share of an excess nonrecourse liability for disguised sale purposes is determined only in accordance with the partner’s share of partnership profits and by taking into account all facts and circumstances relating to the economic arrangement of the partners.

32

1(a)(1) or a nonrecourse liability under Reg. § 1.752-1(a)(2), respectively, if the liability was treated as a partnership liability for purposes of Code Sec. 752. IRS is reinstating these rules (Prop Reg § 1.707-5(a)(2)(i); Prop Reg § 1.707-5(a)(2)(ii)), but cautions in the Preamble that it is continuing to study the issue of the effect of such contingent liabilities with respect to Code Sec. 707, as well as other sections of the Code.

IRS is also proposing to reinstate Examples 2, 3, 7, and 8 under former Reg. § 1.707-5(f), with an amendment in Example 3 reflecting a provision in the 2016 final regs under Code Sec. 707. (Prop Reg § 1.707-5(f))

Applicability date/reliance. The 2016 temporary regs under Code Sec. 707 are proposed to be removed 30 days following the date the new proposed regs are published as final regs.

The amendments to Reg. § 1.707-5 are proposed to apply to any transaction with respect to which all transfers occur on or after 30 days following the date the new proposed regs are published as final regs in the Federal Register, but a partnership and its partners may apply the rules in the proposed regs in lieu of the 2016 temporary regs under Code Sec. 707 to any transaction with respect to which all transfers occur on or after Jan. 3, 2017. (Prop Reg § 1.707-9(a)(4))

Guidance Instructs IRS Attorneys On Sec. 6751(b) Penalty Approval Issues

Chief Counsel Notice 2018-006

In a Chief Counsel Notice (CCN), IRS has advised Chief Counsel attorneys on how to address compliance with Code Sec. 6751(b) when handling penalties in litigation, as well as how to proceed in cases where a penalty has already progressed beyond the point where compliance with the requirements set out in the CCN are practical.

Background. Under Code Sec. 7491(c), IRS has the burden of production (i.e., to come forward initially with evidence) in any court proceeding with respect to the liability of any individual for any penalty imposed by the Code.

Under Code Sec. 6751(a), IRS must provide information about any penalty it imposes under the Code. Specifically, with each notice of a penalty, IRS must include information with respect to the name of the penalty, the Code section under which the penalty is imposed, and a computation of the penalty. Under Code Sec. 6751(b)(1), no penalty can be assessed "unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate."

The Tax Court has held that compliance with Code Sec. 6751(b)(1) is appropriately considered in a deficiency proceeding, and showing such compliance is part of IRS's burden of production under Code Sec. 7491(c). (Graev, (2017) 149 TC No. 23, see "Tax Court determined that Code Sec. 6751 procedural requirements were met"). Under Code

Sec. 7491(c), the burden of production includes evidence of written supervisory approval of penalties as required by Code Sec. 6751(b)(1).

General instruction to IRS attorneys. The CCN instructs counsel attorneys not to dispute whether compliance with Code Sec. 6751(b)(1) is part of IRS’s burden of production if Code Sec. 7491(c) places that burden on IRS. Counsel attorneys should submit evidence of compliance with Code Sec. 6751(b)(1) to satisfy the burden of production.

In cases to which Code Sec. 7491(c) does not apply because the taxpayer is not an individual, IRS does not have the burden of production. (Dynamo Holdings, L.P., (2018) 150 TC No. 10) Nonetheless, the CCN advised that the best practice in these cases is to submit evidence of compliance with Code Sec. 6751(b)(1) so that the burden issue does not need to be litigated at the circuit court level or does not arise in a subsequent CDP proceeding.

If there is no evidence sufficient to meet the burden of production, then Counsel attorneys are instructed to concede the penalty. If there is doubt as to whether the evidence is sufficient to show compliance with Code Sec. 6751(b)(1), Counsel attorneys should coordinate with IRS's Procedure and Administration division.

Case-specific guidance on Sec. 6751(b)(1). The CCN explained how Counsel attorneys should approach compliance with Code Sec. 6751(b)(1) in a variety of cases, including:

…Deficiency cases. In any Tax Court deficiency case in which a penalty is at issue and is not excepted from supervisory approval under Code Sec. 6751(b)(2), attorneys must submit evidence of compliance (see below) with Code Sec. 6751(b)(1), even if the taxpayer does not raise the issue. Attorneys should not argue that approval of a penalty appearing in a statutory notice of deficiency may be obtained from IRS after the statutory notice is mailed.

If a penalty was not included in a statutory notice of deficiency, an attorney may raise a penalty in the answer or amended answer, in which case (i) the attorney’s immediate supervisor must sign the answer or amended answer, and (ii) the answer or amended answer must identify the supervisor’s signature as the written supervisory approval of the attorney’s initial determination pursuant to Code Sec. 6751(b)(1).

If an attorney reviews a statutory notice of deficiency before it is issued and recommends that a penalty not currently in the statutory notice of deficiency should be included, the attorney should obtain approval from their immediate supervisor, preferably in the form of a short separate memorandum signed by the supervisor, to memorialize the initial penalty recommendation and approval. This separate memorandum should be provided to the examiner and should include a statement identifying both the individual who made the initial determination and his or her immediate supervisor. Further, the attorney should advise the employee who receives the attorney’s recommendation to document the acceptance of it

33

partners of the partnership; and if the penalty is not included in the FPAA, it may be raised upon answer (or amended answer) following the same procedures as in deficiency cases (above). Attorneys should argue that supervisory approval obtained at the partnership level (before the FPAA is mailed to the tax matters partner) is sufficient evidence of compliance with Code Sec. 6751(b) in subsequent partner-level proceedings.

If taxpayers bring a TEFRA proceeding in a district court or the Court of Federal Claims and a Counsel attorney determines that a penalty should be assessed and prepares a defense letter requesting that the Department of Justice (DOJ) raise a penalty in a counterclaim, the attorney’s immediate supervisor must approve the penalty. Approval may be granted by having the attorney prepare, and the supervisor sign, the defense letter, which expressly states that the supervisor’s signature constitutes the written approval of the attorney’s initial determination under Code Sec. 6751(b)(1). Similar to deficiency cases, the best practice is for the attorney to prepare, and the attorney’s immediate supervisor to sign, a short separate memorandum memorializing the penalty approval.

…Refund cases & DOJ collection referrals. Attorneys who write defense letters to the DOJ in refund cases must address in the letter applicability and compliance with Code Sec. 6751 and make sure that any written approval is contained in the administrative file. If possible, the letter should identify the document constituting the written supervisory approval. Attorneys should also address whether the Code Sec. 6751(b)(1) argument was raised in the administrative claim for refund,as the "variance doctrine" (i.e., the rule that a refund suit can'tbe brought on a ground that IRS didn't have an opportunityto consider at the administrative level) may bar the taxpayerfrom raising the issue for the first time in a refund suit. (MalletteBros. Const. Co., Inc. v. U.S., (CA 5 1983) 51 AFTR 2d 83-660)

Attorneys who refer penalty liabilities for collection to the DOJ must include the same information as specified above for refund suits. If the DOJ wishes to assert penalties as an offset to refund claims, attorneys should advise that Code Sec. 6751(b)(1) is not applicable to an offset defense because, under the principles of Lewis v. Reynolds, (Sup Ct 1932) 10 AFTR 773, the U.S. can retain any amount that IRS could have assessed on audit, so proof of compliance with Code Sec. 6751(b)(1) is not an element of the U.S.’s case-in-chief in these types of cases. Rather, a taxpayer must prove that he or she is entitled to a refund in the suit.

Evidence of compliance. When working on a Tax Court case, a Counsel attorney should determine whether there is evidence of compliance with Code Sec. 6751(b)(1) at the earliest opportunity, and no later than filing the pretrial memorandum. If such evidence exists, it can generally be introduced through stipulation or admitting into evidence a copy of the written supervisory approval. In lieu of testimony, Rule 803(6) of the Federal Rules of Evidence allows a party to submit evidence of the veracity of the approval; a certification that complies with Rule 902(11) of the Federal Rules of Evidence must also

and have their immediate supervisor personally approve it in writing.

…Collection Due Process (CDP) cases. Compliance with Code Sec. 6751(b) must be evaluated in all CDP cases regardless of whether liability is at issue under Code Sec. 6330(c)(2)(B) (i.e., whether the taxpayer is precluded from challenging his or her liability on account of having had a prior opportunity to do so).

Where liability is not at issue, Code Sec. 6751(b)(1) compliance must be verified by Appeals as part of its general responsibility under Code Sec. 6330(c)(1). (Blackburn, (2018) 150 TC No. 9) However, if the penalty was the subject of a prior courtproceeding that has collateral estoppel or res judicata effect,or the issue of Code Sec. 6751(b) compliance is precludedby Code Sec. 6330(c)(4), then verification under Code Sec.6330(c)(1) is not required. (Chief Counsel Notice 2014-002) On the other hand, where liability is properly at issue,compliance with Code Sec. 6751(b) should be treated as partof the liability determination.

In a docketed CDP case where liability is not at issue, the Tax Court reviews verification by Appeals for an abuse of discretion, and IRS does not have the burden of production under Code Sec. 7491(c). (Blackburn) If Appeals properly verified written supervisory approval and included necessary documentation in the administrative file, the assigned attorney should defend the verification, relying on the abuse of discretion standard.

If Appeals did not properly perform such verification, Counsel should obtain the documentary evidence necessary to establish compliance with Code Sec. 6751(b) and submit this evidence to the Court with a summary judgment motion or at trial. The administrative record may be supplemented with documentary evidence that Appeals failed to consider based on an exception to the record rule (i.e., the rule limiting the Court's review to evidence in the record at the time of the hearing). (Kreit Mechanical Associates, Inc., (2011) 137 TC 123) If documentary evidence cannot be readily located, remand to Appeals may be appropriate for further investigation. Where liability is properly at issue, the Counsel attorney should decide whether the documentation in the file is sufficient to carry IRS's burden of production in the same manner as in deficiency cases and, if it's not, obtain the additional documentary evidence needed.

Regardless of whether liability is at issue, in cases where no documentary evidence of compliance can be located, and neither judicial doctrines nor Code Sec. 6330(c)(4) bar judicial review of compliance, Counsel should concede the penalty.

…TEFRA cases. Attorneys should introduce evidence of Code Sec. 6751(b)(1) compliance in partnership-level TEFRA cases, regardless of whether it appears that the taxpayers have raised the issue. Evidence of compliance should be submitted at the partnership-level proceeding where the penalties are at issue. For TEFRA cases, approval of the penalty included in the notice of final partnership administrative adjustment (FPAA) must come before the FPAA is mailed to the tax matters

34

be prepared, and certain notice requirements must also be met.

Under Code Sec. 6751(b)(1), an individual's initial determination can be approved by a "higher level official" other than an immediate supervisor if IRS designates the official to provide approval. IRS noted in the CCN that a revision to the IRM designating such "higher level officials" is being drafted and will be finalized soon.

Code Sec. 6751(b)(1) requires only personal approval in writing, not any particular form of signature or even any signature at all. It may also be possible to introduce sufficient evidence to allow the fact-finder to infer that the written approval existed at the relevant time, even if the written approval cannot be located now.

If the Counsel attorney can't find evidence to establish Code Sec. 6751(b)(1) compliance and no exception under Code Sec. 6751(b)(2) applies (see below), then the attorney must concede the penalty, which should be done at the earliest opportunity but at the latest in the pretrial memorandum.

Exceptions. Under Code Sec. 6751(b)(2), a number of penalties are excepted from Code Sec. 6751(b)(1), including any addition to tax under Code Sec. 6651, Code Sec. 6654, or Code Sec. 6655, and penalties that are "automatically calculated through electronic means."

Penalties appearing in a statutory notice of deficiency as a result of programs such as the Automated Underreporter (AUR) and the Combined Annual Wage Reporting Automated programs will fall within the exception for penalties automatically calculated through electronic means if no one submits any response to the notice proposing a penalty. However, if the taxpayer submits a response that challenges a proposed penalty or the amount of tax to which a proposed penalty is attributable, then the immediate supervisor of the employee considering the response should provide written supervisory approval prior to the issuance of any statutory notice of deficiency that includes the penalty because a penalty is no longer considered "automated" at that point.

Under Chief Counsel Notice 2014-004, when the proposal and the assessment of a Code Sec. 6702 penalty is fully automated, written supervisory approval of the penalty is not required; Code Sec. 6702 penalties determined by an IRS employee, however, do not fall within the exception.

The CCN also clarified its position on certain penalties, including:

• Code Sec. 6672, trust fund recovery penalty. Whentaxpayers argue that Code Sec. 6751(b)(1) compliance isnecessary to impose a Code Sec. 6672 penalty, the CCNinstructs Counsel attorneys to take the position that CodeSec. 6751(b)(1) doens't apply because Code Sec. 6672,in substance, imposes a tax rather than a penalty. (U.S.v. Rozbruch, et al, (DC NY 2014) 114 AFTR 2d 2014-5093) IRS noted that there may also be other taxes that

taxpayers will contend are penalties, and that Counsel attorney should coordinate their arguments with Procedure and Administration and any other Associate Office that has responsibility for the tax involved.

• Code Sec. 6673, court-awarded sanctions and costs.Courts can award sanctions and costs under Code Sec.6673 for proceedings instituted primarily for delay, eithersua sponte or at the request of the government. The CCNstates that Code Sec. 6751(b)(1) shouldn't apply to aCode Sec. 6673 penalty that the court imposes sua spontebecause there was no “initial determination” of a penaltyassessment by an IRS employee. While the CCN noted thatan attorney moving the court to impose a Code Sec. 6673penalty arguably shouldn't implicate Code Sec. 6751(b)(1),based on the reasoning that such a motion doesn't deprivethe court of its power to impose the penalty if the attorney'simmediate supervisor doesn't approve it in writing, the CCNnonetheless said that attorneys who make such motionsshould receive written approval; and attorneys who makeoral motions should obtain written approval at the earliestconvenient time.

• Penalties in the alternative. In some cases, there maybe written supervisory approval of one penalty, but approvalmissing for penalties in the alternative to the one approved.In this situation, it may be possible to argue that approvalof one penalty might function as approval of an alternative.Attorneys who encounter this situation must coordinate thecase with Procedure and Administration.

