IRS is looking for volunteers to serve on the Taxpayer Advocacy Panel (TAP), the agency has announced. As described by IRS, the TAP provides a forum for taxpayers from all 50 states, the District of Columbia and Puerto Rico to raise concerns about IRS service and offer suggestions for improvement. The panel prepares an annual report that offers the taxpayers’ perspective as well as recommendations for improvements in agency services and operations. “TAP members are a voice for the nation’s taxpayers and provide valuable insights that are important to effective tax administration,” said IRS Commissioner Douglas Shulman. A member of the TAP must be a U.S. citizen, current with federal tax obligations, able to commit 300 to 500 hours during the year, and able to pass an FBI criminal background check. New TAP members will serve a three-year term starting in December 2011. Alternates also are being selected. The panel must fill membership slots in the following locations: Alaska, Arizona, California, Florida, Georgia, Hawaii, Idaho, Indiana, Kansas, Maryland, Massachusetts, Michigan, Montana, Ohio, Puerto Rico, Texas, Utah, Vermont, Virginia, Wisconsin and Wyoming. Alternates are needed for Iowa, Oklahoma, Oregon, South Dakota and West Virginia. Applications for the TAP will be accepted through April 29 and can be found online at http://www.improveirs.org/.
Estates of decedents dying in 2010 can choose zero estate tax, but at the price of beneficiaries being limited to the decedents’ basis plus certain increases. IRS has announced that Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, is not due Apr. 18, 2011 and should not be filed with the final Form 1040 of persons who died in 2010. However, at this time, IRS has not set a new due date. IRS says the due date will be set in forthcoming guidance but does not indicate when that guidance may be issued.
Background. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax was to have been repealed for individuals dying in 2010, and the rules allowing a step-up in basis for property acquired from a decedent were to have been replaced with a modified carryover basis regime. The 2010 Tax Relief Act restored the estate tax for individuals dying in 2010 with a $5 million per person exemption and a maximum rate of 35%. It also repealed the modified carryover basis rules for property acquired from a decedent who died in 2010. However, Sec. 301(c) of the 2010 Tax Relief Act allows estates of individuals dying in 2010 to elect zero estate tax and the modified carryover basis rules that would have applied before they were repealed.
Under the modified carryover basis rules, the basis of assets acquired from the decedent is the lesser of the decedent’s adjusted basis (carryover basis) or the fair market value of the property on the date of the decedent’s death. However, as discussed in detail in Federal Taxes Weekly Alert 03/04/2010, there are two exceptions to this general rule:
· The executor can allocate up to $1.3 million, increased by unused losses and loss carryovers ($60,000 in the case of a decedent nonresident who is not a citizen of the United States, but with no loss or loss carryover increase), to increase the basis of assets; and
· The executor can also allocate an additional amount, up to $3 million, to increase the basis of assets passing to a surviving spouse, either outright or in a Qualified Terminable Interest Property (QTIP) trust.
Under the original EGTRRA rules, the executors of the estates of certain decedents who died in 2010 were previously required to file an information return (Form 8939) relating to large transfers at death. This form was to be due on the date of the decedent’s final Form 1040 or a later date specified in regs. This is to be contrasted with the election under Sec. 301(c) of the 2010 Tax Relief Act, which is to be made at the time and in the manner prescribed by IRS.
Deadline to be determined. IRS now says it plans to issue future guidance that will provide a deadline for filing Form 8939 and for electing to have the estate tax rules not apply to the estates of persons who died in 2010. IRS observes that the prior deadline was Apr. 18, 2011, and it remains the deadline for filing a decedent’s final Form 1040 this filing season.
Observation: Presumably, the reference to the prior deadline is the original EGTRRA deadline, as recent pronouncements by IRS on this subject did not make reference to an Apr. 18 deadline. See, for example, the IRS guidance discussed in Federal Taxes Weekly Alert 03/24/2011.
The forthcoming guidance will also explain the manner in which an executor of an estate may elect to have the estate tax not apply.
Observation: It is not clear whether the zero estate tax election will be made on Form 8939, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, or some other form.
A reasonable period of time for preparation and filing will be given between issuance of the guidance and the deadline for filing Form 8939 and for electing to have the estate tax rules not apply. The Form 8939 is not currently available, but will be made available soon after the guidance is issued.
