Chapter 6: Wages and Other Income. 1 06: Wages and Other Income

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1 Page Chapter 6: Wages and Other Income 1

2 Learning Objectives Page Upon completion of this seminar, participants should be able to Describe proper reporting for Form W-2 Identify tax implications of virtual currency. Identify other taxable income and available exclusions Understand the changes regarding gambling income reporting and record keeping. 2

3 Key Developments Page The steps required to replace a missing W-2. Page 70 TC Memo , Sabolic, bad records are better than no records. Page 70 Limitation on Crowd Funding for Business Startups. Page 71 IRS continues to raise its oversight of cryptocurrencies with it s recent use of the John Doe summons of Bitcoin users. Page 74 TC , Cosentino, if a taxpayer has a recovery of taxes, penalties or interest, what is the taxability of the award? Page 76 3

4 Key Developments Page TC Summary Opinion , Maciu, Jec, the court rules of the taxability of an award connected with physical injury. Page 76 TC Memo , Rajcoomar, the taxpayer attempted to convert an Equal Opportunity settlement to a physical injury award. Page 77 CA 9 th Cir 08/10/ AFTR 2d taxpayer suffers from failure to include worker s compensation board to obtain settlement. Page 77 TC Memo Taylor, once payments were determined by retirement rules they were no longer workers compensation. Page 77 4

5 Key Developments Page TC Summary Opinion , in Keeter, payments by DOD as retirement were excludable to the extent they reflected what would have been due as VA benefits. Page 78 TC Summary Opinion , the taxpayer failed in his attempt to have Cohen rule invoked to account for gambling losses. Page 82 Reg new rules for W-9 verification for gambling winnings. Page 83 Discussion of taxation and reporting of fantasy sports betting. Page

6 I. Form W-2 Page 70 Replacing a W-2 that is lost or obtaining one never received can be a difficult process: 1. Contact the employer, FYI the employer is allowed to charge the cost of providing a replacement. 2. Contact the IRS at after February 14 th, the earlier filing deadline has helped but the IRS can/will contact the employer directly. Have personal and employment information ready. 6

7 I. Form W-2 Replacing a W-2 that is lost or obtaining one never received can be a difficult process: 3. When all else fails prepare Form 4852 but not before 04/15. Page 70 7

8 I. Form W-2 Page 70-New IRS has proposed rules allowing providers of Form W-2s to truncate SSNs for copies provided to an employee. The format will be ***-**-1234 or XXX-XX Final comments must be received by 12/18/2017 as IRS is attempting to put these rules in place for Form W-2s due to employees in January of

9 II. Tip Log Kept by Taxpayer Defeats IRS Tip Reconstruction Page Sabolic, TC Memo A taxpayer s less than complete records defeats the IRS s reconstruction of his tip income. Facts: Taxpayer worked as a bartender in a casino Shared his tips with fellow workers IRS believed taxpayer had under reported his tips and reconstructed amounts using employer records and industry accepted reconstruction practices. Court found taxpayer had the burden of proof. 9

10 II. Tip Log Kept by Taxpayer Defeats IRS Tip Reconstruction Page 71 But the court said: Yes the log was not complete. It was however an adequate attempt by the taxpayer to record his tip activity. Whole numbers, payments to co-workers, and missing days did not completely negate his record keeping attempt, making it not credible. The moral of the story seems to be that incomplete records are better than none, that an honest attempt continues to be a taxpayer s best defense. 10

11 III. New: Crowdfunding- IRS Information Letter Page 71 Per Wikipedia - The practice of funding a project or venture by raising monetary contributions from a large number of people. Crowdfunding is a form of crowdsourcing and of alternative finance. Current pace of growth estimates the industry will raise to $8.2 billion annually. The fees are based on the site used. They range from 5% to 15%. Sites that claim to be free simply charge the donors. 11

12 III. New: Crowdfunding- IRS Information Letter Page 71 The level of interest using crowd funding to provide capital for business startups continues to increase, but: If the need for capital is in excess of $500,000, the limitations of crowd funding are likely to tip the scale in favor of private placement. 12

13 III. New: Crowdfunding- IRS Information Letter Page Will there be any tax reporting: YES Form 1099-K when there are 200 transactions or more that yield at least $20,000. The problem, IRS will assume the payments are income Solution Convince the IRS that the receipts were either: Charity (Set up the Organization Up Front) Gifts (Nobody thought they were getting anything in return of value) Capital Investments

