Center for Agricultural Law & Taxation The Scoop July 25, 2018 Agenda Miscellaneous Itemized Deductions for Estates and Trusts Notice 2018 61 Understanding Your CP3219A Notice Some Veterans Can Now Claim Refund of Taxes Paid on Disability Severance Payments REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) IRS Adds Five New Issues to LB&I s Campaign Audit Strategy Michael Amelsberg, et ux. v. Commissioner, TC Memo 2018 94, Code Sec(s) 61; 162; 179; 6651; 7491 Legal Advice Issued by Field Attorneys 20182502F Future Tax Legislation Retirement Enhancement and Savings Act of 2018 (RESA) 2019 Form W 4 Instructions Total 11 Pages 2 1
Agenda Only Virgin Islands employers will have higher FUTA rates in 2018 Charles Rettig is Next IRS Commissioner 3 Miscellaneous Itemized Deductions for Estates and Trusts Notice 2018 61 The IRS has announced that it intends to issue regulations providing clarification of the effect of the newly enacted provision in the Tax Cuts and Jobs Act (TCJA) as it applies to estates and trusts Effective for 2018, the TCJA repeals the deduction for all miscellaneous itemized deductions subject to the 2% AGI limitation under prior law Estates and trusts are also subject to the 2% AGI limitation for certain miscellaneous expenses of the estate or trust Miscellaneous expenses that are subject to the 2% AGI limitation for an estate or trust are those that commonly or customarily would be incurred by a hypothetical individual holding the same property 4 2
Miscellaneous Itemized Deductions for Estates and Trusts Notice 2018 61 Examples include: Partnership costs passed through to the partner Insurance premiums Maintenance and lawn service fees Auto registration and insurance costs Tax preparation fees for prior year returns (Form 1040 for years prior to the decedent s death) Most investment advice fees, and Appraisal fees for insurance purposes 5 Miscellaneous Itemized Deductions for Estates and Trusts Notice 2018 61 Practitioner s have suggested that this new TCJA provision eliminates the ability of estates and non grantor trust to deduct any expenses described in IRC 67(e) (miscellaneous expenses of an estate or trust not subject to the 2% AGI limitation) The IRS does not believe that this is a correct reading of the new law The IRS believes that 67(e) removes such expenses from the category of itemized deductions and instead treats them as above the line deductions allowable in determining AGI 6 3
Miscellaneous Itemized Deductions for Estates and Trusts Notice 2018 61 Therefore, the suspension of the deductibility of miscellaneous itemized deductions under TCJA does not affect the deductibility of expenses described in 67(e)(1) However, an expense of an estate or trust that commonly or customarily would be incurred by an individual is affected by the new law and thus is not deductible to the estate or non grantor trust As reported by Tax Materials, Inc. 7 Understanding Your CP3219A Notice Statutory Notice of Deficiency IRS received information that is different from what was reported on the tax return This may result in an increase or decrease in tax The notice explains how the amount was calculated and how a taxpayer can challenge it in U.S Tax Court 8 4
Understanding Your CP3219A Notice Read the notice carefully It explains the proposed increase or decrease in the tax The amounts shown as due on the notice may not match the previous notice because taxpayers can not challenge all items in U.S. Tax Court If the client agrees with the changes, they must sign the enclosed Form 5564, Notice of Deficiency Waiver, and mail to the address shown on the notice If they do not agree with the changes, they have the right to challenge the proposed changes by filing a petition with the U.S. Tax Court no later than the date shown on the notice 9 Understanding Your CP3219A Notice Please note the court can't consider your case if you file the petition late. If you don t agree with the changes and have additional information for us to consider, mail or fax the information with the Form 5564 to the address or fax number on the notice. Our review of the new information won't extend the time you have to file a petition with the U.S. Tax Court. 10 5
Understanding Your CP3219A Notice Can I get an extension of time to respond? No But, if the client has information that will resolve the issue, they should contact IRS as soon as possible Once IRS issues the CP3219A notice, they can not extend the time the taxpayer has to respond or to file a petition with the U.S. Tax Court If IRS does not hear from the client and they do not file a petition, IRS will assess the proposed changes and send a bill 11 Understanding Your CP3219A Notice Do I need to file a petition with the U.S. Tax Court? No, you may be able to resolve your dispute with the IRS. Mail any additional information you may have with the Form 5564 or provide a signed statement, along with any documentation, explaining which items you disagree with and why. Send your response as soon as possible since we can't extend the time you have to respond or file a petition with the U.S. Tax Court. 12 6
