monthly TAXPRO Farmland Rental Income Tax Guide Government News Issue 1 Volume 40 January 2018 Not subject to self-employment tax

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1 TAXPRO monthly Issue 1 Volume 40 January Government News Tax Reform on the Move: The gears are turning 4 Tax Guide Quick Reference Guide: A tool for preparing 2017 returns 12 Tax 101 Data Compromises: A tax professional s nightmare Farmland Rental Income Not subject to self-employment tax By Kris Siolka, EA Charles Martin and his wife have owned more than 300 acres of farmland for several years. Their farm also includes various agricultural and horticultural structures and their personal residence. They entered into an arrangement with a large poultry producer, Sanderson Farms, to raise chickens. Sanderson owned the chickens and provided the feed and had very specific requirements that the Martins had to meet under their contract with Sanderson Farms. The agreement required the Martins to install specialized equipment at a cost of $1,200,000. Sanderson Farms gave the Martins detailed instructions for the farming activity. The Martins were able to hire laborers. The Martins formed an S corporation, CL Farms, of which they were the sole shareholders. Sanderson Farms approved the transfer of the remainder of the Martins contract with Sanderson Farms to CL Farms. CL Farms used an appraisal guide for cost of labor and management services and incorporation information from other chicken growers and entered into an oral employee agreement with the Martins to set their salaries and those of the other workers hired by CL Farms. CL Farms leased the farmland and equipment from the Martins (shareholders of CL Farms). CL Farms and the Martins entered into a 5-year lease for the rental at $1.3 million. The agreement required CL farms to make the rent payments no matter their financial situation. This amount represented fair market rent and was consistent with amounts paid by other Sanderson Farms growers for the use of similar properties. continued on page 3

2 Government News Tax Reform is on the Move The gears are turning By Cindy Hockenberry, EA Both the Senate and the House Republicans have put forth their versions of tax reform. Both bills eliminate several popular deductions and credits, cut tax rates for individuals and corporations and either repeal or partially repeal the estate tax. What will all this mean to you and your clients? By the time this article hits your desk, we could well have the answer to that question. On November 16, the House passed its version of the Tax Cuts and Jobs Act [HR 1] by a mostly party-line vote of The Senate passed its version on December 2 by a vote. Does this mean we have new tax law to learn? Not yet. Now that both chambers passed their bills, the differences are hashed out in joint committee, voted on and passed to the president for signature. There is no way to predict when that will happen. It s expected there will be difficult conference negotiations between the two chambers over the final legislation. Meanwhile, here s what you can do for yourself and your clients. These proposed changes will impact taxpayers at every income level, so the assistance and advice you provide can be used to retain current clients and even gain some new ones. There is a prevailing uncertainty among the tax professional community that any form of tax simplification spells doom and the loss of clients. This doesn t need to be the case. Tax reform will result in a substantial amount of insecurity for taxpayers, and you can guide your clients through these changes. Start by becoming as inform ed as you can about the proposed changes. NATP has many resources to help you in that area. Keep in mind, the bulk of the proposed changes won t take effect until 2018, but you might want to get in front of some of your clients as soon as possible, maybe even before the year is over. If you have clients who are on the edge of the increased standard deduction threshold, it may be advantageous to double up on the remaining itemized deductions for next year. If the House s proposals are enacted, only real property taxes, mortgage interest and charitable contributions will survive. If possible, advise your clients to consider accelerating any deduction and taking any credits that they might lose before this year is over. Both Chambers of Congress have adamantly expressed that their versions of tax reform will cut the taxes for middle income earners. While this notion is heavily debated among tax experts, you will be called to task to independently assess who among your clients may be affected. The House and Senate proposals differ significantly with regard to tax brackets and rates. Neither bill changes the current tax rates on capital gains and qualified dividends. The House bill has four income tax rates, 12%, 25%, 35% and 39.5%. The Senate has seven, 10%, 12%, 22%, 24%, 32%, 35% and 38.5%. Both bills have their highest rate hit taxpayers who earn over $500,000 for single filers, $1 million for joint filers. Those taxpayers earning less will need your attention. For now it will be a matter of number crunching. Even though more taxable income may fall into a lower rate than currently, 2 NATP TAXPRO Monthly / natptax.com

