Originally published on Passive Activities and Other Oxymorons on May 10th, 2011.
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Excerpts From Boston Tax Alert 2011-14
Our thanks to Frank Constance, CPA, MST for the following email regarding identity theft, this time with a MA twist!
In early April, one of my client’s received notices from both the IRS and the MA DOR. The IRS notice stated that the IRS received my client’s income tax return and they were in the process of conducting a thorough review of return information. The MA DOR noticed indicated that the DOR had discovered a discrepancy in the client’s account. Specifically, the amount of payments received according to the DOR records exceed the amount of payments claimed on the taxpayer’s 2010 MA Income Tax Return. My client had yet to file his MA return. He was going to need an extension because of missing K-1s. By the way, the estimated tax payments on both the federal and MA returns were seven figures.
I obtained a POA from the client and contacted the IRS and MA DOR. The IRS said to file the Identity Theft Affidavit Form 14039 with the Form 4868. We were told to file the forms with the IRS in Andover. The Form 1040 would have to be filed in paper version when the taxpayer was ready to file. They also recommended that the taxpayer contact the FTC, the SSA, and a major credit bureau. The MA DOR recommended that the taxpayer call the MA DOR Criminal Investigation Bureau. They stated that the client could still e-file his extension and return.
In addition to the above case, I also had two cases were duplicate returns were filed for deceased taxpayers. We tried to e-file returns in each case, but they bounced because returns were already on file.
When I spoke with Lu recently he indicated that identity theft is becoming a big issue with tax returns. I haven’t found much on the subject in the alphabet soup of internal IRS material that I try to keep up with. It may be that some of the measures they are taking are exempt from disclosure under the Freedom of Information Act.
The IRS has issued proposed regulations providing guidance in applying the Code §108 bankruptcy and insolvency exclusions for cancellation of debt (COD) income to grantor trusts and disregarded entities. Specifically, the proposed regulations clarify the meaning of the term “taxpayer,” as used in Code §108, with regard to a grantor trust or a disregarded entity. The regulations apply to COD income occurring on or after the date the regulations are published as final regulations.
Some taxpayers have taken the position that the Code §108(a)(1)(A) bankruptcy exception is available if a grantor trust or disregarded entity is under the jurisdiction of a bankruptcy court, even if its owner is not. Similarly, some taxpayers have contended that the Code §108(a)(1)(B) insolvency exception is available to the extent a grantor trust or disregarded entity is insolvent, even if its owner is not. The taxpayers argue that because, for Federal income tax purposes, the disregarded entity is disregarded and the “taxpayer” is the owner of the disregarded entity’s assets and liabilities, the taxpayer is properly seen as being subject to the bankruptcy court’s jurisdiction.
The IRS doesn’t believe this is an appropriate application of the Code §108 bankruptcy and insolvency provisions.
The proposed regulations provide that, for purposes of applying the bankruptcy exception and the insolvency exception to discharge of indebtedness income of a grantor trust or a disregarded entity, the term “taxpayer” refers to the owner(s) of the grantor trust or disregarded entity. The proposed regulations clarify that, subject to the special rule for partnerships, the insolvency exception is available only to the extent the owner is insolvent, and the bankruptcy exception is available only if the owner of the grantor trust or disregarded entity is subject to the bankruptcy court’s jurisdiction. Further, the proposed regulations provide that grantor trusts and disregarded entities themselves will not be considered owners for this purpose.
In addition, the proposed regulations provide that in the case of a partnership, the owner rules would apply at the partner level to the partners of the partnership to whom the discharge of indebtedness income is allocable.
The economy’s recent woes assure us that COD issues will be relevant to many taxpayers in the next couple of years.
Our thanks to Edward DeFranceschi, Esq. for another email on identity theft as it applies in a tax return context!
