Where Tax Dollars Went in 2015

Premium Tax Credit

Check Out this Graphic to Determine if You Might be Eligible for the Premium Tax Credit

• IRS Health Care Tax Tip 2016-30, March 10, 2016 Español
• The premium tax credit can help make purchasing health insurance coverage more affordable for people with moderate incomes. Answer the yes-or-no questions in the following chart – or in this accessible text – and follow the arrows to find out if you may be eligible for the premium tax credit.
• Here are links to information and resources referenced in the graphic:
• Form 8962, Premium Tax Credit (PTC) and Instructions
• Information about the federal poverty line (FPL)
• Publication 974, Premium Tax Credit (PTC)
• Interactive Tax Assistant: Am I Eligible to Claim the Premium Tax Credit

New Minimum Late File Penalty

• The Trade Facilitation and Trade Enforcement Act of 2015, referred to as the "Customs Bill", was signed into law on Feb 24th, 2016.   The Bill originally grabbed tax headlines news for it's ban on local taxation of InterNet access.  
• This law included late-filing penalties. 
• For tax returns filed after Dec 31, 2015, the minimum late-file penalty is the smaller of $205 or 100% of the unpaid tax. 
• The previous minimum late-file penalty was the smaller of $135 or 100% of the unpaid tax. 
• The late-file penalty is assessed on tax returns filed 60 days after the filing deadline, usually April 15th.

IRS Penalties

• Normally, the IRS treats each late filer individually and calculates penalties and interest on a case-by-case basis.
• Once the IRS receives or accepts your return, the penalties are computed (plus interest) and a separate bill is sent to the taxpayer.
• There is no penalty if you're getting a tax refund, provided you file within 3 years of the April 15 deadline (or October 15 deadline if you filed an extension).
• After 3 years, unclaimed tax refunds are forfeited and become the property of the US Treasury.
• There is no late-file penalty if you filed an extension and paid any additional taxes owed by April 15, as long as you file your return by the October 15 deadline.
• A late-file penalty applies if you owe taxes and didn't file your return or extension by April 15.
• This penalty applies if you owe taxes, filed an extension, but didn't file your return by October 15.
• The late-file penalty is 5% of the additional taxes owed amount for every month (or fraction thereof) your return is late, up to a maximum of 25%.
• If you file more than 60 days after the due date, the minimum penalty is $205 or 100% of your unpaid tax, whichever is smaller.
• The late-file penalty is 10 times higher than the late-pay penalty. Even if you can't pay your tax bill, file your return on time, or at least file a 6-month extension. You can file an amendment later.
• A late-pay penalty applies if you didn't pay any balance due owed by April 15, whether you filed an extension or not.
• The late-pay penalty is 0.5% (1/2 of 1%) of any balance due amount for every month (or fraction thereof) the owed tax remains unpaid, up to 25% maximum.
• For any month(s) in which both the late-pay and late-file penalties apply, the 0.5% late-pay penalty is waived.

Case Study:  Let's say you haven't filed your return or an extension by April 15, and you still have a $10,000 balance due the IRS.

• If you file your return on April 29 (2 weeks late) and submit your payment for $10,000, you would likely owe an additional $500 for the late-file penalty ($10,000 x 5% = $500).
• Had an extension been filed by April 15, your late-pay penalty would only be $50 ($10,000 x .05% = $50) and not a late-file penalty of $500. 
• Say instead, you filed your return and submit your payment for $10,000, 5-years late, (past the original due date).  You would owe an additional $5,000 for filing late and paying late ($10,000 X 25%), (5% per month up to 25% for filing late) plus ($10,000 X 25%), (0.5% per month up to 25% for paying late)*, plus possible interest.

* The late-pay penalty is 0.5% of the unpaid taxes, assessed on a monthly basis, up to a maximum of 25%.

Courtesy: IRS Tax Topic 653

Estate and Gift Tax - Consistent Basis Reporting Between Estate and Person Acquiring Property from Decedent

Estate and Gift Tax - Consistent Basis Reporting Between Estate and Person Acquiring Property from Decedent

Last year’s “Highway Bill”, Regarding Beneficiaries Acquiring Property From a Decedent, requires certain estates to file Form 8971 to ensure consistent basis reporting among estates and their beneficiaries.

On February 29, 2016, the IRS plans to begin accepting basis information with respect to property acquired from decedents as required by H.R. 3236, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, signed into law on July 31, 2015.