3 Government News taxpayers are faced with losing most itemized deductions and their personal exemptions. In the end, many middle income taxpayers may see little in the way of tax savings. Clients who are business owners will need your attention as well. Significant increases to the 179 deduction (100% for five years) are proposed as well as how pass-through entities are taxed, especially if the entity is operating a service business. Both proposals reduce the corporate tax rate to 20%. The House does it immediately, while the Senate version delays the drop until Regardless, now may be the time to reassess whether your clients who operate sole proprietorships, partnerships or S corporations may benefit by operating as a C corporation. On a final note, there has been widespread speculation that tax reform, whether it s the current proposals or something else, will put tax professionals out of business. That isn t true. Might some clients feel their return is now simple enough to tackle on their own? Perhaps. But this doesn t mean there won t be plenty of work remaining for you. Your clients will have questions about how these changes will affect them. They are relying on you to properly advise them so they pay the least amount of tax under the law. NATP is here to assist you with serving your clients. n Tax Talk Farmland Rental Income (continued from page 1) The issue at hand is whether the rental income CL Farms paid to the Martins was subject to selfemployment tax under 1402(a)(1). The Tax Court found that even though the Martins materially participated in production of agricultural commodities on their farm during the years at issue, because the rents they received represented fair market rent and were consistent with amounts that other third-party growers paid, this indicated that the rental agreement stood on its own and therefore is not subject to self-employment tax. Also, other surrounding circumstances further indicated the same and that the rental agreement functioned as a return on investment rather than a method of income recharacterization. The IRS needed to prove that the rental and growing operation were related and showed the Martins material participation. The IRS failed to do so in this case. n Charles D. Martin, et ux. v. Commissioner 149 T.C. No. 12 Applicable Federal Rates for December 2017 Annual Semiannual Quarterly Monthly Revenue Ruling Short-term (3 years or less) Mid-term Long-term (More than 9 years) December 7520 rate = 2.6% January 2018 / NATP TAXPRO Monthly 3

4 Quick Reference Guide Quick Reference Guide A tool for preparing 2017 returns By Chris Novak, CPA At the close of every year, NATP s Tax Knowledge Center pulls together a list of common facts and figures based on current law that tax professionals can reference throughout the coming tax season. You ll find this Quick Reference Guide useful as you prepare returns. 179 Expensing For 2017, taxpayers may expense up to $510,000 of qualifying property acquired for use in a trade or business. The deduction phase-out begins at $2,030,000 on purchases of qualifying property. Qualified real property permanently qualifies as 179 property and, after 2015, is no longer limited to $250,000. In addition, air conditioning and heating units placed in service after 2015 are eligible 179 property. The SUV limit remains at $25,000. For 2018, the aggregate amount taxpayers may expense increases to $520,000. However, the deduction is reduced when the cost of qualifying property exceeds $2,070,000. Adoption The maximum nonrefundable credit increases to $13,570 for The credit begins to phase out when MAGI exceeds $203,540 and completely phases out when MAGI reaches $243,540. The maximum credit is $13,840 for The credit begins to phase out when MAGI exceeds $207,580 and is completely phased out when MAGI reaches $247,580. Alternative Minimum Tax (AMT) For 2017, the AMT exemption amounts are as follows: Filing Status 2017 Exemption 2017 Phaseout MFJ, QW $84,500 $160,900 $498,900 S, HH $54,300 $120,700 $337,900 MFS $42,250 $80,450 $249,450 For a child subject to kiddie tax Estates and Trusts $7,500 plus child s earned income not to exceed $54,300 $120,700 $337,900 $24,100 $80,450 $176,850 Alternative Minimum Tax (AMT), cont. For 2018, the AMT exemption amounts are as follows: Filing Status 2018 Exemption 2018 Phaseout MFJ, QW $86,200 $164,100 $508,900 S, HH $55,400 $123,100 $344,700 MFS $43,100 $82,050 $254,450 For a child subject to kiddie tax Estates and Trusts $7,650 plus child s earned income not to exceed $55,400 $123,100 $344,700 $24,600 $82,050 $180,450 Annual Gift Tax Exclusion and Exemption For tax years , the annual gift tax exclusion is $14,000 to each person. For 2018, it increases to $15,000 per person. The 2017 annual exclusion to a spouse who is not a citizen of the United States is $149,000. This annual exclusion increases to $152,000 for tax year The gift tax exemption amount is $5,490,000 for 2017 and $5,600,000 for Capital Gains Rates The top tax rate for capital gains is permanently set at 20% for taxpayers with taxable income in the highest tax bracket. The net investment income tax (NIIT) of 3.8% makes the overall capital gain rate for higher income taxpayers effectively 23.8%. The highest tax bracket is 39.6%. The 0% rate will continue to apply to capital gains to the extent ordinary income is taxed at a rate below the 25% rate. For individuals subject to a 25% or higher rate but still below the highest tax bracket, capital gains are taxed at the 15% rate. 4 NATP TAXPRO Monthly / natptax.com

