Form 56- Notice Concerning Fiduciary Relationship
Form 1040-Final Individual Income Tax Return and the State Tax Return
Form 706-United States Estate (and Generatino-Skipping Transfer) Tax Return
TAX FILINGS FOR ESTATES AND TRUSTS
FORM 56 – NOTICE CONCERNING FIDUCIARY RELATIONSHIP
This form is filed with the IRS to notify the Service that you are acting as the representative for the estate or trust. It is important to file this form as soon as possible so that the Service sends any tax notices or other correspondence to the correct address. By filing this form, you notify the IRS that you are the responsible party for filing and paying taxes for the estate or trust.
FORM 1040 – FINAL INDIVIDUAL INCOME TAX RETURN AND THE STATE TAX RETURN
The decedent’s final individual tax returns, Form 1040 and state return. The executor, administrator, or trustee is responsible for filing this form. It includes all income, deductions, credits, and withholdings from January 1 to through the date of death. As of the date of death, the decedent’s tax filing ends.
FORM 706 – UNITED STATES ESTATE (and GENERATION-SKIPPING TRANSFER) TAX RETURN
This return reports all the assets and liabilities of the decedent as of the date of death or an alternate valuation date. It is a snapshot of a moment in time. It does not report income and it is not an income tax return.
The assets are reported at the fair market value as of the date of death. The executor of the estate must obtain documents to prove the date of death values of the decedent’s assets. These documents would include bank statements, CD certificates, broker statements, IRA and/or 401k statements, annuity statements, etc. dated as of the date of death or very close to it. The estate must also include life insurance proceeds on policies owned by the decedent and payable on his/her death. It will include income earned but not yet received by the decedent such as a paycheck, a bonus, and award, etc.
There will be a need for appraisals of the value of certain assets if the decedent owned any of the following:
- real estate
- a closely held business
- partnership interests
- jewelry
- art, antiques, and collectibles
The return is required if the net value is in excess of $5.43 million in 2015. This amount is referred to as the exemption amount. This amount is estate-tax free. It is adjusted annually for inflation.
The return may be required if the surviving spouse elects to carry over her/his deceased spouse’s unused exemption amount (the DSUE). In general, we advise a spouse to file the Form 706 to make this election if the couple’s entire estate is valued at $4 million or more at the date of the first spouse’s death.
The Form 706 is due exactly 9 months after the date of death. For example, if the date of death is February 7, the Form 706 is due by November 7. An extension may be available for the filing for 6 months. The extension is for filing, not paying. The estate tax is due by the original filing date.
FORM 1041 – US INCOME TAX RETURN FOR ESTATES AND TRUSTS and THE STATE RETURN
Income earned or received and deductions incurred after the date of death are reported on this return. For example, if the date of the decedent’s date of death is May 6, there could be a final decedent’s return for the period January 1 through May 6 reporting income and deductions during that period. The estate or trust would file a Form 1041 reporting income and deductions for the period May 7 through December 31. It is important to keep track of income and deductions during these two periods of time.
FORM 709 – UNITED STATES GIFT (and GENERATION-SKIPPING TRANSFER) TAX RETURN
- Every individual may gift (give a gift) up to $14,000 per gift recipient in 2015 without incurring a gift tax.
- Gifts are never taxable to the recipient.
- Gifts may be taxable to the giver.
- You may give or bequest up to the Exclusion Amount, $5.43 million in 2015, during your lifetime or at your death.
- All gifts and the net estate value are totaled on the Form 706.
- Annually, any gifts in excess of $14,000 are reported on the Form 709.
- The Form 709 is due by 4/15 each year. The due date can be extended to 10/15.
What is Propositon 60 & 90, 58 & 193 re transfer of base year property tax values
FAQ’s REGARDING THE TRANSFER OF THE PROPERTY TAX BASE
What is Proposition 60?