Understanding Your CP3219A Notice What if the information is wrong or if I disagree? If the client wants the IRS to consider additional information, send it to them, along with a written explanation supporting the position The client can also call IRS at the phone number on the first page of the notice The client may want to contact whoever reported the information and ask them to correct it Send the response to us as soon as possible, since IRS can't extend the time a taxpayer has to file a petition with the U.S. Tax Court 13 Understanding Your CP3219A Notice The information is wrong because someone else is using the client s name and social security number What can they do? Complete and send Form 14039, Identity Theft Affidavit to the IRS 14 7
Understanding Your CP3219A Notice I reported the information but I reported it incorrectly. Can I call you to correct my return? IRS can generally accept information over the phone for incorrectly reported information If the information provided over the phone isn't enough to resolve all issues with the case, mail or fax a signed statement explaining the disagreement and include any documentation that supports the position You should call or send the response as soon as possible since IRS can't extend the time taxpayer s have to file a petition with the U.S. Tax Court 15 Understanding Your CP3219A Notice Do I need to amend my return? If the information displayed in the Changes to your tax return section of the notice is correct, the client does not need to amend the return unless they have additional income, credits, or expenses to report If they agree with the notice, follow the instructions to sign the Form 5564 and return it to IRS in the envelope provided If the client has additional income, credits or expenses to report, they may want to complete and submit a Form 1040 X, Amended U.S. Individual Income Tax Return 16 8
Certain Veterans Can Claim Refund or Credit of Taxes Paid on Disability Severance Payments Certain veterans who received disability severance payments after January 17, 1991, and included that payment as income should file Form 1040X, Amended U.S. Individual Income Tax Return, to claim a credit or refund of the overpayment attributable to the disability severance payment This is a result of the Combat Injured Veterans Tax Fairness Act passed in 2016 Most veterans who received a one time lump sum disability severance payment when they separated from their military service will receive a letter from the Department of Defense with information explaining how to claim tax refunds 17 Certain Veterans Can Claim Refund or Credit of Taxes Paid on Disability Severance Payments The letters include an explanation of a simplified method for making the claim The IRS has worked closely with the DoD to produce these letters, explaining how veterans should claim the related tax refunds Statute of Limitations The amount of time for claiming these tax refunds is limited However, the law grants veterans an alternative timeframe one year from the date of the letter from DoD 18 9
Certain Veterans Can Claim Refund or Credit of Taxes Paid on Disability Severance Payments Veterans making these claims have the normal limitations period for claiming a refund or one year from the date of their letter from the DoD, whichever expires later As taxpayers can usually only claim tax refunds within 3 years from the due date of the return, this alternative time frame is especially important since some of the claims may be for refunds of taxes paid as far back as 1991 19 Certain Veterans Can Claim Refund or Credit of Taxes Paid on Disability Severance Payments Amount to Claim Veterans can submit a claim based on the actual amount of their disability severance payment by completing Form 1040X However, there is a simplified method Veterans can choose instead to claim a standard refund amount based on the calendar year (an individual s tax year) in which they received the severance payment Write Disability Severance Payment on line 15 of Form 1040X and enter on lines 15 and 22 the standard refund amount 20 10