5 The ordinary income tax rates for short-term capital gain, the unrecaptured 1250 rate of 25% and the collectible rate of 28% continue to apply. Child and Dependent Care Credit The minimum child and dependent care credit is 20% and the maximum is 35% based on AGI. The amount of eligible expenses is $3,000 for one child and $6,000 for two or more children. Child Tax Credit The maximum child tax credit is $1,000 for each qualify ing child. The refundable child tax credit is limited to the greater of: 15% of earned income above $3,000; or The excess of the taxpayer s social security taxes for the year over the earned income credit for the year for taxpayers with three or more qualifying children. Filing Status Phaseout MAGI MFJ $110,000 S, HH, QW $75,000 MFS $55,000 Day Care Per Diem for Meals The standard meal and snack rates allowed for day care facilities are equal to the Tier 1 reimbursement rates established by the Child and Adult Care Food Program (CACFP) of the Department of Agriculture. The Department of Agriculture changes the rates every July; therefore, the IRS uses the rates in effect as of December 31 of the prior year for the entire year (for example, December 31, 2016, rates apply for all of 2017), even though the CACFP rates change in July ( The taxpayer is required to keep a log for the number of meals and snacks served to each child. The rate represents the amount allowed as a deduction per child for the corresponding type of meal served Meal Contiguous States Alaska Hawaii Breakfast $1.31 $2.09 $1.53 Lunch and Supper $2.46 $3.99 $2.88 Snack $0.73 $1.19 $ Meal Contiguous States Alaska Hawaii Breakfast $1.31 $2.09 $1.52 Lunch and Supper $2.46 $3.99 $2.88 Snack $0.73 $1.19 $0.85 Dividend Rates The top tax rate for qualified dividends is permanently set at 20% for taxpayers with taxable income in the highest tax bracket. For 2017, the highest tax bracket is 39.6%. The 0% rate will continue to apply to dividends to the extent ordinary income is taxed at a rate below the 25% rate. For individuals subject to a 25% or higher rate but still below the high-income threshold, qualified dividends are taxed at the 15% rate. Earned Income Tax Credit The maximum amount of income a taxpayer can earn and still be eligible for the earned income tax credit increased. If earned income or AGI exceeds the following amounts, the earned income tax credit is zero Earned Income Tax Credit Taxpayer MFJ Other Than MFJ Max. Credit With one child $45,207 $39,617 $3,400 With two children $50,597 $45,007 $5,616 With three or more children $53,930 $48,340 $6,318 With no children $20,600 $15,010 $ Earned Income Tax Credit Taxpayer MFJ Other Than MFJ Max. Credit With one child $46,102 $40,402 $3,468 With two children $51,598 $45,898 $5,728 With three or more children $54,998 $49,298 $6,444 With no children $21,000 $15,310 $520 January 2018 / NATP TAXPRO Monthly 5