IR-2011-33 can be viewed on the IRS website at http://www.irs.gov/newsroom/article/0,,id=237978
Owners still owe $2 million responsible person penalty despite death of accountant who embezzled funds
The U.S. Court of Appeals for the Eighth Circuit has granted summary judgment to the IRS in a ruling that found the owners of a company to be “responsible persons” subject to a $2 million trust fund recovery penalty for failing to timely remit employment taxes, despite their assertion that their accountant had embezzled funds, which deprived them of the opportunity to make informed decisions.
Responsible person penalty. Under Code Sec. 6672(a), if an employer fails to properly pay over its payroll taxes, the IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. In determining whether there is “willfulness” for purposes of Code Sec. 6672(a), the courts have focused on whether a taxpayer had knowledge about the non-payment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.
Facts. In 1992, James and Gayle Oppliger formed Double O, a trucking business, and served as the sole owners and primary officers of the company. In 1997, the Oppligers formed LFC, a payroll company for Double O. The Oppligers were the sole members of LFC.
In 1996, the Oppligers hired Mary Kerkman to perform accounting and bookkeeping services for the companies. The Oppligers delegated to Kerkman the tasks of filing employment tax returns and paying payroll taxes. Kerkman provided the Oppligers with weekly reports that informed them of the companies’ financial situations. Kerkman committed suicide on April 3, 2002. After her death, the Oppligers learned that Kerkman had embezzled $10,000 from the companies.
On April 4, 2002, the day after Kerkman’s death, an IRS revenue officer informed the Oppligers that LFC employment taxes were not paid to the government for 13 consecutive quarters and Double O employment taxes were not paid for 17 quarters. The Oppligers claimed that this was when they first learned that Double O and LFC had not been paying employment taxes.
The Oppligers subsequently sold the assets of Double O on Sept. 1, 2002. Between April 4, 2002 and Sept. 1, 2002, LFC paid $2,117,640.43 to its employees and $3,240,138.60 to third-party creditors. The IRS then assessed penalties under Code Sec. 6672 against the Oppligers for LFC’s unpaid taxes in the amount of $2,363,704.25, and Double O’s unpaid taxes in the amount of $27,013.21. The Oppligers argued that they were not liable for the unpaid taxes. A federal district court granted summary judgment to the IRS, stating that there were no genuine issues of material fact regarding whether the Oppligers were responsible persons under Code Sec. 6672 . The district court also determined that the Oppligers willfully failed to pay the employment (trust fund) taxes because they admitted that after the IRS informed them of their outstanding tax liabilities, they paid employees and third parties over $5 million.
The Oppligers appealed the district court ruling.
Eighth Circuit ruling. The Eighth Circuit held that the Oppligers were responsible persons under Code Sec. 6672 because they had the status, duty, and authority to pay the trust fund taxes. The Eighth Circuit refuted the Oppligers’ claim that Kerkman’s misconduct deprived them of the opportunity to make informed decisions by noting that whether Kerkman may have been a responsible person under Code Sec. 6672 is immaterial to the Oppligers’ liability since they were both responsible persons for purposes of the penalty.
The Eighth Circuit also concluded that the Oppligers had willfully failed to pay the trust fund taxes. Their decision to pay employees and other creditors, rather than the U.S. government, constituted a willful failure to pay the taxes under federal law.
Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, on Jan. 25 introduced a bill to repeal certain new reporting requirements for businesses that were included in the Patient Protection and Affordable Care Act. The bill, S. 72, is titled “A bill to repeal the expansion of information reporting requirements for payments of $600 or more to corporations, and for other purposes.” It was introduced with 19 cosponsors. As described in a Baucus press release, the legislation would repeal requirements for businesses to report payments made for goods and certain services to IRS using Form 1099. Since the passage of the health care legislation, the business community has become increasingly aware of the new paperwork burden and has voiced strong concerns, Baucus said. Baucus and Senate Majority Leader Harry Reid (D-NV), a cosponsor, expect bipartisan support for the measure. “Small businesses, the engine of our economy, told us the 1099 provision was burdensome, and we are responding quickly to ensure that they can keep running smoothly,” said Reid, adding that easing the paperwork burden is an issue on which Republicans and Democrats can agree. “We have heard small businesses loud and clear and are responding to their concerns,” said Baucus. “Many of my colleagues on both sides of the aisle want to work with the small business community to eliminate these requirements, and it is my hope we can come together to pass legislation quickly.” The text of the bill was unavailable currently but should be visible shortly at http://www.govtrack.us/congress/bill.xpd?bill=s112-72.