Prop. 60 was a constitutional amendment approved by the voters of California in 1986. It allows the transfer of an existing Proposition 13 base year value from a former residence to a replacement residence, if certain conditions are met. This benefit is open to homeowners who are at least 55-years old and are able to meet all qualifying conditions, (see below).
What is Proposition 90?
Proposition 90 has the same provisions and qualifications as Proposition 60. The difference is that it allows base year transfers from one county to another county in California. The only counties that have adopted an ordinance to allow values from other counties are:
o Alameda
o El Dorado
o Los Angeles
o Orange
o Riverside
o San Bernardino
o San Diego
o San Mateo
o Santa Clara
o Ventura
This list can change at any time. Please contact the local assessor to see if the value of your original property can be transferred to a replacement in that county.
How do I qualify for these property tax benefits?
- Proposition 60 - Both the original property (former residence) and its replacement must be located in the same county.
- Proposition 90 - The original property is located in a different county from replacement, (see Proposition 90 information above).
- As of the date of transfer of the original property, the seller or a spouse living with the seller must be at least 55 years old.
- The original property must have been eligible for the Homeowners' Exemption or entitled to the Disabled Veterans' Exemption.
- The replacement dwelling must be of equal or lesser value than the original property.
- The replacement dwelling must have been purchased or newly constructed on or after 11/06/86.
- Without exception, the replacement dwelling must be purchased or newly constructed within two years (before or after) of the sale of the original property.
- The original property must be subject to reappraisal at its current fair market value as the result of its transfer, in accordance with Sections 110.1 or 5803 of the Revenue and Taxation Code.
- Without exception, a Claim for Relief must be filed within three years of the date a replacement dwelling is purchased or new construction of a replacement dwelling is completed to receive the full relief. A claim filed after the three year time period will receive a prospective relief only.
Is it true that only one claimant, out of several co-owners of a replacement dwelling, need be at least 55 as of the date of sale of an original property?
Yes, but the claimant must be an owner of record. Either the claimant or his/her spouse must also have been an occupant of the original property and at least 55 years old on the date of sale.
Can a taxpayer apply for and receive the benefit of Prop. 60/90 more than once?
No, this is a one-time benefit. You are not eligible if you have been previously granted this benefit.
What is meant by "equal or lesser value" than the original dwelling?
In general, "equal or lesser value" means:
100 % of the market value of an original property if a replacement dwelling is purchased before the original property is sold.
105 % of the market value of an original property if a replacement dwelling is purchased within one year after the sale of the original property.
110 % of the market value of an original property if a replacement dwelling is purchased within the second year after the sale of the original property.
Is the "equal or lesser value" test a simple comparison of the sales price of the original property and the purchase price or cost of new construction of the replacement dwelling?
No. The comparison must be made using the full market value of the original property and the full market value of the replacement dwelling as of its date of purchase or completion of new construction. This is important because sales prices are not always the same as market value. The Assessor must determine the market value for each property, which may differ from sales price.
If the current full cash value of my replacement dwelling slightly exceeds the full market value of my original property, can I still receive a partial benefit?
No. Unless the replacement dwelling satisfies the "equal or lesser value" test, no benefit is available.
May I give my original property to my child and still receive the Prop. 60/90 benefit when I purchase a replacement property?
No. The law provides that an original property must be sold for consideration and subject to reappraisal at full market value at the time of sale. Original property transferred to a child or disposed of by gift or devise does not qualify. See the FAQ’s below re Propositions 58 and 193.
Can I qualify for the benefits of Prop. 60/90 when I sell my original property (owned by me alone) and purchase a replacement dwelling with several co-owners? What if I own only a 10 percent interest in the replacement dwelling?
Yes. The base year value of your original property can be transferred to your replacement dwelling, as long as you are otherwise qualified. You may receive the benefits of Prop. 60 regardless of how many co-owners of record there are on the replacement dwelling. In this situation, the total market value of the original property is compared to the total market value of the replacement property regardless of the fact that the qualified principal claimant may only own 10 percent of both original and replacement dwelling properties.