6 Quick Reference Guide (continued from page 5) The maximum amount of investment income a taxpayer may have and still be eligible for the credit is $3,450 for 2017 and $3,500 for Education Credits Credit 2017 Maximum Lifetime Learning Credit $2,000 Hope Credit N/A American Opportunity Tax Credit $2,500 Credit 2018 Maximum Lifetime Learning Credit $2,000 Hope Credit N/A American Opportunity Tax Credit $2,500 The maximum lifetime learning credit is the lesser of 20% of the first $10,000 of qualified higher education expenses or $2,000. The maximum American opportunity tax credit is 100% of the first $2,000 of qualified higher education tuition and related expenses, plus 25% of the next $2,000 of such expenses paid during the tax year, equaling a maximum credit of $2, Phaseout American Filing Lifetime Opportunity Status Learning Credit Tax Credit MFJ, QW $160,000 $180,000 $112,000 $132,000 S, HH $80,000 $90,000 $56,000 $66,000 MFS Not Available Not Available 2018 Phaseout American Filing Lifetime Opportunity Status Learning Credit Tax Credit MFJ, QW $160,000 $180,000 $114,000 $134,000 S, HH $80,000 $90,000 $57,000 $67,000 MFS Not Available Not Available Educator Expense Deduction An eligible educator can take an above-the-line deduction for out-of-pocket classroom-related expenses. For , the deduction may not exceed $250. Personal Exemption Amount The personal exemption is $4,050 for 2017 and $4,150 for Personal Exemption Phaseout Filing Status 2017 AGI 2018 AGI MFJ, QW $313,800 $436,300 $320,000 $442,500 HH $287,650 $410,150 $293,350 $415,850 S $261,500 $384,000 $266,700 $389,200 MFS $156,900 $218,150 $160,000 $221,250 Foreign Earned Income Exclusion For 2017, a qualified individual may exclude up to $102,100 of qualified foreign earned income using Form 2555, Foreign Earned Income. For 2018, the indexed amount increases to $104,100. Health Savings Accounts (HSAs) Like IRAs, funds in HSAs are 100% tax-deferred until distributed. A non-dependent taxpayer insured by a high deductible health plan (HDHP) may deduct monthly HSA contributions up to an annual limit. Coverage 2017 Individual 2017 Family 2018 Individual 2018 Family Annual Contribution Limit HDHP Minimum Deductible HDHP Maximum Out of Pocket $3,400 $1,300 $6,550 $6,750 $2,600 $13,100 $3,450 $1,350 $6,650 $6,900 $2,700 $13,300 If the HSA account beneficiary is age 55 or older at the end of the year, the annual contribution limit is increased by $1,000 [ 223(b)(3)]. If a husband and wife are both age 55 or over and eligible individuals, they can each contribute an additional $1,000 to his or her own HSA (Notice , Q&A #22). In other words, if they both want to take advantage of the additional $1,000, each must have their own HSA in which to contribute. 6 NATP TAXPRO Monthly / natptax.com

7 IRA: MAGI Phaseout for Roth IRA Contributions Filing Status MFJ $186,000 $196,000 $189,000 $199,000 MFS (lived with spouse) S, HH, QW, or MFS* $0 $10,000 $0 $10,000 $118,000 $133,000 $120,000 $135,000 *If a taxpayer is filing MFS and did not live with his/her spouse at any time during the year, he/she is considered Single for IRA deduction purposes. IRA: Contribution Limit to Traditional and Roth IRAs For , the contribution limit to a traditional or Roth IRA is $5,500 ($6,500 for taxpayers age 50 and over). IRA: Deduction Phaseout for Traditional IRAs for 2017 Filing Status Taxpayer Covered by Employer Plan S, HH $62,000 $72,000 MFJ, QW $99,000 $119,000 MFS* $0 $10,000 Filing Status Spouse of Covered Employee S, HH N/A MFJ $186,000 $196,000 MFS $0 IRA: Deduction Phaseout for Traditional IRAs for 2018 Filing Status Taxpayer Covered by Employer Plan S, HH $63,000 $73,000 MFJ, QW $101,000 $121,000 MFS* $0 $10,000 Filing Status Spouse of Covered Employee S, HH N/A MFJ $189,000 $199,000 MFS $0 Itemized Deductions The Pease Limitation applies to reduce certain otherwise allowable itemized deductions for taxpayers with AGI exceeding an applicable threshold. Filing Status MFJ/QW $313,800 $320,000 HH $287,650 $293,350 S $261,500 $266,700 MFS $156,900 $160,000 Kiddie Tax For , kiddie tax applies to children with unearned income greater than $2,100 if: The child is under age 18; or Has earned income that does not exceed one half of his or her support and is either (1) age 18; or (2) a full-time student age 19 23; Has at least one living parent; and Is required to file, but does not file a tax return for the year. Long-Term Care Premiums Annual Deductible Limit Taxpayer s Age at the Close of the Tax Year or less $410 $420 More than 40, but not more than 50 $770 $780 More than 50, but not more than 60 $1,530 $1,560 More than 60, but not more than 70 $4,090 $4,160 More than 70 $5,110 $5,200 January 2018 / NATP TAXPRO Monthly 7