Automatic Consent for Accounting Method Change to Deduct Post-casualty Citrus Replanting Costs

Rev Proc 2018-35, 2018-27 IRB

In a Revenue Procedure, IRS has provided a new automatic method change for certain taxpayers to change their method of accounting from applying Code Sec. 263A to citrus plant replanting costs to instead deducting those costs, pursuant to Code Sec. 263A(d)(2)(C), as added by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017).Code Sec. 263A(d)(2)(C) provides that Code Sec. 263A does not apply to certain costs that are paid or incurred by certain taxpayers for replanting citrus plants after the loss or damage of citrus plants.

Background—tax treatment of citrus replantings following casualty. Code Sec. 263A, also known as the uniform capitalization or "UNICAP" rules, generally requires direct costs and an allocable portion of indirect costs of certain property produced or acquired for resale by a taxpayer to be included in inventory costs in the case of property that is inventory, or to be capitalized in the case of other property.

However, under Code Sec. 263A(d)(2)(A), Code Sec. 263A does not require the capitalization of certain costs paid or incurred to replant plants bearing an edible crop for human consumption that were lost or damaged by reason of freezing

35

2017, and on or before Dec. 22, 2027;

• satisfies the ownership test (below); and

• wants to change its method of accounting fromapplying Code Sec. 263A to citrus plant replanting costs tonot applying Code Sec. 263A to those costs, pursuant toCode Sec. 263A(d)(2)(C).

The taxpayer satisfies the ownership test if either:

1. the owner described in Code Sec. 263A(d)(2)(A) hasan equity interest of not less than 50% in the replantedcitrus plants at all times during the tax year in which thetaxpayer paid or incurred amounts for replanting costs, andthe taxpayer holds any part of the remaining equity interest;or

2. the taxpayer acquired the entirety of the equity interestof the owner described in Code Sec. 263A(d)(2)(A) in theland on which the lost or damaged citrus plants were locatedat the time of the loss or damage, and the replanting is onsuch land.

The eligibility rule in Rev Proc 2015-13, section 5.01(1)(f), which prohibits a taxpayer that has made or requested a change for the same item during any of the five tax years ending with the year of change from requesting consent to change its accounting method for a specific item under the automatic change procedures, does not apply to this change.

A taxpayer making a change under new Rev Proc 2018-31, section 12.15, calculates a Code Sec. 481(a) adjustment by taking into account only amounts paid or incurred after Dec. 22, 2017, and on or before Dec. 22, 2027.

A taxpayer making both this change and another change in method of accounting in the same year of change must comply with the ordering rules of Reg. § 1.263A-7(b)(2), under which a change in method of accounting for costs subject to the UNICAP rules is generally considered to occur, including the computation of the Code Sec. 481(a) adjustment, before any other change in method of accounting is considered to occur for that same tax year.

Effective date. Rev Proc 2018-35 is effective for a tax year in which a taxpayer pays or incurs replanting costs that are not subject to Code Sec. 263A pursuant to Code Sec. 263A(d)(2)(C) and that are paid or incurred after Dec. 22, 2017, and onor before Dec. 22, 2027.

Final "May Company" Regs Prevent Corporate Partners From Avoiding Gain in Partnership Transactions

T.D. 9833, 6/7/2018; Reg. § 1.337(d)-3, Reg. § 1.732-1

IRS has issued final regs under Code Sec. 337(d) and Code Sec. 732(f), which generally adopt with minor clarifications

temperatures, disease, drought, pests, or casualty. Code Sec. 263A(d)(2)(A) applies to certain replanting costs paid or incurred by a taxpayer that owned the plants at the time the plants were lost or damaged, and Code Sec. 263A(d)(2)(B) applies to similar costs paid or incurred by other taxpayers that meet certain ownership and participation criteria.

The TCJA added new Code Sec. 263A(d)(2)(C) for certain costs that are paid or incurred after Dec. 22, 2017, and on or before Dec. 22, 2027 to replant citrus plants, effectively expanding who can deduct the costs of replanting citrus plants lost due to casualty. Under that provision, in the case of replanting citrus plants after the loss or damage of citrus plants by reason of freezing temperatures, disease, drought, pests, or casualty, Code Sec. 263A does not apply to replanting costs paid or incurred by a taxpayer other than the owner described in Code Sec. 263A(d)(2)(A) if:

1. the owner described in Code Sec. 263A(d)(2)(A) hasan equity interest of not less than 50% in the replantedcitrus plants at all times during the tax year in which suchamounts were paid or incurred and the taxpayer holds anypart of the remaining equity interest; or

2. the taxpayer acquired the entirety of the owner describedin Code Sec. 263A(d)(2)(A)’s equity interest in the land onwhich the lost or damaged citrus plants were located at thetime of such loss or damage, and the replanting is on suchland.

Background—accounting method changes. Under Code Sec. 446(e) and Reg. § 1.446-1(e), except as otherwise provided, a taxpayer must secure IRS's consent before changing an accounting method for federal income tax purposes, under the administrative procedures set out in Reg. § 1.446-1(e)(3)(ii).

When a taxpayer changes its accounting method, Code Sec. 481(a) adjustments are generally required to be made to prevent items from being duplicated or omitted.

Rev Proc 2018-31, 2018-22 IRB 637, provides the procedures by which a taxpayer may obtain automatic consent from IRS to change to a method of accounting described in that Rev Proc.

Addition to automatic change list. Rev Proc 2018-35 modifies Rev Proc 2018-31, which sets out the automatic change list, to add a new section 12.15 reflecting the replanting cost provision described above.

The accounting method change applies to a taxpayer, other than the owner described in Code Sec. 263A(d)(2)(A), that:

• paid or incurred replanting costs of citrus plants afterthe loss or damage of citrus plants by reason of freezingtemperatures, disease, drought, pests, or casualty, asdescribed in Code Sec. 263A(d)(2)(A);

• paid or incurred the replanting costs after Dec. 22,

36

temporary and proposed regs issued in 2015, that prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner. IRS noted, however, that it is considering proposing substantive amendments to the final regs under Code Sec. 337(d), and described a number of the changes that it might make.

Statutory background. In General Utilities & Operating Co., (S Ct 1935) 16 AFTR 1126, the Supreme Court held that corporations generally could distribute appreciated property to their shareholders without the recognition of any corporate-level gain (the General Utilities doctrine). Congress repealed the General Utilities doctrine by enacting Code Sec. 336(a) to apply gain and loss recognition to liquidating distributions.

Under current law, Code Sec. 311(b) and Code Sec. 336(a) require a corporation that distributes appreciated property to its shareholders to recognize gain determined as if the property were sold to the shareholders for its fair market value. (FMV). IRS is also specifically authorized under Code Sec. 337(d) to prescribe regs that are necessary or appropriate to carry out the purposes of the General Utilities repeal.

In general, under Code Sec. 732(a)(1), the basis to a partner of property distributed to him by the partnership, in kind, other than in distribution of his partnership interest, is the same as the property's adjusted basis to the partnership immediately before the distribution. A partner's basis for property distributed in liquidation of his partnership interest is the same as the adjusted basis for his partnership interest reduced by any money distributed to him in the same transaction. (Code Sec. 732(b))

Code Sec. 732(f) was enacted to address concerns that a corporate partner could otherwise negate the effects of a basis "step-down" to distributed property required under Code Sec. 732(b) by applying the step-down against the basis of the stock of the distributed corporation. Under Code Sec. 732(f), if (1) a corporate partner receives a distribution from a partnership of stock in another corporation (distributed corporation); (2) the corporate partner has control of the distributed corporation, defined as ownership of stock meeting the requirements of Code Sec. 1504(a)(2), immediately after the distribution or at any time thereafter (control requirement); and (3) the partnership’s basis in the stock immediately before the distribution exceeded the corporate partner’s basis in the stock immediately after the distribution, then the basis of the distributed corporation’s property must be reduced by this excess. The amount of this reduction is limited to the amount by which the sum of the aggregate adjusted basis of property and the amount of money of the distributed corporation exceeds the corporate partner’s adjusted basis in the stock of the distributed corporation. The corporate partner must recognize gain to the extent that the basis of the distributed corporation’s property cannot be reduced.

Code Sec. 732(f)(8) authorizes IRS to prescribe such regs as may be necessary to carry out the purposes of Code Sec. 732(f), including regs to avoid double counting and to prevent

the abuse of such purposes.

Prior regs. In '92, IRS issued proposed regs ('92 proposed regs) under Code Sec. 337(d) that were designed to prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving stock of the corporate partner, stock of the partner's affiliate, and other equity interests in the corporate partner or affiliate.

The '92 proposed regs provided two rules that would protect the repeal of the General Utilities doctrine. The first, a "deemed redemption" rule, provided that a corporate partner would recognize gain at the time of, and to the extent that, any transaction (or series of transactions) has the economic effect of an exchange by the partner of its interest in appreciated property for an interest in its stock (or the stock of any member of the affiliated group of which such partner is a member) owned, acquired, or distributed by the partnership. The second, a "distribution rule,” provided that a partnership's distribution to a corporate partner of stock in the corporation would be treated as a redemption or an exchange of that stock for a portion of the partner's partnership interest with a value equal to the distributed stock.

Under the '92 proposed regs, a corporation would be treated as an affiliate of a partner at the time of a deemed redemption or distribution by the partnership if, immediately thereafter, the partner and corporation were members of an affiliated group as defined in Code Sec. 1504(a) without regard to Code Sec. 1504(b) ("section 337(d) affiliation"). In subsequent guidance, IRS indicated that the '92 proposed regs would be amended to limit their application to transactions in which section 337(d) affiliation existed immediately before the deemed redemption or distribution.

In June 2015, IRS issued temporary and proposed regs under Code Sec. 337(d) which retained the deemed redemption rule provided in the '92 regs, with certain modifications, but which did not keep the separate distribution rule. The 2015 proposed regs also set forth de minimis and inadvertence exceptions to the deemed redemption rule. For more details, see "Temp regs prevent corporate partners from avoiding gain in partnership transactions" (06/18/2015). The regs, which were issued in response to a transaction in which May Department Stores Co. attempted to use a partnership to redeem stock owned by a group of investors using appreciated real estate without paying corporate-level tax, are commonly known as the "May Company" regs.

Also in June 2015, IRS issued proposed regs under Code Sec. 732(f) that were intended to address the concern that the application of that provision was too broad in some circumstances (e.g., by requiring basis reduction of gain recognition even when such wouldn't further the purposes of Code Sec. 732(f) but too narrow in others (in that corporate partners could avoid it by engaging in transactions that allow corporate partners to receive property held by a distributed corporation without reducing the basis of that property to account for basis reductions under Code Sec. 732(b) made when the partnership distributed stock of the distributed

37

includes interests in any entity to the extent that the value of the interest is attributable to stock of the Corporate Partner (the "Value Rule"), as well as an equity interest issued by a third party on a Corporate Partner's stock. (Reg. § 1.337(d)-3(c)(2)(i))

In T.D. 9833, IRS acknowledged that the Value Rule could potentially be overbroad in certain situations and stated that it is considering limiting its application to entities that are not Controlling Corporations but which own, directly or indirectly, 5% or more of the stock, by vote or value, of the Corporate Partner. IRS also noted in T.D. 9833 that it is considering modifying the definition of "Stock of a Corporate Partner" so that it would no longer include attribution under Code Sec. 318(a)(1) and Code Sec. 318(a)(3) when determining whether an interest in an entity is Stock of the Corporate Partner.

The final regs retain the "Affiliated Group Exception" provided in the 2015 regs under Code Sec. 337(d), which excludes from "Stock of the Corporate Partner" any stock or other equity interests held or acquired by a partnership if all interests in the partnership’s capital and profits are held by members of an affiliated group defined in Code Sec. 1504(a) that includes the Corporate Partner. (Reg. § 1.337(d)-3(c)(2)(ii)) However, IRS noted in T.D. 9833 that it was considering publishing new proposed regs to remove the Affiliated Group Exception because it can permit corporations to engage in transactions with partnerships to eliminate permanently the built-in gain on appreciated assets or otherwise to avoid the purposes of General Utilities repeal and these regs.

The final regs define a "Section 337(d) Transaction" as a transaction(or series of transactions) that has the effect of an exchange by a Corporate Partner of its interest in appreciated property for an interest in Stock of the Corporate Partner owned, acquired, or distributed by a partnership. (Reg. § 1.337(d)-3(c)(3)) IRS noted in T.D. 9833 that in certain situations, a partnership's acquisition of Stock of the Corporate Partner does not have the effect of an exchange of appreciated property for that stock—but that taxpayers must maintain appropriate records or other documentation to affirmatively demonstrate that the acquisition doesn't have the effect of an exchange of appreciated property for the stock.

Deemed redemption rule. The final regs adopt the "deemed redemption rule" as set out in the 2015 regs, which generally provides that if a transaction is a Section 337(d) Transaction, a Corporate Partner must recognize gain. (Reg. § 1.337(d)-3(d)) For more details on the deemed redemption rule, see "Temp regs prevent corporate partners from avoiding gain in partnership transactions."

IRS clarified that the deemed redemption rule does apply in certain transactions involving related parties in which a first transaction does not constitute a Section 337(d) Transaction because the partnership does not own stock in either a Corporate Partner or in a Controlling Corporation, but the Corporate Partner in a later, separate transaction transfers its partnership interest to a related corporation whose stock the partnership owns. And, in situations where the Corporate

corporation to the corporate partner).

To address these concerns, the 2015 proposed regs under Code Sec. 732(f) set out specific rules that would govern the application of that provision in two specific sets of circumstances. The first rule would permit consolidated group members to aggregate the bases of their respective interests in the same partnership, in certain circumstances, for Code Sec. 732(f) purposes. The second rule would restrict corporate partners from entering into certain transactions or a series of transactions (gain elimination transactions) that might eliminate gain in the stock of a distributed corporation while avoiding the effects of a basis step-down under Code Sec. 732(f). In addition, the 2015 proposed regs under Code Sec. 732(f) would require taxpayers to apply those rules to tiered partnerships in a manner consistent with the purpose of that provision. For more details, see "Proposed regs on partnership distributions of stock to corporate partner" (06/18/2015).

The temporary and proposed regs under Code Sec. 337(d), and the proposed regs under Code Sec. 732(f), are collectively referred to throughout this article as "the 2015 regs."

New final regs. The new final regs adopt as final the 2015 regs under Code Sec. 337(d) with only minor clarifications as explained below, and the 2015 regs under Code Sec. 732(f) without change. However, IRS noted that it is considering publishing new proposed regs that would make more substantive amendments to the final regs under Code Sec. 337(d).