You and your spouse, as the claimants, will use your "one time only" benefit. An owner of record of the replacement property who is not the claimant's spouse is not considered a claimant, and a claim filed for the property will not constitute use of the one-time-only exclusion by the co-owner even though that person may benefit from the property tax relief.
Can two otherwise qualified taxpayers who have recently sold their separately owned original properties combine their claim for Prop. 60/90 benefit when they buy a single replacement dwelling together?
No. they can only receive the benefit if one or the other, not both together, qualifies by comparing his or her original property to the jointly purchased replacement dwelling. The implementing legislation specifically disallows combining a claim, whether or not the co-owners of the replacement dwelling are married.
May I, as a former co-owner of an original property, receive partial benefit on my replacement dwelling, along with other co-owners who purchase separate replacement dwellings?
No. The law provides that only one co-owner of an original property that is, or was, qualified for the Homeowners' Exemption may receive the benefit in a situation like this where all co-owners purchase separate replacement dwellings. The co-owners must determine, between themselves, which one should receive the benefit. Only in the case of a multiple-residential original property, where several co-owners qualify for separate Homeowners' Exemptions, may portions of the factored base year value of that property be transferred to several qualified replacement dwellings.
What if I am the co-owner of a property with more than one residential unit?
A portion of the original property may qualify for the Homeowners' Exemption for you. The base year value of that portion can be transferred to your replacement dwelling. The other portion(s) of the original property may qualify for a separate Homeowners' Exemption(s). The base year value(s) of that other portion(s) can be transferred to another replacement dwelling(s).
Does a person qualify for the Prop. 60/90 benefit when he/she sells an original property, then buys a replacement dwelling within two years, but no longer qualifies for a Homeowners' Exemption on the original property that sold nearly two years before?
Yes. The statute requires that the original property be eligible for the Homeowners' Exemption at the time of sale. It is eligible if the claimant owns and occupies the property as his or her principal residence at the time of sale.
Can I receive Prop 60. benefits if my original property is outside Orange County but my replacement dwelling is inside Orange County?
No. Both properties must be within Orange County.
Can I receive Prop. 60 benefits if my original property is inside Orange County but my replacement dwelling is in another county in California?
You may qualify under Prop. 90. Call the county Assessor's Office where the replacement dwelling is located and ask if that county allows transfers of base year values between counties.
If the transfer of my base year value to the replacement dwelling results in a supplemental assessment that is a refund, do I still have to pay the existing annual roll tax bill on the replacement property or will that bill be adjusted to reflect the new, lower value?
Unfortunately, you must pay the existing annual roll tax bill on your replacement property. That bill cannot be adjusted or canceled to reflect the Prop. 60 benefit. Additionally, you must pay that bill before any refund resulting from the Prop. 60 benefit will be sent to you.
However, after the existing bill has been paid, you will later receive a refund that will reflect the Prop. 60 benefit. In other words, when the entire process is complete, you will not have overpaid any taxes,.
May parents transfer the family home to their children without a property tax reassessment?
YES. Proposition 58 allows parents to transfer by gift, bequest, or sale their principal residence to their child(ren) and there will be no property tax reassessment. There is no limit on the value of the principal residence. The parents must have a Homeowner’s or Disabled Veterans Exemption on the home.
May parents transfer other property to their children without a property tax assessment?
Yes. Each parent may transfer up to a total of $1 million of other property to their children without a property tax assessment.
May grandparents transfer property to their grandchildren without a property tax assessment?
Proposition 193 expanded the benefits of family transfers of real property to grandparents. They may transfer the property to a grandchild(ren) without a tax reassessment if the middle generation had already died.
How do the transferor and transferee obtain the relief of Propositions 58 and 193?
In order to obtain such relief, a Claim for Reassessment Exclusion for Transfer form must be signed by both the property owner or deceased owner’s estate and by the person to whom title is being transferred. The Claim must be filed within three years of the date of the transfer of the real property. It is filed with the county Assessor.