President’s proposal would make exclusion of gain on small business stock permanent & expand new markets credit
On January 31, the White House announced a proposal to make the temporary exclusion on capital gains from the sale of small business stock permanent and to expand the new markets tax credit. The proposals came as part of President Obama’s “Startup America” initiative to promote entrepreneurship and create jobs.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) extended for one year the Code Sec. 1202 exclusion under which noncorporate taxpayers could exclude 100% of the gain realized on the sale of “qualified small business stock” held for more than five years. Thus, qualifying taxpayers can continue to exclude 100% of the gain from the disposition of qualified small business stock acquired before Jan. 1, 2012. After 2011, the exclusion is currently scheduled to drop to 50% (60% for certain stock issued by corporations in empowerment zones).
The 2010 Tax Relief Act also extended the Code Sec. 45D new markets tax credit for two years, through 2011 (the carryover period for unused new markets tax credits was extended through 2016). For each of the 2010 and 2011 calendar years, up to $3.5 billion in qualified equity investments is currently allowed.
The 1/31/2011 Press Release “White House to Launch “Startup America” Initiative” can be viewed at http://www.whitehouse.gov/the-press-office/2011/01/31/white-house-launch-startup-america-initiative .
Many important tax changes go into effect this year. Most are the result of new rules in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) as well as in seven other tax laws enacted in 2008–2010, while others are triggered by regs. This article reviews the 2011 non-extender, non-indexing tax changes that relate to retirement plans.
Restricted definition of medicine for health plan reimbursements. Under Sec. 9003 of the Patient Protection and Affordable Care Act (P.L. 111-148), the cost of over-the-counter medicines can’t be reimbursed with excludible income through a health flexible spending arrangement (FSA), health reimbursement account (HRA), health savings account (HSA), or Archer MSA, unless the medicine is prescribed by a doctor. For HSAs and Archer MSAs, this applies for amounts paid with respect to tax years beginning after December 31, 2010; for health FSAs and HRAs, it applies for expenses incurred with respect to tax years beginning after December 31, 2010. (Code Sec. 106(f), Code Sec. 220(d)(2)(A), and Code Sec. 223(d)(2)(A)) (See RIA Pension and Benefits Week 9/13/10 for the latest guidance.)
Boosted tax on nonqualifying HSA and Archer MSA distributions. Under Sec. 9004 of the Patient Protection and Affordable Care Act (P.L. 111-148), for disbursements made during tax years starting after December 31, 2010, the additional tax on distributions from an HSA that are not used for qualified medical expenses is increased from 10% to 20% of the disbursed amount, and the additional tax on distributions from an Archer MSA that are not used for qualified medical expenses is increased from 15% to 20% of the disbursed amount. (Code Sec. 220(f)(4)(A) and Code Sec. 223(f)(4)(A))
Small employers may establish “simple cafeteria plans.” Under Sec. 9022 of the Patient Protection and Affordable Care Act (P.L. 111-148), for years beginning after December 31, 2010, small employers (average of 100 or fewer employees on business days during either of the two preceding years) may provide employees with a “simple cafeteria plan.” (Code Sec. 125(j)) Under such a plan, the employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self-insured medical expense reimbursement plan, and benefits under a dependent care assistance program.
Ability to treat qualifying charitable distribution made in January 2011 as made in 2010. Taxpayers who are age 70- 1/2 or older can make tax-free distributions to a charity from an individual retirement account (IRA) of up to $100,000. These distributions aren’t subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer’s return. Under the 2010 Tax Relief Act, these rules are available for charitable IRA transfers made in tax years beginning before January 1, 2012. (Code Sec. 408(d)(8)(F)) In addition, a taxpayer can elect for such a distribution made in January of 2011 to be treated as if it were made on December 31, 2010. Thus, a qualified charitable distribution made in January 2011 may be (1) treated as made in the taxpayer’s 2010 tax year and thus so allowed to count against the 2010 $100,000 limitation on the exclusion, and (2) treated as made in the 2010 calendar year and so allowed to be used to satisfy the taxpayer’s minimum distribution requirement for 2010.