8 Quick Reference Guide (continued from page 7) Luxury Automobile Depreciation Limits for 2017 Year Automobiles Trucks & Vans 1st year 2017 $3,160 $3,560 1st year with 50% bonus depreciation $11,160 $11,560 2nd year $5,100 $5,700 3rd year $3,050 $3,450 Succeeding years $1,875 $2,075 Additional Medicare Tax An additional Medicare tax of 0.9% applies to an individual s wages, Railroad Retirement Tax Act compensation, and self-employment income if such compensation exceeds the following threshold amount: $250,000 for MFJ. $125,000 for MFS. $200,000 for all others (QW, HH, S). Medical Expense Deduction After 2016, the deduction for medical expenses on Schedule A, Itemized Deductions, is subject to a 10%-of-AGI limitation for all taxpayers regardless of age. (Archer) Medical Savings Accounts Health Plan Annual Deductible Maximum Out-of-Pocket Expenses Annual Maximum Deduction* 2017 Individual $2,250 $3,350 $4,500 65% of deductible 2017 Family $4,500 $6,750 $8,250 75% of deductible 2018 Individual $2,300 $3,450 $4,600 65% of deductible 2018 Family $4,600 $6,850 $8,400 75% of deductible *If the plan is established by a self-employed individual, the limit is the lesser of the related trade or business earned income or the applicable percentage. Net Investment Income Tax A 3.8% Medicare tax is applied against net investment income (NII) of individuals, estates and trusts. For this purpose, individual means any natural person, except those who are nonresident aliens. As such, the net investment income tax (NIIT) applies only to citizens or residents of the U.S. The NIIT, also referred to as the unearned income Medicare contribution (UIMC) tax, is 3.8% of the lesser of: Net investment income for the year. The excess of modified adjusted gross income (MAGI) over the threshold amount of $250,000 for MFJ and QW; $125,000 for MFS; and $200,000 for HH and S. Estates and trusts do not have any threshold as defined in They pay tax on the lesser of undistributed net investment income or the amount of AGI that exceeds the highest tax bracket of $12,500 for 2017 and $12,700 for Per Diem Meal Allowance for Transportation Industry Type of Travel Travel inside the United States Travel outside the United States $63 $63 $68 $68 8 NATP TAXPRO Monthly / natptax.com

9 Per Diem Allowance Substantiation Method Standard Rate* M&IE Lodging Total October 1, 2016 September 30, 2017 October 1, 2017 September 30, 2018 $51 $91 $142 $51 $93 $144 *See gsa.gov for rates for specific cities. The incidentals allowance is $5 for travel both inside and outside the United States. Health Flexible Spending Arrangement (FSA) Voluntary employee salary reduction contributions to a health FSA cannot exceed $2,600 for This amount increases to $2,650 for Refundable Credit: Qualified Health Plan The limitation on tax imposed under 36B(f)(2)(B) for excess advanced credit payments is determined using the following table: 2017 If household income (expressed as a percent of the poverty line) is: Limitation amount for unmarried individuals (QW and HH) is: Limitation amount for all other taxpayers is: Less than 200% $300 $600 At least 200%, but less than 300% At least 300%, but less than 400% 2018 If household income (expressed as a percent of the poverty line) is: $750 $1,500 $1,275 $2,550 Limitation amount for unmarried individuals (QW and HH) is: Limitation amount for all other taxpayers is: Less than 200% $300 $600 At least 200%, but less than 300% At least 300%, but less than 400% $775 $1,550 $1,300 $2,600 Saver s Credit A saver s credit can be claimed using Form 8880, Credit for Qualified Retirement Savings Contributions. The credit is calculated by multiplying the applicable rate by the qualified retirement plan contributions not to exceed $2,000. The maximum credit is $1,000 per person Filing Status 50% 20% 10% MFJ $0 $37,000 $37,001 $40,000 HH $0 $27,750 $27,751 $30,000 All others $0 $18,500 $18,501 $20, Filing Status $40,001 $62,000 $30,001 $46,500 $20,001 $31,000 50% 20% 10% MFJ $0 $38,000 $38,001 $41,000 HH $0 $28,500 $28,501 $30,750 All others $0 $19,000 $19,001 $20,500 $41,001 $63,000 $30,751 $47,250 $20,501 $31,500 No Credit Over $62,000 Over $46,500 Over $31,000 No Credit Over $63,001 Over $47,251 Over $31,501 Self-Employment Optional Methods In 2017, the following dollar limits apply: Under the farm optional method, if the individual s gross farm income is $7,800 ($7,920 for 2018) or less, or net farm income is less than $5, ($5, for 2018), net earnings from selfemployment equal the smaller of two-thirds of gross farm income (not less than zero) or $5,200 ($5,280 for 2018). The individual can use this method year after year. There is no limit on the number of years a taxpayer can use this method. Under the nonfarm optional method, if net nonfarm profits are less than $5, ($5, for 2018), and less than % of gross nonfarm income, and net earnings from self-employment were at least $400 in two of the prior three years, net earnings from self-employment equal the smaller of two-thirds of gross nonfarm income (not less than zero) or $5,200 ($5,280 for 2018). There is a five-year lifetime limit on the use of the nonfarm optional method. However, the five years do not have to be consecutive. January 2018 / NATP TAXPRO Monthly 9