International estates, an increasing concern.
Situation: One of our clients referred a challenging fiduciary issue to our firm. A U.S. citizen had died and left his assets to relatives in India. The benficiaries of the estate were not U.S. citizens. The trustee had to travel to the U.S. to settle the estate, creating a compressed timeline. The trustee was facing a large tax bill as the rule for income paid to a non-U.S. citizen is that tax must be withheld at a rate of 30%, and the trustee is liable for the withholding.
Action: The fiduciary accounting team at Green Zahn & Associates determined that the tax convention with The Republic of India provided for relief from double taxation and that the fiduciary was not required to withhold tax.
Results: GZA saved the taxpayer tens of thousands of dollars in tax withholdings, and the cost of a second year's tax return preparation, by being proactive in researching and understanding international tax laws.
We need to prepare a burden calculation, what?!
Situation: Our client needed to submit burden calculations, in a proposal, to a major customer.
Action: We helped our client determine what costs should be included in the burden pool to enable the client to accurately calculate the burden.
Results: Our client received acceptance of their proposal to produce parts for the customer.
We need to expand to another state...
Situation: A construction company client wanted to be qualified to do business in another state. The state required audited financial statements to be submitted in the qualification process.
Action: Our client included reviewed financial statements prepared by Green Zahn & Associates in the qualifications package submitted to the state.
Results: The state accepted the reviewed financial statements and the company received its license to operate in the state.
As a firm, we believe in giving back to our community. This year we have achieved this through cash and time donations. We regularly support the Long Beach Symphony, the Long Beach Rescue Mission, the Orange County School of the Arts, and (of course!) UCLA. Allison dedicates quite a bit of time to the National Association of Women Business Owners' Mentoring Committee where she helps new business owners receive invaluable coaching from seasoned professionals. Several staff members participated in the Run Seal Beach 5k & 10k this year and Rachel went on to participate in the Long Beach Half Marathon, the rest of the staff was happy to cheer for her!
In July the entire staff headed over to the Ronald McDonald House in Long Beach to prepare lunch for the families staying there. We toured the facility, learned about the charity and its services, and prepared a fresh Chinese chicken salad luncheon. It was very gratifying to help an organization with such a noble cause. We highly reccomend adding this charity to the list you support, there are many ways to get involved, from preparing meals, to helping out with odd jobs, or donating household supplies. Cash donations are always useful as well. Did you know that you can rent their beautiful, high tech boardroom for your company's off-sites? Find out more at their website:
http://www.longbeachrmh.org/about_us.php
In November we headed over to Working Wardrobes in Costa Mesa to help prepare for a workshop they hold at Camp Pendleton in suport of our returning troops. Working Wardrobes is a smart organization that not only helps individuals put together a professional wardrobe, but offers workshops, mentoring and training on subjects such as networking the art of management, marketing, and change management. Check out their offerings at:
http://www.workingwardrobes.org/
We are always looking for opportunities to get involved, so let us know if you have a favorite not-for-profit that could use the likes of us for a day's worth of labor. You can email your ideas to: greenzahn@greenzahn.com
Help! Are we growing too fast?
Situation: A manufacturing client was experiencing extremely rapid growth and their accounting needs were not being met by their in-house team, creating hazards on their path to success.
Action: GZA stepped in to provide additional support to their existing accounting department as well as assisting with creating a policies and procedures manual to provide a basis for future growth.
Results: The client was able to maintain stability and meet the demands of their clients while sustaining the rapid growth.
The IRS expects to issue guidance on the Code Sec. 199A passthrough deduction in July, Acting IRS Commissioner David Kautter has said. Kautter outlined the timeline of various guidance proposals at the American Bar Association (ABA) Section of Taxation May Meeting in Washington, D.C.
The IRS expects to issue guidance on the Code Sec. 199A passthrough deduction in July, Acting IRS Commissioner David Kautter has said. Kautter outlined the timeline of various guidance proposals at the American Bar Association (ABA) Section of Taxation May Meeting in Washington, D.C.