Designated Roth accounts okay in 457 plans. Under the Small Business Jobs Act of 2010 (P.L. 111-240), for tax years beginning after December 31, 2010, governmental Code Sec. 457 plans (i.e., Code Sec. 457(b) eligible deferred compensation plans of a Code Sec. 457(e)(1)(A) eligible employer) are added to the definition of “applicable retirement plans” that can offer a qualified Roth contribution program. (Code Sec. 402A(e)(1)(C)) Thus, a Code Sec. 457 plan maintained by a state, its political subdivision, agency, or instrumentality, or the state subdivision’s agency or instrumentality, can include a qualified Roth contribution program.
Payroll tax holiday in place. For remuneration received during 2011, the 2010 Tax Relief Act reduces the employee OASDI tax rate under the FICA tax by two percentage points to 4.2%. (Similarly, for self-employment income for tax years beginning in 2011, the OASDI tax rate under the SECA tax is reduced by two percentage points to 10.4% percent.) As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800 (and self-employeds will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800).
Partial annuitization of annuities. Under the “Small Business Jobs Act of 2010,” the tax title of H.R. 5297, the Small Business Lending Funding Act (P.L. 111-240), for amounts received in tax years beginning after December 31, 2010, taxpayers may partially annuitize a nonqualified annuity, endowment, or life insurance contract. (Code Sec. 72(a)(2)) If any amount is received as an annuity for a period of 10 years or more, or during one or more lives, under any portion of an annuity, endowment, or life insurance contract:
(1) that portion will be treated as a separate contract for annuity taxation purposes;
(2) for purposes of applying Code Sec. 72(b) (calculation of the exclusion ratio for annuity distributions), Code Sec. 72(c) (investment in contract, expected return, and annuity starting date), and Code Sec. 72(e) (taxation of distributions from an annuity, endowment, or life insurance contract, that aren’t received as an annuity), the investment in the contract is allocated pro rata between each portion of the contract from which amounts are received as an annuity, and the portion of the contract from which amounts are not received as an annuity; and
(3) a separate annuity starting date under Code Sec. 72(c)(4) (annuity starting date) is determined for each portion of the contract from which amounts are received as an annuity. (Code Sec. 72(a)(2))
Thus, holders of nonqualified annuities can elect to receive a portion of an annuity contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.
The partial annuitization rule is not intended to change the rules for amounts received as an annuity (or as a lump sum) from Code Sec. 401(a) qualified plans, Code Sec. 403(a) annuity plans, Code Sec. 403(b) annuity plans, or individual retirement plans.
Improved and expanded research is a key requirement for IRS to improve customer service to small businesses and self-employed taxpayers, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit released on Jan 18. According to TIGTA, the audit was initiated to determine whether the services provided by IRS’s Small Business/Self-Employed (SB/SE) Division, which caters to some 57 million taxpayers, will aid the agency in meeting its customer service goals. The taxpayers served by the SB/SE Division represent one-third of the overall taxpayer base and consist mainly of self-employed individuals and small business corporations and partnerships with assets of less than $10 million, the audit noted. As described in the audit, the division educates and informs these taxpayers of their tax obligations, develops educational products and services, helps them understand and comply with applicable laws, and protects the public interest by applying the tax law with integrity and fairness. However, the audit found flaws in the way that SB/SE Division personnel use an IRS issue management resolution system and a key database. These problems adversely affect efforts to improve customer service, the audit said. “The IRS conducts research on individual taxpayers so it can incorporate their needs when making service improvement decisions, but it has only begun to conduct comparable research concerning the needs of the small business taxpayer,” said J. Russell George, the inspector general. “As a significant portion of the tax gap is attributed to small businesses and self-employed taxpayers, understanding more about their needs could yield dividends.” The audit is located at http://www.treasury.gov/tigta/auditreports/2011reports/201140010fr.pdf.
U.S. Treasury Secretary Timothy Geithner will meet with chief financial officers and other officials on January 14 to hash out ideas for simplifying and trimming the corporate tax — nearly the highest in the industrialized world. Executives from Microsoft Corp., Cisco and GE are among the heavy-hitters expected to attend the meeting. Experts say it would require a major effort to overhaul the corporate tax code, which is packed with provisions favoring certain industries and even specific companies. “The U.S. tax code is the most politicized law in the entire world,” said Jonathan Blattmachr, a tax lawyer for the wealthy based in New York. “Everything is driven by politics; not by what is fair or sensible.” Many analysts believe it could be a multiyear process. Here are some keys to the debate.