Overview and purpose. The final regs are intended to prevent taxpayers from using a partnership to avoid gain recognition under Code Sec. 311(b) or Code Sec. 336(a). (Reg. § 1.337(d)-3(a)) In general, the final regs apply when a partnership, either directly or indirectly, owns, acquires, or distributes Stock of the Corporate Partner (see below). A Corporate Partner may be required to recognize gain when it is treated as acquiring or increasing its interest in Stock of the Corporate Partner held by a partnership in exchange for appreciated property in a manner that avoids gain recognition under Code Sec. 311(b) or Code Sec. 336(a). (Reg. § 1.337(d)-3(b))

Definitions. The final regs adopt the 2015 regs' definition of a “Corporate Partner” as a person that holds or acquires an interest in a partnership and that is classified as a corporation for federal income tax purposes. (Reg. § 1.337(d)-3(c)(1))

"Stock of a Corporate Partner" is defined by the final regs as including the Corporate Partner's stock, or other equity interests, including options, warrants, and similar interests, in the Corporate Partner or a "Controlling Corporation." A Controlling Corporation is one that controls the Corporate Partner (within the meaning of Code Sec. 304(c); generally, ownership of stock possessing at least 50% of (i) the total combined voting power of all classes of stock entitled to vote, or (ii) the total value of all classes of stock), except that the familyattribution rules of Code Sec. 318(a)(1) and the downwardattribution rules of Code Sec. 318(a)(3) do not apply. (Reg.§ 1.337(d)-3(c)(2)(i)) Stock of the Corporate Partner also

38

3(e)(2)) Therefore, under the proposed regs, before taking into account the distribution of other property, the Corporate Partner would reduce its basis in its partnership interest by the Corporate Partner’s basis in the distributed Stock of the Corporate Partner (but not below zero).

In response to a commenter who noted that duplication of gain under Code Sec. 337(d) and Code Sec. 732(f) could occur under the 2015 regs, the final regs provide a basis rule under which, for purposes of determining the amount of the decrease to the basis of property held by a distributed corporation pursuant to Code Sec. 732(f), the amount of this decrease is reduced by the amount of gain that a Corporate Partner has recognized under this section in a Section 337(d) Transaction, both in cases where Code Sec. 732(f) applies at the time of the Section 337(d) Transaction and in cases where Code Sec. 732(f) is subsequently triggered. (Reg. § 1.337(d)-3(e)(2)(iii)) This rule prevents the Corporate Partner from recognizing the same gain twice.

Exceptions. The final regs adopt the "de minimis rule" set out in the 2015 regs. (Reg. § 1.337(d)-3(f)) Under this rule, the final regs don't apply to a Corporate Partner if: (1) both the Corporate Partner and any persons related to the Corporate Partner (under Code Sec. 267(b) or Code Sec. 707(b)) own, in the aggregate, less than 5% of the partnership; (2) the partnership holds Stock of the Corporate Partner worth less than 2% of the value of the partnership's gross assets, including Stock of the Corporate Partner; and (3) the partnership has never, at any point in time, held more than $1 million in Stock of the Corporate Partner or more than 2% of any particular class of Stock of the Corporate Partner. (Reg. § 1.337(d)-3(f)(1)(i)) These conditions are to be tested upon the occurrence of a Section 337(d) Transaction and upon any subsequent revaluation event described in Reg. § 1.704-1(b)(2)(iv)(f), and a special gain recognition rule applies if the conditions were met at the time of a Section 337(d) Transaction, but are not satisfied at the time of a subsequent Section 337(d) Transaction or revaluation event.) (Reg. § 1.337(d)-3(f)(1))

Due to concerns that taxpayers could intentionally plan to combine entities, each meeting the de minimis limits, to avoid the purposes of these final regs, IRS added a clarifying provision to the de minimis exception in the final regs. (Reg. § 1.337(d)-3(f)(1)(i)) This clarifying provision states that the diminimis exception does not apply to Stock of the CorporatePartner that is acquired as part of a plan to circumvent thepurpose of these final regs.

The final regs also generally adopted the so-called "inadvertence" exception set out in the 2015 regs under which the regs won't apply to a Section 337(d) Transaction in which the partnership satisfies two requirements: (1) the partnership disposes of, by sale or distribution, the Stock of the Corporate Partner before the due date (including extensions) of its federal income tax return for the tax year in which the partnership acquired the stock (or in which the Corporate Partner joined the partnership, if applicable); and (2) the partnership has not distributed the Stock of the Corporate Partner to the Corporate Partner or a person possessing Code Sec. 304(c) control of

Partner has an existing interest in the partnership’s Stock of the Corporate Partner prior to the Section 337(d) Transaction, the deemed redemption rule applies only with respect to the Corporate Partner’s incremental increase in the Stock of the Corporate Partner. (Reg. § 1.337(d)-3(h), Examples 5 - 7)

The final regs clarify that, when determining a Corporate Partner's gain in a Section 337(d) transaction, basis adjustments, including those made pursuant to Code Sec. 743(b), are taken into account. (Reg. § 1.337(d)-3(d)(4)) The final regs also clarify that the character of the gain that the Corporate Partner recognizes in a Section 337(d) Transaction is the same character of the gain that the Corporate Partner would have recognized if, immediately before the Section 337(d) Transaction, the Corporate Partner had disposed of the appreciated property in a fully taxable transaction for cash in an amount equal to the FMV of such property (taking into account Code Sec. 7701(g)). (Reg. § 1.337(d)-3(d)(3)(ii))

The final regs adopt the rules in the 2015 regs related to the effect of the deemed redemption rule on partner and partnership basis, including the rule that a Corporate Partner must increase its basis in its partnership interest by an amount equal to the gain that the Corporate Partner recognizes in a Section 337(d) Transaction in order to prevent the Corporate Partners from recognizing gain a second time when the partnership liquidates (or, if property is distributed to the Corporate Partner, when that property is sold). (Reg. § 1.337(d)-3(d)(4)(i)) The final regs also clarify that, for basisrecovery purposes, this increase is treated as property thatis placed in service by the partnership in the tax year of theSection 337(d) Transaction. (Reg. § 1.337(d)-3(d)(4)(ii))

Gain recognition rule. The final regs adopt the gain recognition rule in the 2015 regs, which provided that if a distribution is a Code Sec. 337(d) distribution, then in addition to any gain recognized under the deemed redemption rule upon the distribution of Stock of the Corporate Partner to the Corporate Partner, the Corporate Partner must recognize gain to the extent that the partnership’s basis in the distributed Stock of the Corporate Partner exceeds the Corporate Partner’s basis in its partnership interest (as reduced by any cash distributed in the transaction) immediately before the distribution. (Reg. § 1.337(d)-3(e)(3)) The language in the final regs, however, ismodified to conform to the Code Sec. 732(f) gain recognitionprovision.

Basis rules. The 2015 regs provided two rules under Code Sec. 337(d) and Code Sec. 732 to coordinate the effects of the rule requiring gain recognition when the basis of the Stock of the Corporate Partner is stepped down on a Code Sec. 337(d) distribution with existing rules for determining the basis of property upon partnership distributions. Under one of these rules, which was to apply when a Corporate Partner receives both Stock of the Corporate Partner and other property in a Code Sec. 337(d) distribution, the basis to be allocated to the properties distributed under Code Sec. 732(a) or Code Sec. 732(b) would be allocated first to the Stock of the Corporate Partner before taking into account the distribution of any other property (other than cash). (Reg. § 1.337(d)-

39

the Corporate Partner. (Reg. § 1.337(d)-3(f)(2)) However, the final regs renamed the exception so as to clarify that inadvertence is not actually a requirement.

Applicability date. The final regs apply to transactions occurring on or after June 12, 2015. (Reg. § 1.337(d)-3(i))

IRS Clears Up Error In Training Materials On Employment Tax Adjustments vs Claims

Chief Counsel Advice 201822028

In Chief Counsel Advice (CCA), IRS has identified an inaccurate statement in IRS training materials relating to when an employer may file an adjustment for overpaid federal income tax withholding (ITW). The CCA points out that such an adjustment may be made after the calendar year end only if the employer discovered the withholding error and repaid or reimbursed the employee before the end of the calendar year. A similar rule applies to the additional Medicare tax.

Training materials queried.The CCA responds to a query about whether certain IRS training materials were correct in stating that an “employer CANNOT claim an adjustment for [Income Tax Withholding] and additional Medicare taxes after the close of the calendar year for the employee.” The training materials cite to Reg. § 31.6413(a)-2(c)(2).

IRS replied that it there is wide-spread confusion about the actions an employer must take by calendar year-end and what actions are permitted after the calendar year-end. The confusion is due in large part to the imprecise use of terms, including “claim” and “adjustment.” Of note, IRS said, it is misleading to use the phrase “claim an adjustment” given that the claim process and the adjustment process are different.

Claims vs. adjustments. Any employer who pays IRS more than the correct amount of income tax required to be withheld from wages or interest, addition to tax, or penalty with respect to the tax, may file a “claim” for refund of the overpayment. The claim must designate the return period to which the claim relates, explain in detail the facts to support the claim, and set forth any other information as regs or instructions to the form used to make the claim may require. No refund to the employer will be allowed for the amount of any overpayment of tax which the employer deducted or withheld from an employee. (Reg. § 31.6414-1(a)(1))

An employer cannot file a “claim” for income taxes except for administrative errors, i.e., where the amount reported on Form 941 (Employer's Quarterly Federal Tax Return), line 3 (Federal income tax withheld from wages, tips, and other compensation) does not agree with the amount the employer withheld. (Reg § 31.6414-1) However, the employer can file an “adjusted return” if the error is discovered in the same calendar year employer paid the wages and if the employer also repaid or reimbursed the employees in the same year. (Reg § 31.6413(a)-2(c)(2), Reg § 31.6413(a)-1(b)) The employer adjusts the overpayment of tax by reporting it on an adjusted return for the return period in which the wages were

paid, accompanied by a detailed explanation of the amount being reported on the adjusted return as required by Reg § 31.6413(a)-2(a)(3).

Similarly, an employer cannot file a “claim” for additional Medicare tax except for administrative errors, i.e. where the amount reported on Form 941, line 5d (Taxable wages & tips subject to Additional Medicare Tax withholding) does not agree with the amount the employer withheld. (Reg § 31.6402(a)-2(a)(3) The additional Medicare tax of 0.9% Medicare tax is imposed on employers only on wages for employment in excess of: $250,000 for joint returns; $125,000 for married taxpayers filing a separate return, and $200,000 in all other cases. However, the employer can file an “adjusted return” for additional Medicare tax if the error is discovered in the same calendar year the employer paid the wages and if the employer also repaid or reimbursed the employees in the same year. (Reg § 31.6413(a)-1(a)(2)(ii), Reg § 31.6413(a)-2(a)(1))

The "X" forms (e.g., Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund) are used by employers to make overpayment and underpayment adjustments to employment taxes or to claim refunds of overpaid employment taxes.

The CCA points out that an example in Rev Rul 2009-39, 2009-52 IRB, specifically addresses the situation in which there is an overpayment of income tax withholding (ITW) and the error is ascertained in the same year the wages were paid (i.e., before the calendar year end).

Example. Employer S timely filed its 2011 third quarter Form 941 on Oct. 10, 2011 and timely paid all employment tax reported on the return. On Dec. 2, 2011, S ascertains that it overwithheld and overpaid ITW in the third quarter of 2011 and reported the overpayment on its 2011 third quarter Form 941. S repays the overcollected amounts to its affected employees on Dec. 29, 2011. S files Form 941-X on Jan. 6, 2012 to correct the overpayment using the adjustment process.

Because S repaid its employees the amount of the overcollection of ITW in the same year that the wages were paid, S may correct the overpayment of ITW using the adjustment process even though the adjusted return is filed in a year after the wages were paid. (Rev Rul 2009-39, Situation 2)

The CCA points out that as indicated in Situation 2, above, the employer is not required to file Form 941-X using the adjustment process by the end of the calendar year. However, the discovery of the error and the repayment/reimbursement must occur by the end of the calendar year. The CCA also reminds IRS personnel that because Rev Rul 2009-39 was written before the additional Medicare Tax went into effect in 2013, it does not carry a discussion of the rules for Additional Medicare Tax (which are different than the rules for social security and Medicare taxes).

In summary, the CCA concludes that whether an employer

40

may file a Form 941-X under the adjustment process after the calendar year end is dependent upon whether the employer discovered the withholding error and repaid or reimbursed the employee prior to the end of the calendar year.

10% Alaska Settlement Trust Amount Is Tax, Not Penalty

Chief Counsel Advice 201822026

In an email Chief Counsel Advice, IRS has held that the 10% additional amount that an Alaska Native Settlement Trust must pay if it defers recognition of any income related to property contributed to the Trust, and then disposes of that property too soon, is a tax and not a penalty. IRS also interpreted a portion of the reporting requirement with respect to such property.

Background. A deduction is allowed for contributions made by a “Native Corporation” to an Alaska Native Settlement Trust (Settlement Trust), if an annual election has been made under Code Sec. 247(e). (Code Sec. 247(a))

For purposes of this deduction, a Settlement Trust may elect to defer recognition of any income related to the contributed property until the sale or exchange of the property is made, in whole or in part, by the Settlement Trust. (Code Sec. 247(g)(1))

For each tax year, a Settlement Trust may elect to apply this deferral election for any non-cash property which was contributed by a Native Corporation during the year. Any property to which this deferral election applies must be identified and described with reasonable particularity on the income tax return or an amendment or supplement to the return of the Settlement Trust. (Code Sec. 247(g)(3)(A))

For any property for which a deferral election is in effect, and which is disposed of within the first tax year following the tax year in which the property was contributed to the Settlement Trust: (1) any income or gain which would have been included in the year of contribution under Code Sec. 247(f)(3) but for the taxpayer's deferral election must be included in income for the tax year of the contribution; and (2) the Settlement Trust must pay any increase in tax resulting from such inclusion, including any applicable interest, plus 10% of the amount of such increase with interest. (Code Sec. 247(g)(3)(C)(i))

The fiduciary of a Settlement Trust must, under certain circumstances, include a statement containing certain information with the trust's income tax return. Code Sec. 6039H(e)(2) sets out the content of that statement. Code Sec. 6039H(e)(2)(E) says that the statement must contain "such information as the Secretary determines to be necessary or appropriate for the identification of each contribution and the accurate inclusion of income relating to such contribution by the Settlement Trust."

Code Sec. 170, the charitable contribution deduction section, sets out rules for disclosure where non-cash items are contributed to charity.