Certain Veterans Can Claim Refund or Credit of Taxes Paid on Disability Severance Payments Standard Refund Amount $1,750 for tax years 1991 2005 $2,400 for tax years 2006 2010 $3,200 for tax years 2011 2016 Claiming the standard refund amount is the easiest way for veterans to claim a refund, because they do not need to access the original tax return from the year of their lump sum disability severance payment 21 Certain Veterans Can Claim Refund or Credit of Taxes Paid on Disability Severance Payments Special Instructions All veterans claiming refunds for overpayments attributable to their lump sum disability severance payments should write either Veteran Disability Severance or St. Clair Claim across the top of the front page of the Form 1040X that they file Because all amended returns are filed on paper, veterans should mail their completed Form 1040X, with a copy of the DoD letter, to: Internal Revenue Service 333 W. Pershing Street, Stop 6503, P5 Kansas City, MO 64108 22 11
Certain Veterans Can Claim Refund or Credit of Taxes Paid on Disability Severance Payments Veterans eligible for a refund who did not receive a letter from DoD may still file Form 1040X to claim a refund but must include both of the following to verify the disability severance payment: A copy of documentation showing the exact amount of and reason for the disability severance payment, such as a letter from the Defense Finance and Accounting Services (DFAS) explaining the severance payment at the time of the payment or a Form DD 214, and A copy of either the VA determination letter confirming the veteran s disability or a determination that the veteran s injury or sickness was either incurred as a direct result of armed conflict, while in extra hazardous service, or in simulated war exercises, or was caused by an instrumentality of war. 23 Certain Veterans Can Claim Refund or Credit of Taxes Paid on Disability Severance Payments Veterans who did not receive the DoD letter and who do not have the required documentation showing the exact amount of and reason for their disability severance payment will need to obtain the necessary proof by contacting the Defense Finance and Accounting Services (DFAS) 24 12
REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Proposed regulations are revised to demonstrate how head of household due diligence requirements are intertwined with the rules for determining a taxpayer's eligibility for the CTC The proposed rules affect paid tax return preparers who determine a taxpayer is eligible to file as head of household, in addition to those tax return preparers who determine eligibility for, or the amount of, the EIC, the CTC/ACTC, and/or the AOTC 25 REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 1 Preparer A prepares a federal income tax return for a taxpayer claiming the CTC and the AOTC Preparer A did not meet the due diligence requirements with respect to the CTC or the AOTC claimed on the taxpayer's return Unless an exception to penalty is provided, preparer A is subject to two penalties under 6695(g): one for failure to meet the due diligence requirements for the CTC and a second penalty for failure to meet the due diligence requirements for the AOTC 26 13
REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 2 Preparer B prepares a federal income tax return for a taxpayer claiming the CTC and the AOTC Preparer B did not meet the due diligence requirements with respect to the CTC claimed on the taxpayer's return, but Preparer B did meet the due diligence requirements with respect to the AOTC claimed on the taxpayer's return Unless an exception to penalty is provided, preparer B is subject to one penalty under 6695(g) for the failure to meet the due diligence requirements for the CTC Preparer B is not subject to a penalty under 6695(g) for failure to meet the due diligence requirements for the AOTC 27 REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 3 Preparer C prepares a federal income tax return for a taxpayer using the head of household filing status and claiming the CTC and the AOTC Preparer C did not meet the due diligence requirements under this section with respect to the head of household filing status and the CTC claimed on the taxpayer's return Preparer C did meet the due diligence requirements under this section with respect to the AOTC claimed on the taxpayer's return 28 14
REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 3 continued Unless an exception to penalty is provided, preparer C is subject to two penalties under 6695(g) for the failure to meet the due diligence requirements: one for the head of household filing status and one for the CTC Preparer C is not subject to a penalty under 6695(g) for failure to meet the due diligence requirements for the AOTC 29 REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) The tax return preparer must not know, or have reason to know, that any information used by the tax return preparer in determining the taxpayer's eligibility to file as head of household or in determining the taxpayer's eligibility for, or the amount of, any credit and claimed on the return or claim for refund is incorrect The tax return preparer may not ignore the implications of information furnished to, or known by, the tax return preparer 30 15
REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) They must make reasonable inquiries if a reasonable and well informed tax return preparer knowledgeable in the law would conclude that the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete The tax return preparer must also contemporaneously document in the preparer's paper or electronic files any inquiries made and the responses to those inquiries 31 REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 4 In 2019, Q, a 22 year old taxpayer, engages Preparer C to prepare Q's 2018 federal income tax return Q completes Preparer C's standard intake questionnaire and states that she has never been married and has two sons, ages 10 and 11 Based on the intake sheet and other information that Q provides, including information that shows that the boys lived with Q throughout 2018, Preparer C believes that Q may be eligible to claim each boy as a qualifying child for purposes of the EIC and the CTC 32 16
REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 4 continued However, Q provides no information to Preparer C, and Preparer C does not have any information from other sources, to verify the relationship between Q and the boys To meet the knowledge requirement Preparer C must make reasonable inquiries to determine whether each boy is a qualifying child of Q for purposes of the EIC and the CTC, including reasonable inquiries to verify Q's relationship to the boys, and Preparer C must contemporaneously document these inquiries and the responses 33 REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 5 Assume the same facts as in Example 1 In addition, as part of preparing Q's 2018 federal income tax return, Preparer C made sufficient reasonable inquiries to verify that the boys were Q's legally adopted children In 2020, Q engages Preparer C to prepare her 2019 federal income tax return When preparing Q's 2019 federal income tax return, Preparer C is not required to make additional inquiries to determine the boys relationship to Q for purposes of the knowledge requirement, but verify their we no changes in the 34 relationship 17
REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 6 In 2019, R, an 18 year old taxpayer, engages Preparer D to prepare R's 2018 federal income tax return R completes Preparer D's standard intake questionnaire and states that she has never been married, has one child, an infant, and that she and her infant lived with R's parents during part of the 2018 tax year R also provides Preparer D with a Form W 2 showing that she earned $10,000 during 2018 35 REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 6 continued R provides no other documents or information showing that R earned any other income during the tax year Based on the intake sheet and other information that R provides, Preparer D believes that R may be eligible to claim the infant as a qualifying child for the EIC and the CTC Preparer D must make reasonable inquiries to determine whether R is eligible to claim these credits, including reasonable inquiries to verify that R is not a qualifying child of her parents or a dependent of her parents, and Preparer D must contemporaneously document these inquiries and the responses 36 18
REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 7 In 2019, S engages Preparer E to prepare his 2018 federal income tax return During Preparer E's standard intake interview, S states that he has never been married and that his niece and nephew lived with him for part of the 2018 taxable year Preparer E believes S may be eligible to file as head of household and claim each of these children as a qualifying child for purposes of the EIC and the CTC 37 REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 7 continued To meet the knowledge requirement, Preparer E must make reasonable inquiries to determine whether S is eligible to file as head of household and whether each child is a qualifying child for purposes of the EIC and the CTC, including: Reasonable inquiries about the children's residency S's relationship to the children The children's income The sources of support for the children, and S's contribution to the payment of costs related to operating the household Preparer E must contemporaneously document these inquiries and the responses 38 19
REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 8 Y, who is 32 years old, engages Preparer G to prepare his federal income tax return Y completes Preparer G's standard intake questionnaire and states that he has never been married As part of Preparer G's client intake process, Y provides Preparer G with a copy of the Form 1098 T Y received showing that University M billed $4,000 of qualified tuition and related expenses for Y's enrollment or attendance at the university and that Y was at least a half time undergraduate student 39 REG 103474 18. Tax Return Preparer Due Diligence Penalty under 6695(g) Example 8 continued Preparer G believes that Y may be eligible for the AOTC To meet the knowledge requirements, Preparer G must make reasonable inquiries to determine whether Y is eligible for the AOTC, as Form 1098 T does not contain all the information needed to determine eligibility for the AOTC or to calculate the amount of the credit if Y is eligible, and contemporaneously document these inquiries and the responses 40 20
41 IRS Adds Five New Issues to LB&I s Campaign Audit Strategy Restoration of sequestered AMT credit carryforward S corporation distributions Virtual currency Repatriation via foreign triangular reorganizations 965 Transition Tax 42 21
CCA 201825028 Liability for Penalties Can an assessment of the penalty provided for under 6694(b) on the individual SSN of a co owner of an S Corporation be a legal hazard and whether IRS is aware of any situations where the owner of an S Corp may be held personally liable for the penalty provided for under 6694(b) Code Sec. 6694. Understatement of taxpayer's liability by tax return preparer Understatement due to willful or reckless conduct 43 CCA 201825028 Liability for Penalties Counsel s interpretation of Treasury regulation 1.6694 3(a)(2) is that generally, the entity (corporation, partnership, or other firm entity) that employs a tax return preparer will simultaneously be subject to the penalty under 6694(b) only if the specific conditions set forth in the regulation are met Otherwise, only the individual(s) that is primarily responsible for the position(s) on the return or claim for refund that gives rise to the understatement will be subject to the penalty 44 22
CCA 201825028 Liability for Penalties Counsel did find one case in which the owner of an entity was subject to the 6694 penalty In United States v. Elsass, 978 F. Supp. 2d 901 (S.D. Ohio 2013), aff'd, 769 F.3d 390 (6th Cir. 2014), the court found that the owner of an entity was a "tax return preparer" for the purposes of the penalties provided for under 6694 and 6695 In that case, the owner was the sole owner of the entity and personally signed or prepared over twentyeight of the tax returns at issue 45 CCA 201825028 Liability for Penalties Additionally, the owner and the entity "were the moving force behind the decisions and calculations regarding the returns The court noted that "Congress intended the definition of tax return preparer to encompass those contributing to the material decisions regarding tax returns 46 23
Michael Amelsberg, et ux. v. Commissioner, TC Memo 2018 94, Code Sec(s) 61; 162; 179; 6651; 7491 Petitioners failed to carry their burden of establishing that they are entitled for the taxable year 2012 to a deduction of $43,686 for a claimed net operating loss carryover 47 Legal Advice Issued by Field Attorneys 20182502F In a Legal Advice Issued by Field Attorneys (LAFA), IRS has concluded that quarterly commitment fees paid to secure a revolving line of credit didn't have to be capitalized under 263(a) Instead, they were deductible in the year incurred under 162(a) The fees weren't paid to acquire an intangible in a purchase or similar transaction, to create an intangible, to create or enhance a separate and distinct intangible asset, or to facilitate the acquisition of creation of an intangible asset 48 24
Future Tax Legislation Possible technical correction bill by November The technical corrections bill would be in addition to the phase 2 tax bill Retirement Enhancement and Savings Act of 2018 (RESA) a few provisions 49 RESA Section 107. Treat Certain Taxable Non Tuition Fellowship and Stipend Payments as Compensation for IRA Purposes ( 219) Stipends and non tuition fellowship payments received by graduate and postdoctoral students are not treated as compensation and cannot be used as the basis for IRA contributions The legislation removes this obstacle to retirement savings by taking such amounts that are includible in income into account for IRA contribution purposes The change will enable these students to begin saving for retirement and accumulate tax favored retirement savings 50 25