What do people mean by tax system “reform?” Experts across the ideological spectrum say the high corporate rate leads companies to move and keep money abroad. When people talk about an overhaul, they generally mean cutting the rate and “broadening the base” of companies paying taxes. Federal Reserve Chairman Ben Bernanke voiced support for that tact in testimony to Congress last week. “Lowering rates and closing loopholes is, I think, the best approach,” in the long term, he told the Senate Budget panel. “Broadening the base” means bringing more taxpayers into the system and closing what some call “loopholes” — deductions and other ways companies use to minimize taxes. That is where it gets tricky.
Who would win, who would lose? Big pharmaceutical and technology companies could be among the losers in a rewrite of the tax code that lowers overall rates but also trims loopholes and deductions, according to Anne Mathias, an analyst at MF Global in Washington. Because of their extensive international operations, they have “aggressively utilized the existing system” and have managed to keep their effective tax rates in the low 20 percent range, Mathias said in a recent investor note. Winners could be companies with mostly U.S. sales, like retail, food service and healthcare companies. “Somebody is going to pay more; let’s get serious,” said Bruce Josten, executive vice president at the Chamber of Commerce.
What are the sticking points? Obama’s past two budgets sought to curb sections of the tax code that allow companies to defer taxes on profits earned abroad. Congress has taken up some small slices of this but generally stayed away from the more controversial proposals. U.S. companies are generally taxed on income earned worldwide and get tax credits to avoid double taxation for taxes paid abroad. Business says these credits do not fully offset the cost and want to move to a “territorial” system in which they are taxed just on income earned in the United States. The deficit commission panel set up by President Barack Obama recommended a move to a territorial system in its report late last year. That report failed to gain enough votes to trigger a congressional vote, but many see it as a model for reform. Obama administration officials have been largely silent on moving to a territorial system, so a move in this direction could signal progress.
What has Obama proposed? Obama’s first budget aimed to limit “deferral” of taxes on income earned abroad by companies and sought to tighten other tax policies to bring the Treasury $210 billion over a decade. His second budget also proposed limiting deferral, but allowed more exceptions, raising a more modest $120 billion. Under the proposals, companies would not be able to write off certain expenses until they paid taxes on profits associated with those expenses. Obama has also sought to limit what officials call abuse of the foreign tax credit system and curb tax breaks for oil and gas companies, which would raise $38 billion over a decade.
What to watch in the near term? Observers are eyeing Obama’s late January State of the Union address to gauge whether tax reform will be a major priority in the second half of his term. In mid-February, the president’s budget will be released, which may highlight those recommendations of the deficit panel the president will support. In Congress, the chairmen of the tax-writing panels will have a series of hearings as well. In addition, a bipartisan group of senators led by Democrat Mark Warner and Republican Saxby Chambliss is working on legislation to incorporate the deficit commission’s report. It is expected to include tax changes.
Taxpayers who are age 70 1/2 or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000. These distributions aren’t subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer’s return. Under the 2010 Tax Relief Act, these rules are available for charitable IRA transfers made in tax years beginning before Jan. 1, 2012. (Code Sec. 408(d)(8)(F)) In addition, a taxpayer can elect for such a distribution made in January of 2011 to be treated as if it were made on Dec. 31, 2010. Thus, a qualified charitable distribution made in Jan. 2011 may be (1) treated as made in the taxpayer’s 2010 tax year and thus so allowed to count against the 2010 $100,000 limitation on the exclusion, and (2) treated as made in the 2010 calendar year and so allowed to be used to satisfy the taxpayer’s minimum distribution requirement for 2010.
Under Sec. 9003 of the Patient Protection and Affordable Care Act (P.L. 111-148), the cost of over-the-counter medicines can’t be reimbursed with excludible income through a health flexible spending arrangement (FSA), health reimbursement account (HRA), health savings account (HSA), or Archer MSA, unless the medicine is prescribed by a doctor. For HSAs and Archer MSAs, this applies for amounts paid with respect to tax years beginning after Dec. 31, 2010; for health FSAs and HRAs, it applies for expenses incurred with respect to tax years beginning after Dec. 31, 2010.