Preparing for and Defending Examinations of Emerging Issues under the New Tax Act, including the Pass Through Deduction

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1 Preparing for and Defending Examinations of Emerging Issues under the New Tax Act, including the Pass Through Deduction UCLA Tax Controversy Institute Beverly Hills, CA OCTOBER 23,

2 Panelists Moderator and Panelist: G. Michelle Ferreira, Managing Shareholder, Greenberg Traurig, LLP Panelists: John Tuzynski, TCJA Implementation Team Lead, SBSE, Internal Revenue Service Claudia Hill, EA, Tax Mam Inc. Steven Jager, CPA, Steven L. Jager, An Accountancy Corporation Philip Wilson, CPA, Marcum LLP 2018 Greenberg Traurig, LLP 2

3 Refresher EAs, CPAs and Attorneys who choose to practice before IRS are held to multiple standards when they prepare tax returns 31 C.F.R. Subtitle A, Part 10 aka Circular 230 Standards codified primarily in penalty statutes found in the Internal Revenue Code Industry Professional Standards such as Codes of Conduct, AICPA s SSTS, and ABA s Model Rules 2018 Greenberg Traurig, LLP

4 Do potential penalties affect our level of diligence when preparing returns?

5 Example: 6695(g) Failure to be diligent in determining eligibility for certain tax benefits. Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining -- (1) eligibility to file as a head of household (as defined in section 2(b)) on the return, or 2018 Greenberg Traurig, LLP

6 6695(g) Failure to be diligent in determining eligibility for certain tax benefits. (2) eligibility for, or the amount of, the credit allowable by section 24, 25A(a)(1), or 32, [that s Child Tax Credit, American Opportunity Tax Credit, and Earned Income Credits] shall pay a penalty of $500 for each such failure Section 6695(h) provides an inflation adjustment for the penalty 2018 Greenberg Traurig, LLP

7 IRC 6694(a) - Understatement due to unreasonable positions If a tax return preparer (1) prepares a return or claim for refund with an understatement of liability due to an unreasonable position and (2) knew (or should have known) of the position, then the preparer shall pay a penalty 2018 Greenberg Traurig, LLP

8 Unreasonable Positions are ones for which there is no substantial authority A reasonable basis standard applies if the relevant facts affecting the item s tax treatment are adequately disclosed in the return or in a statement attached to the return Disclosure per Rev. Proc Disclosure on Form Greenberg Traurig, LLP

9 Getting to Reasonable NOT REASONABLE Position involves a tax shelter Position was not disclosed and there was no substantial authority Position was disclosed, but there was no reasonable basis WHAT S REASONABLE? STANDARDS More Likely Than Not Substantial Authority Reasonable Basis with disclosure (more than arguable, relied upon in good faith)

10 TCJA & Sec Imposition of accuracyrelated penalty on underpayments (a) Imposition of penalty If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies. For purposes of this section, there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the greater of-- (i) 10 percent of the tax required to be shown on the return for the taxable year, or (ii) $5,000

11 Problem Created by TCJA Change 6662 (d)(1)(c) Special rule for taxpayers claiming section 199A deduction. -- In the case of any taxpayer who claims any deduction allowed under section 199A for the taxable year, subparagraph (A) shall be applied by substituting "5 percent" for "10 percent" Greenberg Traurig, LLP

12 Problem created by TCJA Change Yikes! A Taxpayer may be subject to the lower threshold percentage even if the IRC 199A deduction is correctly reported but other misstatements on the return cause an understatement of tax! This should make all of us who prepare tax returns very nervous, as the amounts at stake can be substantial and many portions of the law are still not clear and guidance is still very lacking Greenberg Traurig, LLP 12

13 HOW DO WE TRAVERSE THIS MINEFIELD IN THE ABSENCE OF GUIDANCE AS TO THE INTRICACIES OF THE NEW IRC 199A?

14 To Escape the Penalty We as preparers will have to show that we: (a) Have a position which had substantial authority, OR (b) The Taxpayer disclosed the relevant facts i.e. that we have disclosed the relevant facts on the tax return, and that there was a reasonable basis for the tax treatment of the item See Chamales v. Commissioner, T.C. Memo Tax Court held that the penalty would not be applied because the Taxpayers chose to make full disclosure rather than obscure the reasons for claiming their tax position Greenberg Traurig, LLP 14

15 But, there is NO SUBSTANTIAL AUTHORITY, at least not yet Substantial Authority is not determined in a vacuum. Substantial Authority is determined relative to contrary authority So, while authority for a position might be sparse, contrary authority is also likely to be very sparse! There will undoubtedly be some very interesting litigation forthcoming!!! 2018 Greenberg Traurig, LLP 15

16 TCJA #1 Most Challenging Area for Individual & Small Business Taxpayers: IRC 199A

17 Qualified Business Income IRS issued a Notice of Proposed Rule Making (NPRM) on August 8, FAQ s and News Release also were issued with information on Wages

18 Qualified Business Income Deduction for Qualified Business Income (QBI) QBI means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any domestic qualified trade or business of the taxpayer All taxpayers, except C corporations, with QBI from a qualified trade or business may take this deduction Taxpayers may claim the deduction in addition to the standard or itemized deduction

19 Qualified Business Income Qualified trade or business is any U.S. trade or business, with two exceptions: specified service trade or business, and the trade or business of being an employee

20 Qualified Business Income A specified service trade or business is any trade or business described in section 1202(e)(3)(A) (with certain modifications) That is, any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

21 Qualified Business Income The specified service exclusion does not apply to taxpayers whose taxable income is less than $157,500 ($315,000 married filing jointly (MFJ)). The deduction is reduced for taxpayers in a specified service trade or business whose taxable income is between $157,500 and $207,500 ($315,000 and $415,000 MFJ). Income from a specified service trade or business is not income from a qualified trade or business for taxpayers with taxable income above $207,500 ($415,000 MFJ).

22 Qualified Business Income If taxable income is below $157,500 ($315,000 married filing jointly) regardless of the type of qualified trade or business, deduction is the lesser of: 20% of qualified trade or business income, plus 20% of qualified Real Estate Investment Trust (REIT) dividends and qualified publicly traded partnership (PTP) income, or 20% of the excess of taxable income over net capital gain

23 Qualified Business Income For taxpayers with taxable income of $157,500 or more ($315,000 married filing jointly (MFJ)), the amount determined for QBI is limited to the greater of: 50% of wages from the qualified trade or business, or 25% of wages plus 2.5% of the unadjusted basis of qualified property from the qualified trade or business These limitations are phased in for taxpayers with taxable income between $157,500 and $207,500 ($315,000 and $415,000 MFJ).

24 And we re still asking how does it apply to the business of rental properties?

25 IRC 199A - Related Issues? Reasonable Compensation Multiple Trades or Businesses To aggregate or not to aggregate Business Losses when there are multiple businesses Calculation of Qualified Business Income (QBI) The calculation of QBI from flow through entities where we, as preparer, are relying upon a different preparer 2018 Greenberg Traurig, LLP 25

26 More TCJA-Related Issues? The impact of net operating losses Guaranteed payments Will return preparers know to make appropriate elections under the new partnership audit rules? 2018 Greenberg Traurig, LLP 26

27 Thank you for your time G. Michelle Ferreira John Tuzynski Steven L. Jager Phil Wilson Claudia Hill