Issues. 1) Is the 10% a tax or a separate penalty with an interest component? 2) What information must an electing trust provide to meet the statutory requirements (i.e., what is the definition of “reasonable particularity”)?

The 10% is a tax. IRS concluded that the 10% is a tax.

IRS said that, as with any case of statutory construction, it first examines the language of the statute itself. The dependent clause in Code Sec. 247(g)(3)(C)(i)(III) "and increased by 10% of the amount of such increase" plainly refers back to the independent clause "the Settlement Trust shall pay any increase in tax resulting from such inclusion." Since the independent clause refers to an "increase in tax," IRS concluded that the dependent clause means the increase is the tax, including any applicable interest.

IRS noted that the legislative history of this provision refers to the additional 10% amount as a penalty. However, IRS said, the language of the statute, which governs, is better read to interpret this amount as tax.

IRS then said that, even if the plain language analysis were unsatisfactory because the statute could be seen as ambiguous, it believes that Supreme Court precedent supports the view that the 10% increase in Code Sec. 247(g)(3)(C)(i)(III) is a tax and not a penalty. In National Federation of Independent Business (NFIB) v. Sebelius, (Sup Ct 2012) 109 AFTR 2d 2012-2563, the Supreme Court reasoned that, "if the concept of penalty means anything, it means punishment for an unlawful act or omission." In NFIB, the Court found, "[w]hile the individual mandate clearly aims to induce the purchase of health insurance, it need not be read to declare that failing to do so is unlawful."

Code Sec. 247(g)(3)(C)(i)(III) can be read as imposing an incentive to keep the contributed property within the Settlement Trust. Disposing of property contributed to the Settlement Trust is not illegal, and the increase is not a penalty for unlawful behavior. The 10% increase here is more an incentive and less a punishment for unlawful conduct.

Information that Trust must provide. IRS also provided insight on the Code Sec. 247(g)(3)(A) "reasonable particularity" rule.It first noted that "reasonable particularity" can be informed by the language found in Code Sec. 6039H(e)(2). It said that, since Code Sec. 6039H(e)(2)(E) is based on specific facts and circumstances of each contribution, the property must be described in such detail that allows IRS to distinguish the property described from other property not contributed or separately contributed.

In addition to looking at the Code Sec. 6039H factors outlined above, Code Sec. 170 and the regs thereunder may also provide insight to what additional information should be requested, in light of the property contributed (e.g., requirements for land, motor vehicles, boats, taxidermy, etc.).

Finally, IRS said that it does not believe it is possible to specifically define "reasonable particularity" for all cases.

41

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after the onset date of the disaster, and on or before the deposit delayed date(specified by county, below), provided the taxpayer made these deposits by the deposit delayed date.

Affected areas and dates for storms, floods and other disasters occurring in 2018 that are federal disaster areas qualifying for individual assistance, as published on IRS's website, are carried below.

Alabama: The following are federal disaster areas qualifying for individual assistance on account of severe storms and tornadoes beginning on Mar. 19, 2018: Calhoun, Cullman, and Etowah counties.

For these Alabama counties, the onset date of the disaster was Mar. 19, 2018 and the extended date is July 31, 2018. The deposit delayed date was Apr. 3, 2018.

American Samoa: Following the President's declaration that a major disaster exists in the Territory of American Samoa, IRS has announced that taxpayers who reside or have a business in the disaster area will qualify for tax relief on account of Tropical Storm Gita, which took place beginning on Feb. 7, 2018.

For the Territory of American Samoa, the onset date of the disaster was Feb. 7, 2018 and the extended date is June 29, 2018 (which includes 2017 individual income tax returns normally due on Apr. 17, 2018). The deposit delayed date was Feb. 22, 2018.

Indiana: The following are federal disaster areas qualifying for individual assistance on account of severe storms and tornadoes beginning on Feb. 14, 2018: Carroll, Clark, Dearborn, Elkhart, Floyd, Fulton, Harrison, Jasper, Jefferson, Kosciusko, Lake, LaPorte, Marshall, Ohio, Porter, Pulaski, Spencer, Starke, St. Joseph, Switzerland, Vanderburgh, and White counties.

For these Indiana counties, the onset date of the disaster was Feb. 14, 2018, and the extended date is June 29, 2018 (which includes the Apr. 18 deadline for filing 2017 individual income tax returns and the Apr. 18 and June 15 deadlines for making quarterly estimated tax payments). The deposit delayed date was Mar. 1, 2018.

North Carolina: The following are federal disaster areas qualifying for individual assistance on account of severe storms and a tornado that occurred on Apr. 15, 2018: Guilford and Rockingham counties.

For these North Carolina counties, the onset date of the

Rather, what constitutes reasonable particularity will depend on the type of property. In general, the description of the property should be specific enough that IRS can identify the property that was transferred.

More Disaster Victims In Indiana Qualify for Tax Relief

Victims of recent severe storms and flooding in numerous states have more time to make tax payments and file returns if they are affected taxpayers in counties that have been designated as federal disaster areas qualifying for individual assistance. Certain other time-sensitive acts also are postponed. IRS has recently announced on its website that additional counties in Indiana have been designated as federal disaster areas qualifying for individual assistance. This article summarizes the relief that's available and includes up-to-date disaster area designations and extended filing and deposit dates for all areas affected by storms, floods and other disasters in 2018.

Who gets relief. Only taxpayers considered to be affected taxpayers are eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts. Affected taxpayers are those listed in Reg § 301.7508A-1(d)(1)) and thus include:

... any individual whose principal residence, and any business entity whose principal place of business, is located in the counties designated as disaster areas;

... any individual who is a relief worker assisting in a covered disaster area, regardless of whether he is affiliated with recognized government or philanthropic organizations;

... any individual whose principal residence, and any business entity whose principal place of business, is not located in a covered disaster area, but whose records necessary to meet a filing or payment deadline are maintained in a covered disaster area;

... any estate or trust that has tax records necessary to meet a filing or payment deadline in a covered disaster area; and

... any spouse of an affected taxpayer, solely with regard to a joint return of the husband and wife.

What may be postponed. Under Code Sec. 7508A, IRS gives affected taxpayers until the extended date (specified by county, below) to file most tax returns (including individual, estate, trust, partnership, C corporation, and S corporation income tax returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date falling on or after the onset date of the disaster (specified by county, below), and on or before the extended date. IRS also gives affected taxpayers until the extended date to perform certain other time-sensitive actions that are due to be performed on or after the onset date of the disaster, and on or before the extended date.

42

Aleykina, of Sacramento, is a CPA and holds a master’s degree in business administration. Prosecutors accused her of filing three false personal tax returns for 2009, 2010, and 2011 and three returns in the names of trusts she created for years 2010 and 2011. On her personal tax returns, prosecutors said she fraudulently claimed the head of household filing status, false dependents, and deductions for education expenses to which she was not entitled. She also falsely claimed on a trust tax return to be paying wages to her mother and her sister to care for her son and for her father, according to the charges.

Aleykina allegedly also stole government funds from the IRS’s Tuition Assistance Program by falsely claiming $4,000 in tuition reimbursement for classes that she didn’t take and obstructed justice during the investigation. When criminal investigators asked her to retrieve her government laptop, she allegedly lied to the agents about its location and started deleting files after the agents left. The total loss to the government from Aleykina’s conduct is estimated at more than $60,000.

Sentencing for Aleykina is scheduled for September. She faces up to three years in prison for each false tax return count, 10 years in prison for theft of government funds, and 20 years in prison for obstruction of justice. The court could also order her to serve extra time on supervised release, and pay restitution and monetary penalties.

Editor's Note: Previously reported in 2016, following the story, IRS Criminal Investigation pursued to the fullest penalty.

Texas Tax Return Preparer Sentenced to Prison for Tax and Identity Theft Crimes

A former Killeen, Texas resident was sentenced to 42 months in prison today for aiding and assisting in the preparation and filing of a false tax return and aggravated identity theft, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division.

According to court documents, Shermin Marshall devised a scheme to file false federal income tax returns on behalf of his clients. Marshall falsified specific items on his clients’ tax returns in order to fraudulently increase their tax refunds. Marshall directed clients’ refunds to be deposited into financial accounts that he controlled and, unbeknownst to his clients, Marshall stole a portion of those refunds. To facilitate the diversion of the stolen funds, Marshall opened financial accounts in his clients’ names, without their permission.

In addition to the term of imprisonment, U.S. District Court Judge Lee Yeakel ordered Marshall to serve three years of supervised release and to pay $397,367 in restitution to the Internal Revenue Service.

Sixto Rodriguez, Operator of North Jersey Tax Preparation Business Convicted of Tax Fraud

A Kissimmee, Florida, man was convicted at trial of tax fraud,

disaster was Apr. 15, 2018 and the extended date is Aug. 15, 2018 (which includes the Apr. 18 deadline for filing 2017 individual income tax returns and the Apr. 18 and June 15 deadlines for making quarterly estimated tax payments). The deposit delayed date was Apr. 30, 2018.

Spring 2018 Statistics of Income Bulletin

The Internal Revenue Service announced that the Spring 2018 Statistics of Income Bulletin is now available on IRS.gov. The Statistics of Income (SOI) Division produces the online Bulletin quarterly, providing the most recent data available from various tax and information returns filed by U.S. taxpayers. This issue includes articles on the following topics:

• Individual Income Tax Returns, Preliminary Data,Tax Year 2016: For Tax Year 2016, taxpayers filed 150.3million U.S. individual income tax returns, a decrease of0.2 percent from the 150.6 million returns filed for TaxYear 2015. For 2016, adjusted gross income (AGI) onlyincreased 0.1 percent to $10.2 trillion. This small increasein AGI reflected minor increases in salaries and wages (1.5percent) and taxable pensions and annuities (0.4 percent)along with declines in partnership and S corporation netincome less loss (1.1 percent) and net capital gains (11.7percent).

• Partnership Returns, Tax Year 2015: The number ofpartnerships in the United States continued to increasefor Tax Year 2015. Partnerships filed more than 3.7 millionreturns for the year, representing more than 27 millionpartners. The real estate and leasing sector containedalmost half of all partnerships (49.7 percent) and over aquarter of all partners (29.2 percent).

Tax Pros in Trouble

Former IRS Agent Convicted of Filing False Tax Returns

A former special agent in the Internal Revenue Service’s Criminal Investigation unit was convicted on charges of filing false tax returns, obstruction of justice, and stealing government money.

A jury in Sacramento, California, found Alena Aleykina guilty of the charges on June 15 after a two-week trial. She had been indicted in 2016 on the .

43

U.S. Attorney Craig Carpenito announced.

Sixto Rodriguez, 55, was found guilty of all 17 counts of an indictment charging him with three counts of filing false tax returns on behalf of himself and fourteen counts of aiding and assisting in the preparation and presentation of false tax returns on behalf of his tax preparation clients. He was convicted following a one-week trial before U.S. District Judge Kevin McNulty.

According to documents filed in this case and statements made in court:

From 2004 through 2012, Rodriguez operated a tax preparation business in Teaneck, New Jersey, by the name of 1-2-3 Taxes. Rodriguez personally met with clients, preparedtheir individual income tax returns and filed the returns withthe IRS.

Rodriguez inflated education credits, charitable donations, unreimbursed business expenses and rental losses that he knew his clients had not actually incurred. On average, for the clients charged in the indictment, this resulted in his clients receiving more than $4,000 in refunds per return, to which they were not entitled. Rodriguez also failed to report more than $230,000 in net profits he made from his business from 2007 through 2009 and personally avoided paying more than $89,000 in taxes as a result.

The charges on which Rodriguez was convicted each carry a maximum potential penalty of three years in prison and a $250,000 fine. Sentencing is scheduled for Aug. 21, 2018.

U.S. Attorney Carpenito credited special agents of IRS-Criminal Investigation, under the direction of Acting Special Agent in Charge Bryant Jackson, with the investigation leading to today’s conviction.

The government is represented by Senior Litigation Counsel Daniel V. Shapiro of the Economic Crimes Unit in Newark and Assistant U.S. Attorney David M. Eskew, Deputy Chief of the U.S. Attorney’s Office Criminal Division.

Tax Return Preparers Charged with Filing False Tax Returns

U.S. Attorney William M. McSwain announced that the owners of a Yeadon, PA, tax preparation business were charged in connection with a scheme to prepare fraudulent tax returns in order to generate unwarranted refunds.

Deron Joe and Edmund Dassin, the owners of Edron Tax Preparation Services, were charged today by superseding indictment with one count of conspiracy to defraud the United States and 15 counts of aiding and assisting in the preparation and filing of a false tax return.

According to the superseding indictment, Joe and Dassin prepared certain tax returns for clients for tax years 2008 to 2010 and falsely claimed on these returns that these clients

had incurred unreimbursed employee business expenses. The indictment alleges the defendants knew their clients were not entitled to such refunds, as the clients had neither reported these expenses to the defendants nor provided any documentation to support such deductions. One of their clients was an IRS agent acting in an undercover capacity.

If convicted, the defendants face a maximum possible sentence of 47 years of imprisonment and a fine of $3.75 million.

The case was investigated by Internal Revenue Service’s Criminal Investigation Division and is being prosecuted by Department of Justice Tax Division Attorneys Chris O’Donnell and Kathryn Sparks and Assistant U.S. Attorney Tomika N.S. Patterson.

Tax Fraud Blotter: Semi-gloss Guilt

Wichita, Kan.: A federal court has permanently barred Ma Guadalupe Valenzuela (a.k.a. Maria Guadalupe Valenzuela, a.k.a. Lupe Valenzuela, individually and doing business asServicio de Income Tax) from preparing federal income taxreturns for others.

She prepared federal returns that lowered her customers’ federal tax liabilities by claiming bogus child tax credits, improper dependency exemptions, and false filing statuses, according to the allegations in the complaint.

Valenzuela agreed to the civil injunction order.

Wilson, N.C.: Preparer Tawanda Denise Pitt has been sentenced to two years in prison for filing a false claim for refund with the IRS.

According to documents and information provided to the court, in early 2015 Pitt managed the prep business Integritax and falsified client returns by claiming phony dependents and education credits and reporting fake businesses. Pitt also admitted that she trained other preparers to file fraudulent returns.

She caused a tax loss of between $550,000 and $1.5 million; the total tax loss resulting from false education credits alone exceeded $780,000.

Pitt was also ordered to serve three years of supervised release and to pay $203,106 in restitution to the IRS.