10 Quick Reference Guide (continued from page 9) Social Security For 2017, the maximum wages subject to social security tax is $127,200. For 2018, the maximum wage amount increases to $128,400. Standard Deduction The basic standard deduction is: Filing Status Standard Mileage Rates Standard Mileage Rates Business mileage 53.5 Medical and moving mileage 17 Charity 14 Depreciation component 25 MFJ/QW $12,700 $13,000 HH $9,350 $9,550 S $6,350 $6,500 MFS $6,350 $6,500 Additional Deduction for Age or Blindness Married or Surviving Spouse $1,250 $1,300 S or HH $1,550 $1,600 In tax year , the standard deduction for dependents who only have unearned income is $1,050. If the dependent has both earned and unearned income, the standard deduction is the greater of: $1,050; or The dependent s earned income plus $350, but not more than the basic standard deduction for his or her filing status Threshold for Tax Rates Capital Gain Rates 0% 15% 20% Filing Status 10% 15% 25% 28% 33% 35% 39.6% S $0 $9,326 $37,951 $91,901 $191,651 $416,701 $418,401 MFJ, QW $0 $18,651 $75,901 $153,101 $233,351 $416,701 $470,701 MFS $0 $9,326 $37,951 $76,551 $116,676 $208,351 $235,351 HH $0 $13,351 $50,801 $131,201 $212,501 $416,701 $444,551 Trusts and Estates N/A $0 $2,551 $6,001 $9,151 N/A $12, Threshold for Tax Rates Capital Gain Rates 0% 15% 20% Filing Status 10% 15% 25% 28% 33% 35% 39.6% S $0 $9,526 $38,701 $93,701 $195,451 $424,951 $426,701 MFJ, QW $0 $19,051 $77,401 $156,151 $237,951 $424,951 $480,051 MFS $0 $9,526 $38,701 $78,076 $118,976 $212,476 $240,026 HH $0 $13,601 $51,851 $133,851 $216,701 $424,951 $453,351 Trusts and Estates N/A $0 $2, 601 $6,101 $9,301 N/A $12, NATP TAXPRO Monthly / natptax.com

11 Tax Talk FBAR Penalties Taxpayer loses appeal By Sheri Fronsee, CPA Taxpayers having a financial interest or signature authority over any foreign financial account such as a bank account, a securities account, or other types of financial accounts in a foreign country or outside the U.S. boarders must report these accounts to the Department of the Treasury if their aggregate balance exceeds $10,000 at any time during the calendar year. This is done by filing the Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR). Those failing to properly file the FinCEN 114 may be subject to civil monetary penalties of up to 50% of the account balance at the time of the violation. Generally though, the IRS will not impose a penalty for failure to file FinCEN 114 if the income from the foreign accounts is properly reported and taxes are paid on the taxpayer s U.S. tax return. In June 2013, the IRS assessed an FBAR penalty of approximately $1.2 million against Letantia Bussell for failing to disclose her financial interests in an overseas account on her 2006 tax return. Bussell did not pay the penalty and the IRS filed suit. On appeal, Bussell admitted she willfully failed to disclose her overseas accounts but presented the following eight arguments in an attempt to reverse the summary judgement ruling. The penalty violates the Eighth Amendment Excessive Fines Clause. Bussell has the burden to prove the fine violates the Constitution. In United States v. Bagakagian, a punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant s offense. Bussell relies on Bajakajian, stating the assessment against her is grossly disproportional. However, the Court disagreed and ruled that the assessment against her is not grossly disproportional to the harm she caused by defrauding the government and reducing public revenues. The timing of the penalty violates the statute of limitations. In this case the applicable statute of limitation is six years, which began running in 2007, when Bussell s 2006 return was due. Therefore, the June 2013, assessment does not violate the statute of limitations. The assessment violates her due process rights because the claim against her could have been filed earlier. However, because the assessment was within the statute of limitations there is no relief under this argument. The assessment violates the Ex Post Facto Clause, of the U.S. Constitution, article I, 9, cl. 3, which prohibits the imposition of a new criminal punishment for conduct that already took place. However, the Ex Post Facto Clause does not apply to civil statutes unless they have punitive purpose or effect, which this does not. An individual cannot receive multiple punishments for the same underlying offense. Unfortunately for Bussell, failing to report her foreign bank account is unrelated to her criminal conviction; therefore, the assessment isn t a multiple punishment. The IRS abused its discretion in calculating the penalty and the district court committed a legal error by not engaging in an analysis of the reasonableness of the penalty. However, the district court did review the penalty and reduce it. Additionally, its assessment is consistent with Congressional limits. The claim is barred by laches (failure to do something at the proper time). Bussell offered no support to her laches claim and the government is not bound by laches in enforcing its rights. In Costello v. United States, the Courts consistently adhered to the principle that laches is not a defense against the sovereign. The introduction of banking evidence at the district court violates the international treaty between the United States and Switzerland. Unfortunately, the treaty relied on does not create an enforceable right; therefore, relief is not available under this theory. After assessing the above arguments, the Court affirmed the penalty assessment of $1.2 million against Bussell. n U.S. v. Bussell Cite as 120 AFTR 2d 2017-XXXX (CA9) 10/25/2017 January 2018 / NATP TAXPRO Monthly 11