The law created IRC §6035, which requires the executor of an estate required to file an estate tax return to also provide certain statements to the IRS and to beneficiaries receiving inherited property. This also applies to IRC §6018(b) filers.

The law also adds IRC §1014(f), which requires consistent basis reporting between an estate and the beneficiary receiving property from a decedent.

These changes apply to any estate tax return filed, and to property with respect to which an estate tax return is filed, after July 31, 2015.

The IRS is working steadily to identify and define the policy, procedural, and information system changes necessary to meet the requirements of the new law. Please see Notice 2015-57 for important information.

Source: irs.gov

FBAR Deadlines Changed

FBAR Deadlines Changed

• On July 31, 2015, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, which modifies the due date for Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114) for any American living abroad and any American with a foreign financial account(s). 
• Any US person holding a financial interest in or having signatory authority over a foreign financial account, must file FBAR, when the aggregate value of their foreign account(s) exceeds $10,000 at any time during the year. FBAR includes any account which a person has signature authority, regardless of ownership interest.
• New due date for the FBAR is April 15th, with a maximum 6-month extension until October 15th. For US citizens living abroad, the deadline is June 15th. New deadlines are effective for 2016 tax returns, due in 2017. 

See FBAR details here: blog post.

Special Alert: 2015 Tax Extenders

Special Alert: 2015 Tax Extenders 
President Obama has signed the Protecting Americans from Tax Hikes (PATH) Act which extends numerous tax provisions. Some important tax provisions have been made permanent, while others were extended through 2016 or 2019. The PATH Act adds in other provisions to mitigate "erroneous" education credit, child tax credit and earned income tax credit claims. Some of the most notable provisions include:

• A permanent extension of the $500,000 §179 limit.
• An extension for bonus depreciation through 2019.
• A permanent extension of the general state and local sales tax deduction.
• A permanent extension of the $250 educator expense deduction.
• An extension for the exclusion from the cancellation of debt of qualified principal residence indebtedness through 2016.
• The research credit.
• A requirement that a tax preparer exercise due diligence, similar to the earned income tax credit, for the American opportunity tax credit and child tax credit, with similar penalties for failure to do so.

A full listing of PATH Act provisions can be found here.

• By signing into law the Tax Extenders bill, President Barack Obama extended over 50 provisions in the tax code due to expire. 
• If your house was foreclosed, and the foreclosure sale did not satisfy the mortgage debt, there is an exclusion for the mortgage debt that is cancelled as a result of the foreclosure.
• Tuition deduction, aimed at students pursuing higher education, e.g. Master's or PhD degrees, is a deduction up to $2,000 or $4,000, subject to income thresholds.
• Earned Income Tax Credit (EITC), an antipoverty program set to expire in 2016, is extended permanently. 
• EITC is intended to encourage workers with children. 
• Max credit for families with 3 or more children has been raised from 40% to 45%.
• American Opportunity Tax Credit (AOTC) is extended permanently, AOTC is a benefit for college students, who can claim a tax credit of up to $2,500 per academic year subject to income limitations.
• "Teacher Deduction" is made permanent, which allows teachers to deduct up to $250 of their personal expenses spent on school supplies for their classrooms.

For a list of the 50 provisions, visit the Journal of Accountancy for more detailed information.

References:

National Association of Tax Professionals

Journal of Accountancy

IRS Withholding Lock-In Letters

 IRS Withholding Lock-In Letters

• Issue of IRS Withholding Lock-In Letters. Often a client’s employer will receive these letters from IRS, and the client almost immediately has their withholding “locked-in” at Single 0, even though the client may have a legitimate reason to be Married 4. 
• There seems to be some confusion regarding whether “Lock-in Letter” W-4 adjustments can be changed after the 30 day deadline in the letter. The IRS department that handles lock-in letters states, 
• when an employer receives a "Lock-in Letter" from the IRS, the employee has 30 days to disagree with the letter based on legitimate exemptions. 
• If the employee does nothing, the lock-in letter goes through and the W-4 is changed to single zero. Even after the 30 days, and the W-4 has changed to single zero, the W-4 can still be adjusted back to proper withholding's. 
• The IRS will allow the taxpayer to claim the number of exemptions based on the most recently filed return. 
• Many times, the IRS allowable exemption amount is above and beyond what the client SHOULD be withholding. 
• You will need to call to have a "Lock-in Letter" adjusted.
• How to get help
• Call toll free 1-855-839-2235 weekdays between 8:00 am and 8:00 pm
• Send a fax to 1-855-202-8300
• Write to:

US Treasury Dept
Internal Revenue Service

Compliance Services

Withholding Compliance Unit

PO Box 9047, Stop 837
Andover, MA 01810-9047

Source: Eric Roffer, Esq. Tax Defense Network/Karle Simmons

New FBAR Extension and Due Dates: Surface Transportation and Veterans Health Care Choice Improvement Act

New FBAR Extension and Due Dates:

• Surface Transportation and Veterans Health Care Choice Improvement Act changes the deadline for FBAR Reporting from June 30th to April 15th, the same due date as an individual tax return. 
• Under new law FBAR (FinCEN Form 114) can be extended for a period of six months ending October 15th, just as an Individual tax return. 
• IRS and/or FinCEN need to provide further clarification on the format or forms for such extensions, which may be similar to Form 4868, the form used to request extensions on Individual tax returns. There may be a requirement that these extensions be filed on the BSA E-filing Website as in the case of the FBAR forms. 
• For those who are not resident in the United States and have to file a US tax return, there is an automatic 2-month extension until June 15th, under §1.6081-5. Under new law, this extension is available to any FBAR filing as well. 
• For those who are filing an FBAR for the first time, new law specifically states that, "for any taxpayer required to file [an FBAR] for the first time, any penalty for failure to timely request or file an extension, may be waived by the Secretary." 
• The above due dates are applicable for returns filed after December 31st, 2015.

Due dates for Trust returns: Foreign trusts with US Owners and transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, Form 3520-A and Form 3520.

• Form 3520 and Form 3520-A Deadlines: 
• The due date for Form 3520-A is March 15th with a maximum 6-month extension until September 15th. Form 3520 is due with the tax returns on April 15th and the maximum extension allowed is 6-months ending October 15th.
• file a Form 3520, if the following apply:
1. Gifts or bequests more than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate); or
2. Gifts more than $15,102 (for 2014) from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships).
• The due date for Form 3520 tax return is the same as the individual tax filing date (April 15th) including extensions (October 15th). You need to include copies of appraisals; copies of documents showing transfer; documentation of unusual items.
• file a Form 3520-A 
• Any foreign trust with a US owner must file Form 3520-A in order for the US owner to satisfy its annual information reporting requirements under IRC §6048(b). Each US person treated as an owner of any portion of a foreign trust under §§671 through 679 is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its US owners and US beneficiaries. 

Effective Tax Administration (ETA) Offer-in-Compromise (OIC)

Effective Tax Administration (ETA) Offer-in-Compromise (OIC)

Submitting an Offer-in-Compromise (OIC) under doubt as to collectibility even though the client could full pay using equity in the home is plausible if the client could not afford to pay a home equity loan or a mortgage loan and the client had applied and been rejected for a home equity loan in the amount of the tax liability. (OIC's submitted under ETA have a much higher reject rate those submitted under doubt as to collectibility). 

If your OIC is rejected under doubt as to collectibility because the client would not take out a reverse mortgage you can appeal. During negotiations with the Appeals Officer who conducts the CDP hearing, make the following argument:

• First, calculate reasonable collection potential (RCP) by determining future income and equity/assets. 
• Calculate the monthly deficit over the life expectancy of the client and arrive at a lump sum deficit. Use the actuary tables at SSA.gov for life expectancies to calculate the lump sum number. Look closely at the Porro and Crosswhite cases for guidance. 

Under IRM 5.8.4.3, a taxpayer's RCP is defined as net equity plus future income. Under this financial analysis, ability to pay is calculated by determining future income minus allowable expenses. Additionally, Rev. Proc. 2003-71 states that special circumstances are:

1. circumstances demonstrating that the taxpayer would suffer economic hardship if the IRS were to collect from him/her an amount equal to RCP and
2. compelling public policy or equity considerations that provide a sufficient basis for compromise. 

In Porro v. Commissioner, TC Memo 2014-81, the Court held it was proper for the Settlement Officer (SO) when calculating RCP to consider the taxpayer's monthly deficit and acknowledge the taxpayer would need to spend over $200,000 of assets in order to meet the taxpayer's future basic living expenses.  The SO excluded net equity/assets of $200,000 (extrapolating living expenses over ten years) from the taxpayer's RCP calculation.