Pompano Beach, Fla.: Former Boca Raton, Fla., resident Wilson Lasset, 48, who purported to operate a prep business, has pleaded guilty to wire fraud and aggravated ID theft in connection with a multi-million-dollar refund fraud.

According to facts filed in court, Lasset applied to the IRS for identification numbers, enabling him and the business he incorporated, Triangle International Training Center, to prepare and e-file returns for others. The business operated out of two addresses in Pompano Beach. In 2012, using these

44

income on her personal tax returns.

For the three years, Campellone understated more than $1.46 million in gross receipts. As a result, she owes more than $447,000 in additional income taxes.

The maximum penalty Campellone can receive is three years in prison and a fine of $100,000.

Chandler, Ariz.: William “Larry” Dorsey, 56, has been sentenced to three years in prison and three years of supervised release, and been ordered to pay $7.3 million in restitution to the IRS after pleading guilty to tax evasion.

Dorsey owned and operated several professional employment organizations, including Pinnacle Employee Group, and Pinnacle Planning Group, which contracted with small-business owners to provide payroll services. Dorsey, through PEG and PPG, collected federal employment taxes from his clients, but instead of paying the taxes over to the IRS, he kept a significant portion of the taxes for his own personal use and to fund other business ventures.

To conceal his theft, Dorsey filed federal employment returns that underreported the taxes due from PEG and PPG. From 2011 through 2014, he underreported and underpaid some $7.3 million in federal employment taxes due.

Fridley, Minn.: Preparer Charles Asong-Morfaw, 55, has pleaded guilty to one count of aiding and assisting in the preparation of a false individual income tax return.

According to the guilty plea and documents filed in court, between 2012 and 2015 Asong-Morfaw, through his prep business AJ & A Tax Services, helped prepare and present to the IRS false and fraudulent returns that claimed clients deserved deductions including unreimbursed employee business expenses, unreimbursed medical expenses and charitable deductions.

During the scheme, Asong-Morfaw prepared more than 100 returns resulting in a tax loss of some $103,095.

Dublin, Calif.: Executive Shiv D. Kumar, 61, has been sentenced to 16 months in prison for filing a false federal corporate return.

The sentence followed a guilty plea in April in which Kumar admitted underreporting income on a 2010 corporate return.

Kumar was the sole shareholder and president of A-Paratransit, a multi-million-dollar company that provided transportation services to disabled individuals in the Bay Area. Kumar filed false corporate federal returns for tax years 2008, 2009 and 2010 that underreported API’s gross receipts by more than $4 million, resulting in a tax loss to the U.S. of more than $1.4 million. Kumar deposited API’s gross receipts into multiple bank accounts, concealed millions of dollars in gross receipts and caused API to provide its tax return preparer with doctored and incomplete bookkeeping records showing less in gross

identification numbers, he filed some 1,606 federal returns, including at least 25 returns filed using the names and Social Security numbers of individuals living with cerebral palsy who did not need to file and who didn’t authorize Lasset to file on their behalf.

The unauthorized filings also included returns using the IDs of approximately 386 incarcerated individuals and also used falsely claimed Earned Income Tax Credits based on false claims of earning income as “household help” employees, and falsely claimed education credits designed to reimburse college and other education expenses.

Lasset’s ID numbers were used to claim more than $2.7 million in fraudulent tax refunds. The IRS paid approximately $788,611 in refunds based on these fraudulent returns; some $51,000 was deducted directly from these refunds as preparer’s fees that were deposited into a bank account Lasset opened and controlled for Triangle International Training Center. Lasset used the money for travel and other personal expenses.

He faces a maximum of 20 years in prison on the wire fraud charge and two years in prison on the aggravated ID theft charge. Sentencing is July 19.

Quechee, Vt.: Self-employed painter Kurt Devoid, 60, has pleaded guilty to filing false income tax returns.

According to court documents, Devoid’s personal federal returns for tax years 2010 through 2013 were prepared by a commercial prep office in Lebanon, N.H. On the returns, Devoid reported income he received from commercial customers of his painting business but failed to report substantial income he received from his residential customers.

His failure to report the true amount of his personal income during the four years caused a federal tax loss of $98,482. Sentencing is Aug. 22.

Myrtle Beach, S.C.: Contractor Stephanie Campellone, 46, has pleaded guilty to filing a false return.

Evidence established that Campellone owns and operates Mastercare Contracting, a lawn care/landscaping business. During 2012, 2013 and 2014, she diverted a large portion of Mastercare’s income into personal bank accounts and substantially underreported the taxable gross receipts of the business. Campellone also substantially underreported her

45

Background. Code Sec. 7407 empowers district courts to enjoin a tax return preparer from preparing federal tax returns for others if the court finds that: (1) the tax return preparer has “continually or repeatedly” violated Code Sec. 6694 (dealing with the understatement of taxpayer's liability by tax return preparer) or Code Sec. 6695 (dealing with assessable penalties with respect to tax preparation); and (2) an injunction prohibiting only violations of Code Sec. 6694 or Code Sec. 6695 would not suffice to prevent the tax return preparer from interfering with the proper administration of the Code.

District courts may enter an injunction under Code Sec. 7408 if they find that (1) a person has engaged in conduct subject to penalty under Code Sec. 6700, Code Sec. 6701, Code Sec. 6707, or Code Sec. 6708; and (2) injunctive relief is “appropriate” to prevent recurrence of such conduct.

Code Sec. 6701 imposes a penalty upon any person who aids or assists in, procures, or advises with respect to, the preparation of any portion of a return with the knowledge that the return will be used in connection with any material matter arising under the internal revenue laws and, if so used, would result in an understatement of the liability for tax of another person.

Code Sec. 7402(a) permits district courts to issue such injunctions “as may be necessary or appropriate for the enforcement of the internal revenue laws.”

Facts. Taxpayers Wells and Stephens were partners in a tax preparation business. They prepared thousands of federal income tax returns that falsified business income in order to boost the EITCs that their clients could claim. Wells and Stephens had prepared 709 federal income tax returns for the 2017 filing year; 89% of them claimed the EITC.

Court enjoins preparers under Code Secs. 7407, 7408 and 7402(a).The court permanently enjoined the preparers from preparing federal returns under Code Sec. 7407, Code Sec. 7408 and Code Sec. 7402(a).

…Sec. 7407 injunction.Wells and Stephens repeatedly violated Code Sec. 6694 and Code Sec. 6695. Regarding Code Sec. 6694, Wells and Stephens prepared returns that knowingly understated customers’ tax liabilities. And regarding Code Sec. 6695, Wells and Stephens repeatedly failed to exercise due diligence in determining the eligibility of their customers to claim EITCs.

The court said that a narrower injunction, prohibiting Wells and Stephens from violating Code Sec. 6694 or Code Sec. 6695, would not do. It concluded that a permanent injunction prohibiting Wells and Stephens from acting as tax return preparers was necessary to prevent them from interfering with the proper administration of the internal revenue laws.

In coming to this conclusion, the court looked to: (1) the egregiousness of the preparers' conduct; (2) the isolated or recurrent nature of the infraction; and (3) the extent of the preparers’ participation in the offense.

receipts than API actually received.

Kumar also admitted that the unreported gross receipts were used to purchase real property in California.

He was also ordered to serve a year of supervised release.

Rochester, N.Y.: Daveanan Sookdeo, 46, formerly of Ontario, has pleaded guilty to conspiring to defraud the U.S. and making a false claim against the U.S.

According to documents filed with the court and evidence, Sookdeo and other Canadian citizens filed fraudulent claims for federal income tax refunds. Sookdeo promoted a scheme that involved falsifying IRS forms to claim that almost $10 million in income had been withheld by various Canadian financial institutions on the conspirators’ behalf.

Sookdeo charged his co-conspirators an upfront fee for the false documents in the scheme, as well as a percentage of any refunds. He travelled to the U.S. to open bank accounts and deposited the refund checks; co-conspirators then wire transferred portions of the fraudulent proceeds to Canada. Sookdeo is the fifth Canadian citizen convicted for his role in this scheme.

Justice Department Seeks to Shut Down Louisiana Tax Return Preparer

A tax return preparer in Avondale, Louisiana prepares fraudulent tax returns for her customers and files false tax returns using taxpayers’ identifying information without their knowledge or authorization, according to a civil lawsuit filed by the Justice Department today. The suit, filed in federal court in New Orleans, asks the court to permanently bar Adrienne Robinson Thomas (doing business as AT Tax Services) from preparing federal tax returns for others.

The complaint alleges that Thomas unlawfully understates her customers’ income tax liabilities and overstates these customers’ refunds. According to the complaint, Thomas unlawfully prepares federal tax returns that lower her customers’ federal tax liabilities by claiming bogus earned income tax credits, bogus child tax credits, false education credits, and fabricated household employee income and withholdings. The government alleges Thomas also files wholly fabricated tax returns using the identifying information of taxpayers who did not hire her to prepare their federal income tax returns.

Frequent EITC-abusing Preparers Permanently Enjoined From Preparing Returns

A district court has permanently enjoined a pair of return preparers, who prepared thousands of federal income tax returns that falsified business income in order to boost the Earned Income Tax Credits (EITCs; also known as Earned Income Credits or EICs) that their clients could claim, from preparing tax returns for others.

46

First, the Court said, Wells's and Stephens’s conduct was egregious. Wells and Stephens reported non-existent businesses and fabricated losses linked to them. They also withheld tax documents from customers and bilked the Government of “likely several million dollars.” Second, Wells's and Stephens’s conduct was recurrent: during a 4-year span, Wells and Stephens prepared 5,410 returns; many, if not all, were fraudulent. And third, Wells and Stephens falsified the returns and so “directly participated” in the misconduct that supplied the basis for the permanent injunction.

The court said that a narrower injunction would not protect the Government’s interest in the proper administration of the Code. The scale of the schemes, the brazenness of the fraud, and the continuation of operations well into 2017 suggested that Wells and Stephens would continue to falsify returns if they were not permanently enjoined from preparing returns for others. "What is more, permanently enjoining Defendants would save IRS the cost of investigating Defendants’ future violations and promote respect for the Code."

…Sec. 7408 injunction. Wells and Stephens engaged in conduct subject to penalty under Code Sec. 6701. Wells and Stephens knowingly prepared returns that understated customers’ tax liability by claiming EITCs to which customers were not entitled. And because they continued their falsifications into 2017, the court concluded that there was no indication that, if not enjoined, they would stop engaging in such activity.

…Sec. 7402(a) injunction. The court noted that Fifth Circuit opinions offer limited guidance in interpreting Code Sec. 7402(a). The cases do not, for example, articulate a standard for issuing a permanent injunction under Code Sec. 7402(a). So the district courts in this circuit have simply applied the statute as it reads, asking whether the Government has shown that an injunction is “necessary or appropriate” to enforce the internal revenue laws.

The court concluded that a Code Sec. 7402(a) injunction was appropriate to enforce the internal revenue laws, "for essentially the same reasons" it stated with respect to Code Sec. 7407.

Aurora Man Gets 12 Years In Prison for $328,000 in Tax Fraud

An Aurora man who masterminded a scheme that fraudulently sought nearly $2.2 million in federal tax refunds has been sentenced to 12 years in prison.

Jaquon Mucsarney of Aurora earlier pleaded guilty to fraud and aggravated identity theft. He was sentenced Monday in Denver.

Prosecutors say between January 2011 and January 2016 the 37-year-old created 50 fake businesses and filed about 100fraudulent tax returns seeking refunds. When he was jailed onunrelated charges, his mother and his girlfriend helped.

The IRS paid out nearly $328,000 — which was the restitution set for him.

His mother, Schosche Mucsarney, was sentenced to five years of probation and ordered to pay nearly $200,000 in restitution. His girlfriend, Sherry Charleston, was sentenced to 18 months in prison and ordered to pay $16,500 in restitution.

California Resident Convicted of Tax Crimes

A jury in the Northern District of California convicted Jyh-Chau “Henry” Horng, of Saratoga, California and part owner of a home-based international trading business, on two counts of filing false tax returns and one count of making false statements to an Internal Revenue Service (IRS) agent while under audit, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and Acting United States Attorney Alex G. Tse for the Northern District of California. The jury acquitted Horng’s wife, Meili Lin, on one count of filing a false tax return and failed to reach a verdict on the second count.

According to court documents and evidence presented during the three-week trial, Horng underreported income on his 2006 and 2007 tax returns. The returns failed to report profits from selling metal products to China while that country was undergoing its economic and infrastructure boom. Horng used these business profits to buy millions of dollars of residential properties, invest over $5 million in a Milpitas shopping center, and purchase a Bentley. Horng also reported annual income of over $1 million on a mortgage application, despite reporting far less than that on the tax returns he filed with the IRS. During an IRS audit of the returns, Horng made numerous false statements, including that neither he nor his wife had any foreign bank accounts.

Horng faces a statutory maximum sentence of three years in prison for each false tax return. He could be sentenced to an additional five years for lying to the IRS auditor. He is also subject to a period of supervised release, restitution, and monetary penalties.

On-Demand WebinarsncpeFellowship.com

website

47

Ragin Cagin

Social Security Combined Trust Fund Reserves Depletion Year Remains 2034 Says Board of TrusteesDisability Fund Improves by Four Years

The Social Security Board of Trustees released its annual report on the long-term financial status of the Social Security Trust Funds. The combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds are projected to become depleted in 2034, the same as projected last year, with 79 percent of benefits payable at that time.

The OASI Trust Fund is projected to become depleted in late 2034, as compared to last year’s estimate of early 2035, with 77 percent of benefits payable at that time. The DI Trust Fund will become depleted in 2032, extended from last year’s estimate of 2028, with 96 percent of benefits still payable.

In the 2018 Annual Report to Congress, the Trustees announced:

• The asset reserves of the combined OASDI TrustFunds increased by $44 billion in 2017 to a total of $2.89trillion.

• The total annual cost of the program is projected toexceed total annual income in 2018 for the first time since1982, and remain higher throughout the 75-year projectionperiod. As a result, asset reserves are expected to declineduring 2018. Social Security’s cost has exceeded its non-interest income since 2010.

• The year when the combined trust fund reserves areprojected to become depleted, if Congress does not actbefore then, is 2034 – the same as projected last year. Atthat time, there will be sufficient income coming in to pay 79percent of scheduled benefits.