12 Tax 101 Data Compromises A tax professional s nightmare By Sherrie Weldon, EA At the 2017 IRS Tax Forums, Brian Thomas from the IRS Criminal Investigation Division (CID) gave a presentation on the increased efforts by criminals to steal valuable taxpayer data from tax practitioners, steps to take if this happens to your tax practice, and the best practices for avoiding a breach in the first place. Stealing taxpayer data from tax practices is on the rise according to the IRS. This is likely due to the fact that data rich targets, such as financial institutions, poured countless resources into stopping these criminals. Now, it s simply easier for thieves to prey on those who are more vulnerable. Therefore, it s more important than ever to invest the time and resources necessary to secure your client data. Data compromise prevention is a huge topic with much to consider. The following serves to outline ideas to identify potential weaknesses in your office, to protect against access to your network, and to detect and stop breach attempts. We will also look at what to do if a criminal compromises your data, and how you can prepare beforehand to recover if this were to happen. Identify: Data, People, Equipment Identify what information your business uses and stores. Control who has access to your business information. Conduct background checks. Require individual user accounts for each employee. Create policies and procedures for information security. Identify an inventory of IT-related equipment. All of these are self-explanatory, but the last warrants further consideration because computers aren t the only place we store data. These days much of our equipment is wireless or Bluetooth capable and hooked up to our networks. Thomas shared a real story of how a perpetrator gained access to a firm s files via an office printer hooked up to the network. The perpetrator was able to pair Bluetooth with the printer in the tax office. The perpetrator did a simple Google search to find out the manufacturer s default password. Because the victim had never changed the password the perpetrator had access to her network within 10 to 15 minutes. This has a happy ending, however. The perpetrator in this case was actually a tax professional proving to a friend and colleague how easy a breach can happen. He had done all of this while parked in the driveway outside her home office. When he printed out one of her client s returns on her printer, she was convinced. Protect: Limit Access, Updates, Firewalls Limit employee access to data and information. Patch your operating systems and applications. Install and activate software and hardware firewalls on all your business networks. Secure your wireless access point and networks. Set up web and filters. Use encryption for sensitive business information. Dispose of old computers and media safely. Train your employees. Thomas shared another practitioner breach where a real criminal was able to load a hidden program on his network granting him full access to copy and extract files. This went unnoticed for about ten months. The perpetrator concealed the program in a folder using common file naming convention (i.e., H1ll, instead of Hill). At least a third of the practice s clients suffered identity theft. IT forensics revealed that the remote access compromise occurred through an employee s infected home computer. 12 NATP TAXPRO Monthly / natptax.com