14 III. New: Crowdfunding- IRS Information Letter Page E. Conventional Wisdom Currently Says 1. Charitable Donation But need support from a qualified organization. 2. Gifts The transfer of goodwill, expecting nothing in return. 3. Taxable Income Anything of value received in return, many organizations look at the transfer as a sale or either a capital investment or an item. 14

15 III. New: Crowdfunding- IRS Information Letter Page In March of 2016 IRS attempted to give a limited level of guidance to the tax consequences of the process. IRS commented on whether crowd funding was an accessions to wealth under IRC Sec. 61(a) To make the determination IRS further looked at Re , the dominion and control standards. The final determination is based on whether the organization that received crowd funding had some kind of material liability to the provider of the funding.

16 III. New: Crowdfunding- IRS Information Letter Page I. IRS has indicated that the following will NOT be income: 1. Loans that must be repaid. 2. Contributions in exchange for an equity interest. 3. Gifts with a detached sense of generosity with NO quid pro quo. The bottom line, IRS says that the Duberstein decision will serve as the litmus test for gifts and IRC 61(a) will determine income but on a case by case basis. 16

17 Page 210-Update IV. Virtual Currency TIGTA Report bitcoin.org Report was critical of IRS failure to coordinate tax treatment of these transactions IRS said that due to budget constraints they were unable to expand programs of guidance in this area choosing to deal with at exam level. 17

18 Page 73 IV. Virtual Currency Some Background: A. Crypto-Currencies continue to grow in usage allowing people to by-pass banks for internet transaction Wikipedia lists 33 different such currencies. ( ncies) Investopedia says there are only 7 relevant dependable currencies (investopedia.com/tech/6- most-important-cryptocurrencies-other-bitcoin/) 18

19 Page 73 IV. Virtual Currency Some Background: C. A review of the differing currencies can be found at toptenreviews.com/money/investing/bestcryptocurrencies/ 19

20 Page 73 IV. Virtual Currency The Bad: Have exhibited extreme volatility through years. Not in the financial mainstream (This is changing) 20

21 Page IV. Virtual Currency What the tax practitioner must be aware of is, what is the type of crypto-currency owner they are dealing with: 1. A Miner A participant in the transaction that created new currency. 2. An Individual or Organization Somebody who accepted the currency in payment of goods or services which they intend to convert to cash. 3. A User Those who buy and sell transferring virtual currency like money. 21

22 Page 74 IV. Virtual Currency IRS responds to the TIGTA report: In November of 2016 a Northern California Court allows IRS to serve a John Doe summons against all of Coinbase (Bitcoin) users. Coinbase has resisted the IRS summons. In July of 2017 IRS relents by narrowing its summons from ALL users to those with a single transaction in excess of $20,000. The summons no longer includes individuals who only bought and held the currency. Coin base has requested the court further limit the IRS summons. 22

23 Page 74 IV. Virtual Currency An interest part of the legal battle on the John Doe summons The following is part of the response by Coinbase regarding the IRS summons 23

24 Page 211 IV. Virtual Currency With Notice IRS answered several questions but left unanswered: 1. What to do with the costs of mining virtual currencies, are the capitalized? 2. When does the taxpayer measure the FMV of the currency? 3. If used in payment of payroll or vendor obligations does the currency continue its property status? 4. Will virtual currency be considered a commodity subject to the mark to market rules? 24

25 Page 75 IV. Virtual Currency The other reality: Agreed price of property or service $50,000 FMV of currency $51,000 Taxable amount of transaction $51,000 Currency converted to cash for $48,000 Gain or (Loss) on sale is: $ -3,000 Loss is of what character i.e. ordinary or capital 25

26 Page75 IV. Virtual Currency In a recent case a Miami judge made this even more difficult or maybe not, but closely mirrors IRS s current attitude. 26

27 There are several income exclusions available in the code Income exclusions for physical injury awards must be directly related to the physical injury. By a show of Hands: A. A mental injury that affects the physical abilities of the taxpayer is excludable. B. Worker s compensation awards are associated with work place injury but are not always excludable. C. To be excludable an award must have a direct connection to the physical injury. D. Physical injury awards are no longer excludable. 27

28 VII. Income Exclusions (Not a Complete List) Page 76 Physical Injury means physical injury Practice Pointer Get a copy of the agreement 28

29 VII. Income Exclusions (Not a Complete List) Page 77 Rajcoomar, TC Memo Case Employee brought suit due to employer s failure to accommodate his physical limitations due to a non-workplace injury. Result Though the payment was due to the injury it was not a direct result of the injury, award was taxable. 29