“The Trustees’ projected depletion date of the combined Social Security Trust Funds has not changed, and slightly more than three-fourths of benefits would still be payable after depletion,” said Nancy A. Berryhill, Acting Commissioner of

Social Security. “But the fact remains that Congress can keep Social Security strong by taking action to ensure the future of the program.”

Other highlights of the Trustees Report include:

• Total income, including interest, to the combined OASDITrust Funds amounted to $997 billion in 2017. ($874 billionfrom net payroll tax contributions, $38 billion from taxationof benefits, and $85 billion in interest)

• Total expenditures from the combined OASDI TrustFunds amounted to more than $952 billion in 2017.

• Social Security paid benefits of more than $941billion in calendar year 2017. There were about 62 millionbeneficiaries at the end of the calendar year.

• The projected actuarial deficit over the 75-year long-range period is 2.84 percent of taxable payroll – slightlylarger than the 2.83 percent projected in last year’s report.

• During 2017, an estimated 174 million people hadearnings covered by Social Security and paid payroll taxes.

• The cost of $6.5 billion to administer the SocialSecurity program in 2017 was a very low 0.7 percent oftotal expenditures.

• The combined Trust Fund asset reserves earnedinterest at an effective annual rate of 3.0 percent in 2017.The Board of Trustees usually comprises six members.Four serve by virtue of their positions with the federalgovernment: Steven T. Mnuchin, Secretary of theTreasury and Managing Trustee; Nancy A. Berryhill, ActingCommissioner of Social Security; Alex M. Azar II, Secretaryof Health and Human Services; and R. Alexander Acosta,Secretary of Labor. The two public trustee positions arecurrently vacant.

Jerry

Taxpayer Advocacy

IRS Addresses Applicability of Penalties Where It Freezes Taxpayer's Refund

Legal Advice Issued by Field Attorneys 20182101FIn Legal Advice Issued by Field Attorneys (LAFA), IRS has addressed whether it can assess the accuracy-related penalty or the Code Sec. 6676 penalty for excessive refund claims in situations where IRS "froze" the taxpayer's refund because the taxpayer didn't respond to IRS's request for information. IRS also addressed procedural rules for assessing the Code Sec. 6676 penalty.

Background—Code Sec. 6676. Code Sec. 6676 imposes a

48

refund and requested documents to substantiate her wages. That request was returned by the Post Office as unclaimed, and the taxpayer never provided the requested documents or information.

Applicability of the accuracy-related and Code Sec. 6676 penalties. IRS determined that there was no underpayment for purposes of the accuracy-related penalty. It first concluded that the portion of the taxpayer's disallowed refund claim based on the EIC and ACTC constituted an underpayment that could be subject to a penalty under Code Sec. 6662. And, it said that overstated withholding tax is provided for in Reg. § 1.6664-2(c)(1)(i) and Reg. § 1.6664-2(c)(1)(ii) and reducesthe “amount shown as the tax by the taxpayer on his return.”

But IRS then noted that it has adopted the practice of treating the amount of a frozen refund as a sum collected without assessment for purposes of calculating a Code Sec. 6664 underpayment, with the result, in many cases, that there is no underpayment for purposes of Code Sec. 6662. It cited both Reg. § 1.6664-2(d) and Internal Revenue Manual 20.1.5.16(7). In this case, it said, while the taxpayer overstated refundable credits on her return, under IRS's practice with respect to the treatment of frozen refunds, no accuracy-related penalty applied because IRS never paid a refund.

However, it noted that no such rule applies with respect to Code Sec. 6676; thus, the excessive amount of the refund claim would be subject to penalty under Code Sec. 6676.

Assessment without deficiency procedures. IRS said that it interprets Code Sec. 6671 and Smith to mean, generally, that when a penalty is dependent upon an underlying deficiency determination, such penalty must be assessed under the deficiency procedures. By contrast, Code Sec. 6676 penalties are generally assessable without deficiency procedures when an excessive amount of a claim for credit or refund arises from an item or transaction other than an erroneous refundable credit. An overstatement of tax withheld at the source falls outside of the deficiency definition and may be immediately assessed pursuant to Code Sec. 6201(a)(3).

IRS Told Not to Send Debts of Those With Income Less Than 250% of FPL to Private Debt Collectors

In a June 6 blog, the National Taxpayer Advocate (NTA) Nina Olson has announced that she has issued a Taxpayer Advocate Directive on Apr. 23, 2018, ordering IRS not to assign to private collection agencies (PCAs) the debt of any taxpayer whose income was less than 250% of the federal poverty level (FPL).

Background. The Fixing America's Surface Transportation (FAST) Act (P.L. 114-94, 12/4/2015) added new Code Sec. 6306(c) which provides, "notwithstanding any other provision of law, IRS shall enter into one more qualified tax collection contracts for the collection of all outstanding inactive tax receivables." A qualified tax collection contract is defined in Code Sec. 6306(b)(1) as an agreement for services: (A) to locate and contact a specified taxpayer; (B) to request full

penalty on any claim for refund or credit of income tax (other than a claim for a refund or credit relating to the earned income credit (EIC; also known as the earned income tax credit, or EITC) under Code Sec. 32) that is excessive in amount and lacks a reasonable basis for the claim. The penalty is equal to 20% of the excessive amount of the claim, and Code Sec. 6676(b) provides that the excessive amount is the disallowable portion of the claim for refund or credit. The Code Sec. 6676 penalty does not apply to any portion of a claim to which the accuracy-related penalty on underpayments under Code Sec. 6662 or the fraud penalty under Code Sec. 6663 applies. (Code Sec. 6676(d))

Background—calculating the accuracy-related penalty.An accuracy-related penalty is imposed on certain underpayments of tax. (Code Sec. 6662(a)) For these purposes, the term “underpayment” means the excess of the amount of tax actually due over the amount of tax shown on the return, amounts not so shown but previously assessed or collected, and amounts collected without assessment. (Reg. § 1.6664-2(a)) Reg. § 1.6664-2(d) explains amounts not so shown but previously assessed or collected, and amounts collected without assessment. Code Sec. 6664(a) also provides that “a rule similar to the rule of Code Sec. 6211(b)(4) shall apply for purposes of this subsection.” Thus, disallowed refundable credits must be taken into account when determining the tax shown on the return and can reduce the tax shown on a return below zero for purposes of calculating the underpayment subject to penalty under Code Sec. 6662.

Background—assessment procedures. The rules of application for assessable penalties under subchapter B of Chapter 68, which includes Code Sec. 6676, provide that the penalties in that subchapter are to be paid upon notice and demand, and assessed and collected in the same manner as taxes. (Code Sec. 6671(a))

If a return contains an overstatement of income tax withheld or estimated taxes, any amounts so overstated, which are allowed against the tax shown on the return or allowed as a credit or refund, are subject to immediate assessment in the same manner as mathematical or clerical errors, except that the abatement procedures for the assessment of mathematical or clerical errors don't apply. (Code Sec. 6201(a)(3))

In Smith v. Commissioner, (2009) 133 TC 424, the Tax Court opined on its jurisdiction to review Code Sec. 6707A, the assessable penalty for failure to report involvement in a listed transaction, as follows: "We concluded that Code Sec. 6707A penalties are not included in the statutory definition of 'deficiency.' See Code Sec. 6671, Code Sec. 6211. Code Sec. 6707A penalties do not depend upon a deficiency. They may be assessed even if there is an overpayment."

Facts. Taxpayer, an individual, filed a return on which she reported, among other things, wages and withholding, and on which she claimed an EIC, an additional child tax credit (ACTC), and a refund. When IRS audited Taxpayer, it suspected that there were irregularities with her W-2 forms, including with respect to the withholding shown on those forms. IRS froze the

49

whose income was less than 250% of the FPL from referral to a private collection agency in the bipartisan Taxpayer First Act, H.R. 5444, which passed the House with a recorded vote of 414-0 on Apr. 18, 2018.

The NTA noted that since IRS implemented the private debt collection initiative last year, she has been concerned that taxpayers whose debts were assigned to PCAs would make payments even when they were likely in economic hardship, i.e., they were unable to pay their basic living expenses. Shehas concluded that this is exactly what has been happening.

IRS has established procedures for determining how much of a taxpayer's income is available to pay taxes for purposes of offers in compromise and installment agreements. IRS analyzes income and expenses to determine the taxpayer's disposable income (gross income less allowable living expenses (ALEs)) available to apply to the tax liability. ALE standards determine how much money taxpayers need for basic living expenses (for items like housing and utilities, food, transportation, and health care), based on family size and where they live. IRS compares the taxpayer's income with the ALE standards to determine the taxpayer's ability to pay his or her tax debt and at what level.

PCAs solicit full payment of the tax debt when they contact taxpayers, and if the taxpayer cannot immediately pay, like IRS, the PCA can also offer an installment agreement. The installment agreements set up by the PCAs can be "streamlined," a process which taxpayers can obtain without submitting financial information and which can be for up to seven years.

The NTA has found that there is a pattern where taxpayers whose debts are assigned to PCAs enter into installment agreements and make payments that they appear to be unable to afford. IRS data shows that since the inception of the program in April 2017 through Mar. 29, 2018, of 9,751 taxpayers who entered into installment agreements and made payments while their debts were assigned to PCAs:

...24% had incomes below the FPL, all of these taxpayers' incomes were less than their ALEs;

...22% had incomes at or above the FPL and below 250% of the FPL;

...80% of these taxpayers' incomes were less than their ALES; and

...Overall, 43% who entered into installment agreements had incomes less than their ALEs.

What Taxpayers Should Know About Tax Return Copies and Transcripts

The IRS recommends that taxpayers keep a copy of tax returns for at least three years. Doing so can help taxpayers prepare future tax returns or even assist with amending a prior year’s return. If a taxpayer is unable to locate copies of previous year

payment from such taxpayer and, if the taxpayer cannot make full payment, to offer the taxpayer an installment agreement for a period not to exceed five years; and (C) to obtain financial information with respect to such taxpayer.

A tax receivable means any outstanding assessment which IRS includes in potentially collectible inventory. An inactive tax receivable means any tax receivable if:

...at any time after assessment, IRS removes the receivable from the active inventory for lack of resources or inability to locate the taxpayer;

...more than ⅓ of the period of the applicable statute of limitation has lapsed, and the receivable has not been assigned for collection to any IRS employee; or

...in the case of a receivable which has been assigned for collection, more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection of the receivable. (Code Sec. 6306(c))

A tax receivable is not eligible for collection under a qualified tax collection contract if the receivable:

...is subject to a pending or active offer-in-compromise or installment agreement;

...is classified as an innocent spouse case;

...involves a taxpayer identified by IRS as being (a) deceased, (b) under the age of 18, (c) in a designated combat zone, or (d) a victim of tax-related identity theft;

...is currently under examination, litigation, criminal investigation, or levy; or

...is currently subject to a proper exercise of a right of appeal under the Code. (Code Sec. 6306(d))

Taxpayer Advocate Directive. On Apr. 23, 2018, the NTA issued a Taxpayer Advocate Directive (TAD) ordering IRS not to assign to private collection agencies (PCAs) the debt of any taxpayer whose income was less than 250% of the FPL. IRS was ordered to respond to the TAD, either by agreeing or by appealing the TAD to the Deputy Director for Services and Enforcement by June 25, 2018.

IRS and the Code use 250% of the FPL as a proxy for economic hardship in several situations. IRS excludes Social Security recipients whose income is below 250% of the FPL in determining whether to issue continuous levies under Code Sec. 6331(h) for unpaid federal liabilities. In Code Sec. 7526, a low-income taxpayer clinic is defined in part by the percentage of taxpayers it represents whose income doesn't exceed 250% of the FPL. Code Sec. 6159 adopts this same measure to excuse some taxpayers from paying user fees to enter into installment agreements. Significantly, the House of Representatives included a provision to exclude taxpayers

50

Foreign Taxes

Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns

This document provides answers to questions regarding return filing and tax payment obligations arising under section 14103 of “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” P.L 115-97 (“the Act”), which was enacted on December 22, 2017. The new provision enacted by section 14103 of the Act, set forth at section 965 of the Internal Revenue Code (the “Code”), applies with respect to the last taxable year of certain specified foreign corporations (as defined under section 965(e) of the Code) beginning before January 1, 2018, and the amount included in income under section 965 of the Code is includible in the United States shareholder’s year in which or with which such a specified foreign corporation’s year ends. Taxpayers may have to pay tax resulting from section 965 of the Code when filing their 2017 tax returns. For example, section 965 of the Code may give rise to a 2017 tax liability for a calendar year United States shareholder holding an interest in a calendar year specified foreign corporation.

In general, section 965 of the Code requires United States shareholders, as defined under section 951(b) of the Code, to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Very generally, section 965 of the Code allows taxpayers to reduce the amount of such inclusion based on deficits in earnings and profits with respect to other specified foreign corporations. The effective tax rates applicable to such income inclusions are adjusted by way of a participation deduction set out in section 965(c) of the Code. A reduced foreign tax credit applies to the inclusion under section 965(g) of the Code. Taxpayers, pursuant to section 965(h) of the Code, may elect to pay the transition tax in installments over an eight-year period. Generally, a specified foreign corporation means either a controlled foreign corporation, as defined under section 957 of the Code (“CFC”), or a foreign corporation (other than a passive foreign investment company, as defined under section 1297 of the Code, that is not also a CFC) that has a United States shareholder that is a domestic corporation.

tax returns, they should check with their software provider or tax preparer first. Tax returns are available from IRS for a fee.Even though taxpayers may have a copy of their tax return, some taxpayers need a transcript. These are often necessary for a mortgage or college financial aid application.

Here is some information about copies of tax returns and transcripts that can help taxpayers know when and how to get them:

Transcripts

To get a transcript, taxpayers can:

• Order online. They can use the Get Transcript tool onIRS.gov. Users must authenticate their identity with theSecure Access process.

• Order by mail. Taxpayers can use Get Transcript byMail or call 800-908-9946 to order a tax return transcriptsand/or tax account transcripts.

• Complete and send either Form 4506-T or Form 4506T-EZ to the IRS. They should use Form 4506-T to requestother tax records, such as a tax account transcript, recordof account, wage and income, and a verification of non-filing.

Transcripts are free and available for the current tax year and the past three years. A transcript usually displays most line items from the tax return. This includes marital status, the type of return filed, adjusted gross income and taxable income. It also includes items from any related forms and schedules filed. It doesn’t reflect any changes the taxpayer or the IRS may have made to the original return.

Taxpayers needing a transcript should remember to plan ahead. Delivery times for online and phone orders typically take five to 10 days from the time the IRS receives the request. Taxpayers should allow 30 days to receive a transcript ordered by mail, and 75 days for copies of your tax return.