13 Detect: Anti-Virus, Spyware Install and update anti-virus, anti-spyware, and other antimalware programs. Maintain and monitor logs. Breaches often occur when staff open phishing s and click on attachments. If in doubt, it is best to delete without even opening the , much less opening any attachments. Respond: Information Security Plan Develop a plan for disasters and information security incidents, which should include the following roles and responsibilities: Determine who makes the decision to initiate recovery procedures and contact law enforcement. Determine what to do with your information systems (i.e., shut down/lock computers, move to backup site). Determine who to specifically contact in case of an incident (i.e., how and when to contact senior executives, emergency personnel, cybersecurity professionals, legal professionals, service providers, or insurance providers). If you have a data breach or other security incident, it s crucial that you follow the steps outlined in the Take Action sidebar below. Recover: Backups Make full backups of important business data and information. Make incremental backups of important business data and information. Make improvements to processes, procedures, and technologies as needed. There s certainly a lot to consider here, but the time is now to take steps to secure your client data. Cyber Security Resources Internal Revenue Service IRS Publication 4557, Safeguarding Taxpayer Data: A Guide For Your Business, found at p4557.pdf. Protect Your Clients; Protect Yourself found at irs.gov/tax-professionals/protectyour-clients-protect-yourself. National Institute of Standards and Technology NISTIR 7621, Small Business Information Security: The Fundamentals, found at nvlpubs.nist.gov/nistpubs/ ir/2016/nist.ir.7621r1.pdf. Federal Trade Commission FTC, Start with Security: A Guide for Business, found at system/files/documents/ plain-language/pdf0205- startwithsecurity.pdf. n Take Action If you have a data breach or other security incident, take the following steps as soon as possible: 1. Contact your IRS Stakeholder Liaison. The Stakeholder Liaison will refer information within IRS (i.e., Criminal Investigations, Return Integrity & Compliance Services) Call your local FBI office. An FBI agent will request at the very least your client names and SSNs, staff PTINs, and any firm EFINs. All of your clients SSNs are put in Revenue Protection. This means that any returns filed with these SSNs are flagged as potential identity theft taxpayers and any returns will endure rigorous verification processes. 3. Call your local police. 4. Call your state tax agency. All tax professionals can e mail the Federation of Tax Administrators at statealert@taxadmin.org to get information on how to report victim information to the appropriate state authorities. 5. Contact your State Attorney General. Most states require that the attorney general be notified of data breaches. 6. Call your cyber insurance provider and attorney. January 2018 / NATP TAXPRO Monthly 13

14 Welcome in the 2018 Tax Season Webinar January 3 January 4 2 CPE for AFSP, EA, CPA, CRTP We ll cover the last-minute federal tax changes that will affect your clients this tax season. Be tax prepared. Register today at natptax.com If you can t make it to the live webinar, it ll be available on-demand.

15 NATP News NATP Participates in IRS National Tax Security Awareness Week On November 28, NATP Executive Director Scott Artman represented the association in a joint press event at the Internal Revenue Service office in Milwaukee to kick off National Tax Security Awareness Week. This event was part of a nationwide effort by the IRS to raise awareness of data security. Artman was part of a panel that included representatives from AARP, the Better Business Bureau, the Wisconsin Institute of Certified Public Accounts and the IRS Criminal Investigation Division. The group addressed the press as a unified front with important advice on how to safeguard personal data through vigilance and knowledge. In his statement, Artman encouraged tax preparers to run a security deep scan of their computers to search for viruses and malware as well as strengthen their passwords. Be skeptical of . Don t click on links or open attachments from unknown senders, Artman advised. Educate your staff about phishing schemes and review all systems and software employees may use. For free resources and a guide on tax-related identity theft, visit natptax.com and enter security awareness in the search field. n TAXPRO monthly ( ) (ISSN ) is published monthly by NATP National Association of Tax Professionals 3517 N. McCarthy Road Appleton, WI Periodicals postage paid at Appleton, WI and additional mailing office. Editor: Cindy Van Beckum Managing Editor: Cindy Hockenberry, EA Contributing Writers: Sheri Fronsee, CPA Cindy Hockenberry, EA Chris Novak, CPA Kris Siolka, EA Sherrie Weldon, EA Postmaster: Send address changes to: TAXPRO Monthly c/o NATP 3517 N. McCarthy Road Appleton, WI Change of address? Please contact NATP at: ext. 3 natp@natptax.com natptax.com Views expressed in TAXPRO Monthly are not necessarily endorsed by the National Association of Tax Professionals. Copyright 2018 National Association of Tax Professionals, Inc. All rights reserved. About NATP NATP is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers. January 2018 / NATP TAXPRO Monthly 15

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