30 VII. Income Exclusions (Not a Complete List) Page 77 Workers Compensation Awards are exempt but: Simpson, CA 9 th 08/10/2016. The settlement agreement did in fact address an agreement between the employee and employer as a payment for WC injuries. However, neither the employer or the employee ever obtained approval by the state regulatory WC board. The court allowed a small percentage of the award as an accommodation. 30

31 VII. Income Exclusions (Not a Complete List) Page 77 Taylor, TC Memo , a public safety employee was converted by state from WC disability to retirement but sought continuation of payments as WC. Finding As the payments were now subject to length of service and age requirements they were in fact no longer eligible for exclusion and we in fact retirement payments. 31

32 VII. Income Exclusions (Not a Complete List) Page 78 Shame on the IRS Keeter, TC Summary Opinion A taxpayer in an annual battle with the IRS argued that his DOD pension was a service related disability (VA) and eligible for exclusion. Court said it mattered not where the payments came from or were labeled. The were VA like payments and excludible. 32

33 VIII. Wrongful Incarceration Award Exclusion Page 78 The PATH Act added an additional income exclusion Awards for wrongful Incarceration The act stipulates that gross income will not include: ANY amount received on the part of an individual who was convicted. The award was proximate to that conviction that was determined to be wrongful. 33

34 IX. Payments for In-Home Supportive Care are Excludable Page 78 A person who receives payments for qualified foster care in their place of residence are eligible to exclude those payments from income. To qualify there are two tests: Payments are made by: State or political subdivision of state Qualified foster care placement agency Are made for care performed in the provider s place of residence. 34

35 IX. Payments for In-Home Supportive Care are Excludable Page 78 A difficulty of care payment which is eligible for exclusion must be on account of: Physical Handicap Mental Handicap Emotional Handicap AND Care must be provided in the residence of the provider AND Payments for care must be designated as such by the agency making the payments 35

36 IX. Payments for In-Home Supportive Care are Excludable Page 78 In Notice IRS provided guidance of what type of payments constituted qualified foster care payments. A primary label identified by IRS that the care was a substitute for care that would ordinarily be provided in a: Hospital Nursing Facility Intermediate Care Facility 36

37 IX. Payments for In-Home Supportive Care are Excludable Page 79 These excludable care payments can be made to an individual who (PLR ): 1. Is an employee of the: Agency Person receiving the care 2. Is living in the home of the person receiving the care 37

38 XII. Gambling Income: Casual versus Professional Gamblers Page 81 Most of our clients are casual gamblers, i.e. those who gamble for entertainment versus profit. There are a series of rulings to help soften the burden for these people that play slots. EMISC How to determine gains/losses from slot play. Green 66 TC 538 (1976) Szkirscak TC Memo For the rest look at the record keeping requirements 40

39 Page 82 XIII. Record Keeping Not an easy task: Keep a diary, supplement by other evidence. Dates and types of wagers, FYI nobody considers player s cards a worthy record keeping method, Merkins TC Memo Tickets, receipts, cancelled checks, credit care records, cash withdrawals, and casino receipts. There is NO Cohan rule, estimates generally do not work. 41

40 Page 82 XIII. Record Keeping It is way to difficult to keep records on my gambling losses says a taxpayer: Peter Phuong K Pham, TC Summary Opinion IRS says, to bad so sad, we told you before the Cohan rule does not work does not work for gambling losses. The court found the taxpayer s argument without merit, finding for the IRS. 42

41 Page XIV. Gambling Winnings and Losses Some pertinent observations: 3. Libutti v. Comm., TC Memo Comps are taxable income. 5. State rules for gambling losses vary greatly. Some states do not allow of state withholding of non-resident gamblers. 7. Rules for completion of Form W-9 have been updated and now require a photo I.D. to complete. 8. UPDATE Reg and 3406 have been finalized. (Allow the pooling of wagers). 43

42 Page 83 XIV. Gambling Winnings and Losses 10. The W-2G may look a little different in the future: NEW: Reg A payer may issue a single Form W-2G for the same type of play for a single day of multiple winning events, using either a: Calendar Day Gaming Day 44

43 Page XV. Fantasy Sports Betting 1099 Reporting Direct Payment Form W-2G, threshold $600 Indirect Payment Form 1099-K, threshold 200 transactions and $20,000 Netting of associated Fees Note: Many states are revising their statute to consider fantasy play as gambling. 45