Copies of tax returns

Taxpayers who need an actual copy of a tax return can get one for the current tax year and as far back as six years. The fee per copy is $50. A taxpayer will complete and mail Form 4506 to request a copy of a tax return. They should mail the request to the appropriate IRS office listed on the form.Taxpayers who live in a federally declared disaster area can get a free copy of their tax return. More disaster relief information is available on IRS.gov.

51

income under section 965(a) of the Code.

• The person’s aggregate foreign cash position, ifapplicable.

• The person’s total deduction under section 965(c) ofthe Code.

• The person’s deemed paid foreign taxes with respectto the total amount required to be included in income byreason of section 965(a).

• The person’s disallowed deemed paid foreign taxespursuant to section 965(g).

• The total net tax liability under section 965 (asdetermined under section 965(h)(6)). [1]

• The amount of the net tax liability under section 965to be paid in installments (including the current yearinstallment) under section 965(h) of the Code, if applicable,which will be assessed. [2]

• The amount of the net tax liability under section 965,the payment of which has been deferred, under section965(i) of the Code, if applicable. [3]

• A listing of elections under section 965 of the Code orthe election provided for in Notice 2018-13 that the taxpayerhas made, if applicable.

A model statement is included in Appendix: Q&A3. Adequate records must be kept supporting the section 965(a) inclusion amount, deduction under section 965(c) of the Code, and net tax liability under section 965, as well as the underlying calculations of these amounts. Moreover, additional reporting may be required when filing returns for subsequent tax years, and the manner of reporting may be different. See also Q&A8 concerning Form 5471 filing._________________________________[1] Use section 965(h)(6) to calculate the total net tax liabilityunder section 965 even if an election to pay the net tax liabilityunder section 965 in installments has not been made and evenif the person is not a United States shareholder of a deferredforeign income corporation. Do not reduce this amountby any net tax liabilities under section 965 with respect towhich section 965(i) is effective. Section 965(h)(6) generallydetermines a person’s net tax liability under section 965 bystarting with (i) the taxpayer’s tax liability with all section 965amounts included and then subtracting (ii) the tax liability withno section 965 amounts included and with dividends receivedfrom deferred foreign income corporations disregarded. SeePublication 5292 for instructions to be used in computing thenet tax liability under section 965.

[2] If both one or more elections under section 965(i) havebeen made and an election under section 965(h) has beenmade, the amount of the net tax liability under section 965 tobe paid in installments is: (i) the amount of the total net taxliability under section 965 as determined above less (ii) the

The instructions in these FAQs are for filing 2017 tax returns with an amount under section 965 of the Code. Failure to submit tax returns according to these instructions may result in difficulties in processing tax returns, including rejection, processing delays, or erroneous notices being issued.

Taxpayers who electronically file Form 1040 are requested to wait to file their return on or after April 2, 2018. This will provide the IRS time to make certain system changes to allow the returns to be accepted and processed.

Taxpayers with questions or comments related to section 965 may submit those questions or comments to the IRS at LB&I.TCJA@irs.gov. Please note that individual responses will not be provided; questions or comments may be addressed in the form of additional FAQs.

Q1. Who is required to report amounts under section 965 of the Code on a 2017 tax return?

A1. A person that is required to include amounts in income under section 965 of the Code in its 2017 taxable year, whether because, the person is a United States shareholder of a deferred foreign income corporation (as defined under section 965(d) of the Code) or because it is a direct or indirect partner in a domestic partnership, a shareholder in an S corporation, or a beneficiary of another passthrough entity that is a United States shareholder of a deferred foreign income corporation, is required to report amounts under section 965 of the Code on its 2017 tax return.

Posted: 03/13/2018

Q2. How are amounts under section 965 of the Code reported on a 2017 tax return?

A2. Amounts required to be reported on a 2017 tax return should be reported on the return as reflected in the table included in Appendix: Q&A2. The table reflects only how items related to amounts included in income under section 965 of the Code should be reported on a 2017 tax return. It does not address the reporting in other scenarios, including distributions made in 2017, which should be reported consistent with the Code and the current forms and instructions.

Posted: 03/13/2018

Q3. Is there any other reporting in connection with section 965 of the Code required on a 2017 tax return?

A3. Yes. A person that has income under section 965 of the Code for its 2017 taxable year is required to include with its return an IRC 965 Transition Tax Statement, signed under penalties of perjury and, in the case of an electronically filed return, in Portable Document Format (.pdf) with a filename of “965 Tax”. Multiple IRC 965 Transition Tax Statements can be combined into a single .pdf file. The IRC 965 Transition Tax Statement must include the following information:

• The person’s total amount required to be included in

52

aggregate amount of the taxpayer’s net tax liabilities under section 965 with respect to which section 965(i) elections are effective. See Publication 5292 for more information.

[3] See Publication 5292 for more information regarding thecalculation of amounts eligible for S corporation shareholderdeferral under section 965(i).

Updated: 04/13/2018

Q4. What elections are available with respect to section 965 of the Code on a 2017 tax return?

A4. Section 965 of the Code permits multiple elections related to amounts included in income by reason of section 965 of the Code or the payment of a taxpayer’s net tax liability under section 965 (as determined under section 965(h)(6)). Statutory elections can be found in section 965(h), (i), (m), and (n).

Furthermore, the Treasury Department and the IRS have announced another election that may be made with respect to the determination of the post-1986 earnings and profits of a specified foreign corporation. This election is described in Notice 2018-13, 2018-6 I.R.B. 341, Section 3.02.

Posted: 03/13/2018

Q5. Who can make an election with respect to section 965 of the Code on a 2017 tax return?

A5. The elections under section 965 of the Code are limited to taxpayers with a net tax liability under section 965 (in the case of section 965(h) of the Code), taxpayers that are shareholders of S corporations and that have a net tax liability under section 965 (in the case of section 965(i) of the Code), taxpayers that are REITs (in the case of section 965(m) of the Code), or taxpayers with an NOL (in the case of section 965(n) of the Code). Thus, a domestic partnership or an S corporation that is a United States shareholder of a deferred foreign income corporation may not make any of the elections under section 965 of the Code. The Treasury Department and the IRS provided further guidance concerning the availability of the elections under section 965 of the Code to direct and indirect partners in domestic partnerships, shareholders in S corporations, and beneficiaries in other passthrough entities that are United States shareholders of deferred foreign income corporations. See Section 3.05(b) of Notice 2018-26.

The election under Notice 2018-13, Section 3.02 may be made on behalf of a specified foreign corporation pursuant to the rules of §1.964-1(c)(3).

In the case of a consolidated group (as defined in §1.1502-1(h)), in which one or more members are United States shareholders of a specified foreign corporation, the agent for the group (as defined in §1.1502-77) must make the elections on behalf of its members.

Updated: 04/13/2018

Q6. When must an election with respect to section 965 of the Code be made?

A6. An election with respect to section 965 of the Code must be made by the due date (including extensions) for filing the return for the relevant year. However, even if an election is made under section 965(h) of the Code to pay a net tax liability under section 965 of the Code in installments, the first installment must be paid by the due date (without extensions) for filing the return for the relevant year.

Posted: 03/13/2018

Q7. How is an election with respect to section 965 of the Code made on a 2017 tax return?

A7. A person makes an election under section 965 of the Code or the election provided for in Notice 2018-13, Section 3.02, by attaching to a 2017 tax return a statement signed under penalties of perjury and, in the case of an electronically filed return, in Portable Document Format (.pdf), for each such election. Each such statement must include the person’s name, taxpayer identification number and any other information relevant to the election, such as the net tax liability under section 965 with respect to which the installment election under section 965(h)(1) of the Code applies, the name and taxpayer identification number of the S corporation with respect to which the deferral election under section 965(i)(1) of the Code is made, the section 965(a) inclusion amountwith respect to which the election under section 965(m)(1)(B)of the Code applies, the amount described in section 965(n)(2) of the Code to which the election under section 965(n)(1)of the Code applies, and the name and taxpayer identificationnumber, if any, of the specified foreign corporation with respectto which the election under Notice 2018-13, Section 3.02, ismade. Model statements are included in Appendix: Q&A7.Each election statement must have the applicable title and,in the case of an attachment in Portable Document Format(.pdf) included with an electronically filed return, the file namereflected in the following table:

53

• The partner’s, shareholder’s, or beneficiary’s share ofthe partnership’s, S corporation’s, or other passthroughentity’s section 965(a) inclusion amount, if applicable.

• The partner’s, shareholder’s, or beneficiary’s share ofthe partnership’s, S corporation’s, or other passthroughentity’s deduction under section 965(c), if applicable.

• Information necessary for a domestic corporatepartner, or an individual making an election under section962, to compute its deemed paid foreign tax credits withrespect to its share of the partnership’s, S corporation’s,or passthrough entity’s section 965(a) inclusion amount, ifapplicable.

For more information concerning the application of section 965 to domestic partnerships, S corporations, or other domestic passthrough entities, see Section 3.05(b) of Notice 2018-26.

Updated: 04/13/2018

Q10. How should a taxpayer pay the tax resulting from section 965 of the Code for a 2017 tax return?

A10. A taxpayer should make two separate payments as follows: one payment reflecting tax owed without regard to section 965 of the Code, and a second, separate payment reflecting tax owed resulting from section 965 of the Code and not otherwise satisfied by another payment or credit as described in Q&A13 and Q&A14 (the 965 Payment). See Q&A13 for information regarding how the IRS will apply 2017 estimated tax payments. Both payments must be paid by the due date of the applicable return (without extensions). But see Notice 2018-26, section 3.05(e), providing that if an individual receives an extension of time to file and pay under §1.6081-5(a)(5) or (6), the individual’s due date for the 965 Payment is also extended.

The 965 Payment must be made either by wire transfer or by check or money order. This may be the first year’s installment of tax owed in connection with a 2017 tax return by a taxpayer making the election under section 965(h) of the Code, or the full net tax liability under section 965 of the Code for a taxpayer who does not make such election and does not make an election under section 965(i) of the Code. For the 965 Payment, there is no penalty for taxpayers electing to use wire transfers as an alternative to otherwise mandated EFTPS payments. Accordingly, taxpayers that would normally be required to pay through EFTPS should submit the 965 Payment via wire transfer or they may be subject to penalties. On a wire payment of tax owed under section 965 of the Code, the taxpayer would use a 5-digit tax type code of 09650 (for more information, see https://www.irs.gov/payments/same-day-wire-federal-tax-payments). On a check or money order payment of tax owed resulting from section 965 of the Code, include an appropriate payment voucher (such as Form 1040-V or 1041-V) and along with all other required information write on the front of your payment “2017 965 Tax.”

For the payment owed without regard to section 965, normal

Posted: 03/13/2018

Q8. Is a Form 5471 with respect to all specified foreign corporations with respect to which a person is a United States shareholder required to be filed with the person’s 2017 tax return, regardless of whether the specified foreign corporations are CFCs?

A8. Yes. In order to collect information relevant to the calculation of a United States shareholder’s section 965(a) inclusion amount, a person that was a United States Shareholder of a specified foreign corporation during its 2017 taxable year, including on the last day of such year, and owned stock of the specified foreign corporation on the last day of the specified foreign corporation’s year that ended during the person’s year must file a Form 5471 with respect to the specified foreign corporation completed with the identifying information on page 1 of Form 5471 above Schedule A, as well as Schedule J. The exceptions to filing in the instructions to Form 5471otherwise will continue to apply. United States shareholdersnot otherwise required to file Form 5471 should consult theinstructions to Form 5471 to determine the correct category offiler. Notice 2018-13, Section 5.02 also provides an exceptionto filing Form 5471 for certain United States shareholdersconsidered to own stock by “downward attribution” from aforeign person. The IRS intends to modify the instructions tothe Form 5471 as necessary.

Updated: 04/13/2018

Q9. Are domestic partnerships, S corporations, or other passthrough entities required to report any additional information to their partners, shareholders, or beneficiaries in connection with section 965 of the Code?

A9. Yes. A domestic partnership, S corporation, or other passthrough entity should attach a statement to its Schedule K-1s, if applicable, that includes the following informationfor each deferred foreign income corporation for which suchpassthrough entity has a section 965(a) inclusion amount:

54

payment procedures apply (for more information, see https://www.irs.gov/payments). This payment may be made at the same or different time from the 965 Payment, but must be made by the due date of the return or penalties and interest may apply.

Updated: 04/13/2018

Q11. If not already filed, when should an individual taxpayer electronically file a 2017 tax return?

A11. Individual taxpayers who electronically file their Form 1040 should file on or after April 2, 2018. Individual taxpayers who file a paper Form 1040 can do so at any time.

Posted: 03/13/2018

Q12. If a person has already filed a 2017 tax return, what should the person do?

A12. The person should consider filing an amended return based on the information provided in these FAQs and Appendices. Failure to submit a return in this manner may result in processing difficulties and erroneous notices being issued. Failure to accurately reflect the net tax liability under section 965 of the Code in total tax could result in interest and penalties.

In order to amend a return, a person would file the applicable form for amending the return pursuant to regular instructions and would attach:

• amended versions of forms and schedules necessaryto follow the instructions in these FAQs,

• any election statements, and

• the IRC 965 Transition Tax Statement included inAppendix: Q&A3.

Posted: 03/13/2018

Q13. How will the IRS apply 2017 estimated tax payments (including credit elects from 2016) to a taxpayer’s net tax liability under section 965?

A13. The IRS will apply 2017 estimated tax payments first to a taxpayer’s 2017 net income tax liability described under section 965(h)(6)(A)(ii) (its net income tax determined without regard to section 965), and then to its tax liability under section 965, including those amounts that are subject to payment in installments pursuant to an election under section 965(h).

Posted: 04/13/2018

Q14. If a taxpayer’s 2017 payments, including estimated tax payments, exceed its 2017 net income tax liability described under section 965(h)(6)(A)(ii) (its net income tax determined without regard to section 965) and the first annual installment (due in 2018) pursuant to an election under section 965(h),

may the taxpayer receive a refund of such excess amounts or credit such excess amounts to its 2018 estimated income tax?