Attached is the IRS identify theft affidavit Fom 14039. Got this from victim #3. There has been some confusion about where to file an original/amended return after the IRS notifies the taxpayer by mail that there is a “duplicate return”. It looks like the correct procedure is to file the original return by paper with the Form 14039 at the same location that you would regularly file. (The efile will be rejected because there will already be a fake return in place). I would like to hear from the other victims asap so that we can keep everyone in the loop. Assuming that any one has the time to read this stuff.
I’ve always figured that nobody would want to steal my identity, but you never know.
On 03/29/11, Final Regulation (TD 9518), Rev. Proc. 2011-25, Notice 2011-26, and Notice 2011-27 were issued regarding the requirement for specified tax return preparers who reasonably expect to “file” 100 or more individual income tax returns during 2011 to file electronically. You can obtain these documents or info about them by seaching for them through Google.
As stated by Peter Gilman in his email below, the key to avoiding this requirement is the definition of the word “filed”. Reg. 301.6011-7(a)(4)(i) states “For purposes of section 6011(e)(3) and these regulations only, an individual income tax return is considered to be ‘filed’ by a tax return preparer or a specified tax return preparer if the preparer SUBMITS the individual income tax return to the IRS on the taxpayer’s behalf, either electronically (by e-file or other magnetic media) or in non-electronic form. Submission of an individual income tax return by a tax return preparer or a specified tax return preparer in non-electronic form includes the transmission, sending, mailing, or otherwise delivering of the paper individual income tax return to the IRS by the preparer, any member, employee, or agent of the preparer, or any member, employee, or agent of the preparer’s firm.” Therefore, if a taxpayer SUBMITS the return to the IRS, it is NOT counted for purposes of determining whether the tax return preparer has “filed” 100 or more individual income tax returns in 2011. This distinction will become even more important in calendar 2012 when the magic number drops to 11 or more. In the meantime, I continue to agree with Peter’s analysis which appears below.
Our thanks to Peter J. Gilman, CPA for the following email! I agree with his technical analysis.
My goal is to avoid getting signed statements from all of my clients in order to avoid efiling (as I prepare over 100 returns). I have attached my analysis which questions what the author meant regarding proposed regulation 301.6011-6.
The way I read the proposed regulation, the signed statements are merely a safe harbor. If my clients mail their returns to the IRS, they are the “filer”. I am not the filer, and thus, I have not filed over 100 returns; so I do not need to efile, even if I do not have signed waivers from my clients.
Today I spoke to Keith Brau, the author of the proposed regulation. He confirmed that my reading is correct. In other words, if you get the signed statement from your client, that takes away all question. However, if you do not get the signed statement, the tax preparer has not “filed returns” if the client mails them to IRS.
So, without the signed client letters, I run the risk that I cannot prove that the client mailed his return directly to IRS. Keith stated that if my office practice is to mail the returns to my client with filing instructions, the office practice is not proof that the client mailed the return. It seems to me that in the event that I am ever questioned (unlikely), I could get an affidavit from my clients at that time stating that they mailed the tax returns to IRS.
There should be a revenue procedure and final regulation issued before the end of next week, according to Keith.
This was the big concern of Robert Flach, The Wandering Tax Pro, who cannot help his clients with e-filing federal returns since it would require him to use the unreliable and expensive software that the rest of us use. He still does returns exclusively by hand.
Our thanks to Edward DeFranceschi, Esq. for the following email!