In Crosswhite v. Commissioner, TC Memo 2014-179, the Court sent back to the Appeals Office a case where the Appeals Officer rejected an OIC and only considered net equity,  but failed to determine the taxpayer's RCP by considering future income and monthly deficits.  The Court in Crosswhite cited the Porro case.  Finally, clients operating at a deficit, who need any potential equity to meet future living expenses have a zero RCP. 

When the home needs repairs, and the terms of a reverse mortgage require the recipient to keep the home compliant with various housing standards, a reverse mortgage is not a smart solution because of all the unaffordable costs involved in procuring one. 

Strangely enough, an OIC can be rejected mainly based upon the fact that the client can get a reverse mortgage. 

• File an ETA OIC on behalf of a client when her current expenses exceed her monthly income even though the equity in her condominium may be in excess of the tax liability due. The taxpayer will be unable to borrow against this equity by way of a conventional home equity loan because she wouldn't be able to repay the amount borrowed.  
• If the IRS forces the sale of the house, severe adverse consequences would result as it's unlikely the taxpayer could afford replacement housing at the same reasonable cost she's paying now. 
• If the ETA OIC is rejected meet with the SO in Appeals. If the SO still believes the taxpayer should secure a reverse mortgage, it needs to be explained that a reverse mortgage would shred the only safety net this elderly taxpayer has. 
• She's 72 years old, in ill health and will likely need all the equity she has in her condo if/when she is forced to move into an assisted living facility.

Question: Can a potential reverse mortgage be a factor considered by the IRS in denying an ETA OIC? The example in paragraph 7 of IRM 5.8.11.2.1 dealing with equity in real estate seems only to refer to a conventional equity loan, and not a reverse mortgage.

Source:

Borland, Tamara, Project Manager, Low-Income Taxpayer Clinic - Iowa Legal Aid

Estate Planning Executor Checklist

Executor/Administrator/Successor Trustee's Responsibilities and Checklist

1. ___ Locate the last will and/or trust document(s)
2. ___ Carry out written instructions of the decedent relating to his/her body, funeral, and burial arrangements
3. ___ Locate all important papers and information of decedent
4. ___ Change mailing address(es) for statements (bank, investment, etc.)
5. ___ If necessary, select an attorney to handle the estate
6. ___ Select a tax professional to prepare the required tax returns (1040, 1041, 706, and state returns)
7. ___ Notify heirs of appointment of attorney
8. ___ Notify IRS and state of your fiduciary relationship as executor, trustee, or administrator
9. ___ Locate all assets (cash, real estate, securities, collectibles, jewelry, life insurance, safe deposit box, etc.)
10. ___ Take possession of estate property
11. ___ Apply for tax identification number for estate/trust income tax returns (TIN)
12. ___ Transfer the decedent's accounts into account(s) for the estate using new TIN
13. ___ Pay expenses for last illness, funeral and burial expenses, and other debts
14. ___ Have real and personal property appraised as of the date of death
15. ___ Have any other assets appraised or valued as of the date of death
16. ___ Notify life insurance companies
17. ___ Notify trustees of retirement accounts
18. ___ Notify Social Security
19. ___ Obtain a list of debts of the decedent (mortgages, credit cards, auto loans, etc.)
20. ___ Arrange for family's immediate living expenses
21. ___ From the estate, raise cash that will be required to pay estate taxes, administration expenses, and other costs of settling the estate, if any 
22. ___ Decide which assets need to be sold, if any
23. ___ Satisfy charitable pledges listed in the decedent's will
24. ___ Locate last 3 years of income tax returns of decedent
25. ___ If a business is involved, locate comparative financial statements for any closely held business
26. ___ Locate all gift tax returns filed by decedent, if any
27. ___ Decide where to deduct the estate's administration expenses (Form 706 or 1040 or 1041)
28. ___ File final individual income tax returns by the due date (Form 1040 and state)
29. ___ File the estate income tax returns by the due date (Form 1041 and state)
30. ___ Consider special valuation on farm and business real estate
31. ___ Consider QTIP election
32. ___ Within 9 months of the date of death, file federal estate tax return and related state forms, if required (Form 706 and state)
33. ___ Safeguard any assets that will be distributed to minors
34. ___ Prepare a statement detailing the distribution of assets
35. ___ Prepare an accounting of both income and expenses of the estate
36. ___ Distribute assets to heirs and beneficiaries