RESA Section 108. Repeal of Maximum Age for Traditional IRA Contributions ( 219) The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½ As Americans live longer, an increasing number continue employment beyond traditional retirement age 51 RESA Section 111. Portability of Lifetime Income Options ( 401(a), 403(b) and 457(d)) The legislation permits qualified defined contribution plans, 403(b) plans, or governmental 457(b) plans to make a direct trustee to trustee transfer to another employersponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan The change will permit participants to preserve their lifetime income investments and avoid surrender charges and fees 52 26
RESA Section 401. Benefits for Volunteer Firefighters and Emergency Medical Responders ( 139B) The legislation reinstates for one year the exclusions for qualified State or local tax benefits and qualified reimbursement payments provided to members of qualified volunteer emergency response organizations and increases the exclusion for qualified reimbursement payments to $50 for each month during which a volunteer performs services 53 RESA Section 502. Increase in Penalty for Failure to File ( 6651(a)) The legislation increases the failure to file penalty to the lesser of $400 or 100 percent of the amount of the tax due Increasing the penalties will encourage the filing of timely and accurate returns which, in turn, will improve overall tax administration 54 27
2019 Form W 4 Instructions Total 11 Pages 55 2019 Form W 4 Instructions Total 11 Pages 56 28
2019 Form W 4 Instructions Total 11 Pages 57 2019 Form W 4 Instructions Total 11 Pages Tell me who is going to read through 11 pages of instructions of how to fill out the Form W 4? Contents Page General Instructions......................... 1 The Withholding Calculator................. 2 Specific Instructions for Form W 4............... 2 Lines 1 Through 4........................ 2 Lines 5 Through 9 (Overview)............... 2 Line 5 Instructions....................... 3.............. 11 58 29
2019 Form W 4 Instructions Total 11 Pages Line 6 Instructions....................... 3 Deductions Worksheet Instructions........ 3 Line 7 Instructions....................... 3 Credit Worksheet Instructions............ 3 Line 8 Instructions....................... 4 Worksheets............................ 5 Deductions Worksheet (Keep for your records.).. 6 Credit Worksheet (Keep for your records.).. 6 Multiple Jobs Worksheet (Keep for your records.).. 7 59 2019 Form W 4 Instructions Total 11 Pages Instructions for Employer................... 8 Boxes 11, 12, and 13.................. 8 Figuring Employee Withholding........... 8 Index..................... 11 60 30
FUTA Higher Rates for 2018 Only One Only Virgin Islands employers will have higher FUTA rates in 2018 U.S. Department of Labor (DOL) announced that, because they have had an outstanding federal unemployment insurance (UI) loan for at least two years, the U.S. Virgin Islands is subject to federal unemployment tax (FUTA) credit reduction on 2018 federal Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return No other state or territory is subject to the reduction 61 Charles Rettig is Next IRS Commissioner The Senate Finance Committee on July 19 voted 14 to 13, along party lines, to approve the nomination of Charles Rettig to serve as the next IRS Commissioner. His term in office would expire in November 2022 62 31
Questions 63 Tax Cuts & Jobs Act Resources https://www.calt.iastate.edu/tax cuts jobs act resources 64 32
TAS Problem Solving Day What: Taxpayer Advocate Service Problem Solving Day Where: Des Moines Taxpayer Advocate Service Office, 210 Walnut Street, Room 483, Des Moines, IA When: Wednesday, August 1, 2018, 9:00am - 2:00pm When: Wednesday, September 5, 2018, 9:00 am 2:00 pm To make an appointment with your case call: 515-564-6888 65 Up Coming Scoops Held at 8:00 am and 12:00 pm Central time August 15, 2018 August 29, 2018 September 12, 2018 October 10, 2018 October 24, 2018 November 14, 2018 December 12, 2018 66 33
UP Coming Webinars July 26 Ethics Parts 1 and 2 July 31 Retirement 103 August 1 The Tax Cuts and Jobs Act of 2017 Employer Provisions August 2 Form 4797 August 8 Tax Cuts and Jobs Act Small Business Provisions August 15 Penalty Abatement and Reasonable Cause August 17 Trusts 102 Review of More Complex Trusts and Estates: Income Tax Matters 67 The CALT Staff Kristine A. Tidgren Director for the Center for Agricultural Law and Taxation Iowa State University 211 Curtiss Hall 513 Farm House Lane Ames, IA 50011 E mail: ktidgren@iastate.edu Phone: (515) 294 6365 Fax: (515) 294 0700 34
Micki Nelson New Program Administrator (515) 294 5217 micki@iastate.edu 69 The CALT Staff Kristy S. Maitre Tax Specialist E mail: ksmaitre@iastate.edu Phone: (515) 296 3810 Fax: (515) 294 0700 35