On January 11, 2011, the U.S. Supreme Court entered a decision resolving the issue of whether medical residents were employees for FICA purposes or “students”. (Mayo Foundation for Medical Education and Research, et al v. US; 2011 US Lexis 609; 2011-1 USTC P50,143). Instead of just saying that they weren’t students, the Court made the IRS the arbiter of what the Code means when the statute isn’t clear, meaning the Court ended the distinction between “procedural regulations” and “interpretative regulations”. There had never been any doubt that the procedural regulations as well as “legislative regulations” could be dictated by the IRS, but there was some issue about the IRS interpretations of the meaning of the law. Under National Muffler, 440 US 472, the Supreme Court had suggested that in reviewing a tax regulation the Courts were to analyze a regulation by determining if the regulation was “a substantially contemporaneous construction of the statute by those presumed to have been aware of congressional intent. If the regulation dates from a later period, the manner in which it evolved merits inquiry. Other relevant considerations are the length of time the regulation has been in effect, the reliance placed on it, the consistency of the Commissioner’s interpretation, and the degree of scrutiny Congress has devoted to the regulation during subsequent re-enactments of the statute”. The Court had to choose between that flexible standard and what has become known as the Chevron standard for the interpretation of agency regulations: “whether the agency’s answer is based on a permissible construction of the statute.” The Court held that the Chevron standard was applicable to the IRS interpretation of the IRC. Based on Mayo, the first place to start tax research is the regulations, not as I used to say, to see if the IRS had stumbled into the correct interpretation but to see if the regulation is “based on a permissible construction of the statute”. Because if it is, you can stop right there. The IRS will soon be firing all of its litigators and hiring those attorneys to write regulations because any permissible construction that makes its way into the regulations is a winner. The courts will be left with factual disputes or places where the IRS hasn’t issued regulations.
Our thanks to Peter Birkholz, MST for the following email!
A representative from the Service’s National Office recently responded to an inquiry regarding whether expenses for Medicare and Cobra coverage could be used in calculating the deduction for SE health insurance.
If an S corporation or a partnership reimburses an individual for health insurance coverage through another plan such as Medicare or Cobra, the reimbursement is deemed to be the establishment of a health insurance plan, and the health insurance would be allowed as a SE Health Insurance deduction on Form 1040 if these individuals report the insurance as a deduction and income (W-2 or guaranteed payment) at the entity level.
When asked about a Schedule C taxpayer, the representative stated that since the taxpayer in business and the individual taxpayer are the same person, Medicare and Cobra would be allowed as a SE Health Insurance deduction on page 1 of Form 1040 even if not reimbursed by the Schedule C business. According to the National Office, Notice 2008-1 supersedes all prior notices and FSAs on the subject.
Our thanks to Christopher Hussey for spotting the following issue:
In our prior email, we noted that 50% bonus depreciation had been extended through 2012 and that 100% bonus depreciation applied to qualified property (QP) acquired after 09/08/10 and before 01/01/12. Chris raised the issue of whether a taxpayer could elect out of 100% bonus and still take 50% bonus. The current position of the IRS National Office is that a taxpayer must take 100% bonus or elect out and take regular depreciation. The National Office says that a taxpayer cannot elect out of 100% bonus and take 50% bonus!!! They say that if a taxpayer were to take 50% bonus on QP acquired after 09/08/10, the taxpayer still would have to reduce the basis of the asset by 100% because 100% bonus is mandatory. You might want to be particularly careful in this regard.
In addition to extending 50% bonus depreciation through 2012, Act Section 401 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) amended section 168(k) by adding a new paragraph 5 which reads as follows:
“(5) SPECIAL RULE FOR PROPERTY ACQUIRED DURING CERTAIN PRE-2012 PERIODS- In the case of qualified property acquired by the taxpayer (under rules similar to the rules of clauses (ii) and (iii) of paragraph (2)(A)) after September 8, 2010, and before January 1, 2012, and which is placed in service by the taxpayer before January 1, 2012 (January 1, 2013, in the case of property described in paragraph (2)(B) or 2 (C)), paragraph (1)(A) shall be applied by substituting ‘100 percent’ for ’50 percent’.” Has anybody considered the implications of this change in MA in light of the fact that MA has decoupled from section 168(k) bonus depreciation?
I greatly appreciate Lu Gauthier’s permission to reproduce this material and look forward to posting more in the future. Be sure to check out The Boston Tax Institute’s seminars. They are not just the best value. They are simply the best.