A14. No. A taxpayer may not receive a refund or credit of any portion of properly applied 2017 tax payments unless and until the amount of payments exceeds the entire unpaid 2017 income tax liability, including all amounts to be paid in installments under section 965(h) in subsequent years. If a taxpayer’s 2017 tax payments exceed the 2017 net income tax liability described under section 965(h)(6)(A)(ii) (net income tax determined without regard to section 965) and the first annual installment (due in 2018) pursuant to an election under section 965(h), the excess will be applied to the next successive annual installment (due in 2019) (and to the extent such excess exceeds the amount of such next successive annual installment due, then to the next such successive annual installment (due in 2020), etc.) pursuant to an election under section 965(h).

Posted: 04/13/2018

Q15: If a taxpayer that has made a section 965(h) election for 2017 filed a 2017 income tax return that calculated an overpayment without including the taxpayer’s total net tax liability under section 965, and the taxpayer attempted to elect to credit the calculated overpayment to its estimated tax liability for 2018, will the IRS determine an addition to tax for an underpayment of taxpayer’s 2018 estimated taxes because the credit elect won’t be available for the first required 2018 estimated tax installment?

A15: No. The IRS has determined that no addition to tax for an underpayment of estimated taxes under section 6654 or 6655 will apply (nor be increased) if a taxpayer makes an estimated tax payment sufficient to satisfy both the underpayment of the first required estimated tax installment for 2018 and the full amount of the second required estimated tax installment for 2018 on or before the due date for the second installment (that is, June 15, 2018, for calendar year taxpayers). This relief from the addition to tax for the underpayment of estimated taxes applies only to taxpayers whose first required installment for 2018 was due on or before April 18, 2018.

If the IRS sends a taxpayer a notice of an addition to tax for underpayment of estimated tax under section 6654 or 6655 and the taxpayer meets all the conditions for relief described above (including making the required payment by the due date for the second installment), the taxpayer should contact the IRS office that issued the notice and request abatement of the addition to tax for underpayment of estimated taxes in accordance with the provisions in these FAQs and updated instructions to Forms 2210 and 2220.

Posted: 06/04/2018

Q16: If an individual fails to timely pay his or her first installment of tax due under section 965(h), will the IRS assess an addition to tax for failure to pay? Will the taxpayer’s requirement to pay all subsequent installments be accelerated under section

55

965(h)(3)?

A16: If an individual meets the criteria in this paragraph and pays the total amount of the first installment on or before the due date for the second installment, the IRS will not assess an addition to tax for failure to timely pay the first installment and will not accelerate subsequent installments under section 965(h)(3). An individual with a net tax liability under section 965 is required to report the liability on his or her tax return for the year in which or with which the inclusion year of the deferred foreign income corporation ends and pay the full amount of that liability on the unextended due date of that return, unless the individual elects to pay the liability in eight annual installments pursuant to section 965(h)(1). However, the IRS has determined that, if an individual’s net tax liability under section 965 in the individual’s 2017 taxable year is less than $1 million, the individual makes a timely election under section 965(h), and the individual did not pay the full amount of the first installment by the due date under section 965(h)(2), the failure to make the payment will not result in an acceleration event under section 965(h)(3) so long as the individual pays the full amount of the first installment (and its second installment) by the due date for its 2018 return (determined without regard to extensions). For this purpose, the relevant due date generally is April 15, 2019. In the case of United States citizens or residents whose tax homes and abodes, in a real and substantial sense, are outside the United States and Puerto Rico, and United States citizens and residents in military or naval service on duty, including non-permanent or short term duty, outside the United States and Puerto Rico, the relevant due date is June 17, 2019, which is provided by Treas. Reg. §1.6081-5(a)(5) and (6). Although the IRS will not assess an addition to tax for failure to timely pay the first installment, a taxpayer will be liable for interest on such amount from the due date of the installment. See I.R.C. §6601.

If the IRS sends a taxpayer a notice of an addition to tax for failure to timely pay the first installment, and the taxpayer meets all the conditions for relief described above (including making the required payment by the due date for the second installment due under section 965(h)), the taxpayer should contact the IRS office that issued the notice and request abatement of the addition to tax for failure to timely pay the first installment in accordance with the provisions in these FAQs.

Posted: 06/04/2018

Q17: If an individual has filed his or her 2017 tax return, but has not made the section 965(h) election, may the individual file another 2017 return on which he or she makes the election?

A17: Yes. If an individual with a net tax liability under section 965 in the individual’s 2017 tax year has already filed his or her tax return and did not make an election under section 965(h), such individual can make the section 965(h) election by filing a Form 1040X that complies with the procedures set forth in these FAQs (including, for example, the IRC 965 Transition Tax Statement(s) described in Q&A 3 and the

election statement described in Q&A 7) on or before the due date of the individual’s 2017 return, taking into account any additional time that would have been granted if the individual had made an extension request. For this purpose, the IRS will treat the individual as if he or she had requested and received the extension.

Posted: 06/04/2018

Appendix: Q&A2

Updated: 04/13/2018

56

_________________________________[4] This includes section 965(a) inclusion amounts of a UnitedStates shareholder of a deferred foreign income corporationand distributive shares and pro rata shares of section 965(a)inclusion amounts of domestic partnerships, S corporations,and other passthrough entities.

[5] This includes deductions under section 965(c) of a UnitedStates shareholder of a deferred foreign income corporationand distributive shares and pro rata shares of deductionsunder section 965(c) of domestic partnerships, S corporations,and other passthrough entities.

[6] See section 965(g).

[7] See section 965(h)(6) and Q&A3.

[8] To make the 965(i) election, the taxpayer will have to file apaper Form 1040.

Updated: 04/13/2018-----------------------------------------------------------[9] See also Q&A9.

[10] See section 965(f)(2) concerning the treatment of theincome inclusion offset by the section 965(c) deduction forthe purposes of computing adjustments to shareholder basisunder section 1367(a)(1)(A) and calculating the accumulatedadjustments account under section 1368(e)(1)(A).

[11] See also Q&A9.

[12]See section 965(f)(2) concerning the treatment of theincome inclusion offset by the section 965(c) deduction for thepurpose of computing adjustments to the basis of a partner’sinterest in a partnership under section 705(a)(1)(B)

57

-----------------------------------------[13]See also Q&A9

Posted: 03/13/2018

Posted: 03/13/2018

58

Posted: 03/13/2018

Posted: 03/13/2018

59

Posted: 03/13/2018

Posted: 03/13/2018

Posted: 03/13/2018

60

State News of Note

Does Your State’s Individual Income Tax Code Conform with the Federal Tax Code?

As the federal government continues to debate tax reform, states, and many taxpayers, are asking an important question: How is my state’s tax code impacted? The exact impacts won’t be known until the federal bill is finalized, but states have a number of things to monitor, as my colleague, Joseph Bishop-Henchman, wrote earlier this month.

To understand how federal tax reform would change state tax codes and revenues, we need to explore the idea of conformity. For reasons of administrative simplicity, states frequently seek to conform many, though rarely all, elements of their tax codes to the federal tax code. This harmonization of definitions and policies reduces compliance costs for individuals and businesses with liability in multiple states and limits the potential for double taxation of income. No state conforms to the federal code in all respects, and not all

Posted: 03/13/2018

61

provisions of the federal code make for good tax policy, but greater conformity substantially reduces tax complexity and has significant value.

States conform on either a static or rolling basis. Static conformity means conforming to the Internal Revenue Code (IRC) as of a specific date, such as January 1, 2016. Rolling conformity means adopting IRC changes as they occur. The states are roughly split between these two types of conformity. Twenty states have rolling conformity, while 18 states have static conformity. (The remaining states do not tax individual income or use their own calculations of income.) But among the states with static conformity, the dates of conformity vary widely. Massachusetts conformed to the IRC as of 2005, while many other states conformed as of 2016.

The first large area of conformity is federal definitions of individual income. Twenty-seven states begin with federal adjusted gross income (AGI) as their income tax base. Six states use federal taxable income and three states use federal gross income as their starting point.

Even if a state uses federal AGI as its starting calculation, there can be adjustments (e.g., pension and retirement income, Social Security benefits, and federal deductibility) which diverge from the federal treatment of income. Twelve states conform to the federal standard deduction, while 10 use the federal personal exemption.

How states define their tax bases would matter a great deal for their revenue impacts under federal tax reform. For instance, a state that uses federal taxable income or AGI as its starting point would likely see an increase in revenue due to the elimination of many federal itemized deductions. Under the House and the Senate tax plans, the federal tax base (the definition of taxable income) would become broader, leading to an expansion of the state tax base. The federal changes include rate cuts to offset the broader bases, but states set their tax rates independently. Absent state-level changes, states would have a much larger tax base without correspondingly lower rates, leading to higher state-level revenue.

62

Wayne's World

IRS Updates Priority Guidance Report for TCJA Implementation Issues

The IRS has released the second quarter update to the agency’s 2017-2018 Priority Guidance Report which shows 18 projects added related to guidance implementing the Tax Cuts and Jobs Act.

In the statement accompanying the report, it contains “guidance projects that we hope to complete during the twelve-month period from July 1, 2017, through June 30, 2018 (the plan year).”

The 18 projects identified as related to initial implementation of the Tax Cuts and Jobs Act are:

• Guidance on certain issues related to the businesscredit under § 45S with respect to wages paid to qualifyingemployees during family and medical leave.

• Guidance under §§ 101 and 1016 and new § 6050Yregarding reportable policy sales of life insurance contracts.

• Guidance under § 162(m) regarding the applicationof the effective date provisions to the elimination of theexceptions for commissions and performance-basedcompensation from the definition of compensation subjectto the deduction limit.

• Guidance under § 162(f) and new § 6050X.

• Computational, definitional, and other guidance undernew § 163(j).

• Guidance on new § 168(k).

• Computational, definitional, and anti-avoidanceguidance under new § 199A.

• Guidance adopting new small business accountingmethod changes under §§ 263A, 448, 460, and 471.

• Definitional and other guidance under new § 451(b)and (c).

• Guidance on computation of unrelated businesstaxable income for separate trades or businesses undernew § 512(a)(6).

• Guidance implementing changes to § 529.

• Guidance implementing new § 965 and otherinternational sections of the TCJA. (published 01/22/18 inIRB 2018-04 as Notice 2018-07 (Released 12/29/17)).

• Guidance implementing changes to § 1361 regardingelecting small business trusts.

• Guidance regarding Opportunity Zones under §§ 1400Z-1 and 1400Z-2.

• Guidance under new § 1446(f) for dispositions ofcertain partnership interests. (To be published 02/12/18 inIRB 2018-07 as Notice 2018-08 (Released 12/29/17)).

• Guidance on computation of estate and gift taxes toreflect changes in the basic exclusion amount.

• Guidance regarding withholding under §§ 3402 and3405 and optional flat rate withholding.

• Guidance on certain issues relating to the excise taxon excess remuneration paid by “applicable tax-exemptorganizations” under § 4960

The ncpe Corporate, Partnership and LLC seminar will address many of these issues. The TCJA is the single largest legislation in 30 years and ncpe has worked diligently to bring you the latest information available. Go to the web site at www.ncpeseminars.com to register or call ncpe at 800-682-2163. Jerry and I will be looking for you.

Wayne

Use Resources and Toolsfor Tax Professionals

On Our Website ncpeFellowship.com

Renew Your Membership OnlineIf Your Membership is due

in June and July

63

Letters to the Editor

In the past when a client was missing a W2, I would go to the IRS and obtain a copy. Then when entering the information on the return I would leave the the state withholding section blank. (Sometimes I had the GA withholding number and sometimes it was a new employer and I didn't.) When GA received the return, the computer would kick the return out and a human would manually check their data and enter the amount of GA withholding received.

This is no longer happening. Now if you don't enter the withholding number and "some" dollar amount, the computer assumes zero and sends the client a deficiency notice.

If the client is unable to obtain a copy of the missing W2 from the employer, we are advised they are to go to the SSA to obtain a copy - for a fee (I've read $50 and $86 for each record requested).

All the more reason to stress to the client the importance of keeping track of their paperwork and, at least to me, a good reason to make the information available via the IRS TDS service.

Georgia might be late in implementing this (and I can't blame them as it must have cost them a lot of money in labor), but it would have been nice to have a heads up.

Just an FYI. I hope you're doing well.

Pat - - - - - - - - - -

Dear Beanna - Loved loved loved the Estate Planning letter to clients!!! An excellent reminder for all of our clients. I have always said - tax or no tax, estate planning is about so much more and at the time of death, that estate plan needs to be carried out. Kudos to you Beanna for making this letter available to the fellowship. You are a treasure my friend!

Love you

Linda- - - - - - - - - -

Thank you Beanna and Tom for taking such great care of us members. I get way more for my money here than anywhere else.

Judy C.

- - - - - - - - - -

Editor's Note: A huge thank you to Mr. Tom who worked diligently throughout the month of June on issues of the Fellowship while I was out teaching.

Tax Jokes and Quotes

Tax Facts:

Nearly 300,000 trees are cut down yearly to produce the paper for all the IRS forms and instructions.

American taxpayers spend over $200 billion and 5.4 billion hours working to comply with federal taxes each year, more

64

than it takes to produce every car, truck, and van in the United States.

The amount of effort needed to calculate and pay federal income for individuals and businesses in the United States is the equivalent of a staff of 3 million people working full-time for a year.

The IRS employs 114,000 people — twice as many as the CIA and five times more than the FBI.

60% of taxpayers must hire a professional to get through their own return.

Taxes eat up 38.2% of the average family’s income; that’s more than for food, clothing and shelter combined.

Sponsor of the Month

National Center for Professional EducationNCPE

Presents the 2018Corporate, Partnership & LLC Seminar

www.ncpeseminars.comto register or call the ncpe office at 800-682-2163

Taxing TimesncpeFellowship Monthly Newsletter

Next Edition - August 1, 2018

NCPE Seminar Series Reference Books

Availablencpefellowship.com

2017 Fall Seminar Series Book:Searchable, With References

1040 Individual Income Tax Update Seminar857-Page

2017 Summer Seminar Series Book:Searchable, With References

Corporations (C & S) andPartnerships (LLCs) Seminar

765-Page

2016 Fall Seminar Series Book:Searchable, With References

1040 Individual Income Tax Update Seminar5th Revision, 854-Page

2016 Summer Seminar SeriesSearchable And Reference Book

Corporations (C & S) andPartnerships (LLCs) Seminar

802 Pages

2015 Fall Seminar SeriesSearchable And Reference Book

923 Pages

2015 Summer Seminar SeriesSearchable And Reference Book

840 pages

2014 Fall Seminar SeriesSearchable And Reference Book

1,004 Pages

2014 Summer Seminar SeriesSearchable And Reference Book

840 Pages