Proposed Guidance
More specifically, the proposed guidance on the passthrough deduction is expected to be released by the end of July, an IRS spokesperson told Wolters Kluwer on May 15. "The goal of the guidance is to get things out that are complete," the IRS spokesperson said, reiterating Kautter. "But, it will not cover every question that taxpayers have," the spokesperson added.
Passthrough Deduction
The new passthrough deduction was enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) last December. The new law provides a 20-percent deduction for income from passthrough entities. The deduction is limited by certain controversial factors including business activities, wages paid by the business, and property values.
Questions Expected
Generally, Kautter anticipates initial follow-up questions from taxpayers and practitioners after the proposed guidance is released, the IRS spokesperson told Wolters Kluwer. Kautter has said that it would be better to get the guidance out in "fairly good shape," to allow for public comment and input, rather than taking more time to draft the guidance internally, according to several reports. Kautter has reportedly said that not everyone may agree with that approach, but that a "better product" will likely be created because of it.
Congressional lawmakers on Capitol Hill continue to focus on tax reform. Republicans and Democrats alike have been discussing the effects of tax reform, albeit reaching different conclusions.
Congressional lawmakers on Capitol Hill continue to focus on tax reform. Republicans and Democrats alike have been discussing the effects of tax reform, albeit reaching different conclusions.
Tax Reform Hearings
The Ways and Means Committee held a hearing during the week of May 14, marking the first in a series of upcoming committee hearings on tax reform. The Ways and Means hearings are each expected to examine the effects of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).
Small Businesses. Ways and Means Tax Policy Subcommittee Chairman Vern Buchanan, R-Fla., has announced the second tax reform hearing in the series is scheduled for May 23. The subcommittee hearing is expected to focus on the TCJA’s impact on small businesses.
Senate. The Senate Finance Committee (SFC) examined early impressions of the TCJA in a hearing last month. SFC Chairman Hatch, R-Utah has indicated to Wolters Kluwer that he is also currently examining House proposals to reform the IRS.
TCJA Criticism
Meanwhile, Ways and Means Democrats remain united in their opposition against the new tax law. Ranking member Richard Neal, D-Mass., released a Democratic Progress Report which details areas in which Democrats believe the TCJA has fallen short.
The Republican tax law has not put the middle class first or provided relief for small businesses, the progress report notes. Rather, it has provided large " tax cuts to big corporations and wealthy executives," the report added.
Additionally, Democrats have criticized the TCJA for significantly adding to the federal deficit. Neal called the new law "fiscally irresponsible,"during a Ways and Means hearing held during the week of May 14.
However, House Speaker Paul Ryan, R-Wis., called Democratic tax policy ideas and criticisms of the TCJA "bizarre," during a May 17 press briefing. Democrats are in "denial" about the "thriving economy," according to Ryan.
"If you saw yesterday’s Ways and Means hearing, Democrats are still using the same old doom-and-gloom talk that they were using six months ago," Ryan said. "It was bizarre before, and it is even more bizarre now, when Democrats are openly calling for tax increases, which will do nothing but harm our economy," he added.
To that end, several House Democrats have called for raising the corporate tax rate, including certain Ways and Means members during the full committee hearing. Under the TCJA, the corporate tax rate was lowered from 35 to 21 percent.
Senate
Likewise, Senate Democrats across the Capitol have proposed raising the corporate tax rate to 25 percent. Additionally, in a proposal released by Senate Democrats in March, the top individual tax rate would be reinstated to 39.6 percent. Under the TCJA, the top individual tax rate was lowered to 37 percent. These tax rate increases would pay for a $1 trillion infrastructure plan, according to the Democratic proposal.
Ways and Means Open Seat
In related news, Rep. Brad Wenstrup, R-Ohio, may be eyeing a seat in the House’s tax writing committee. The House Steering Committee has recommended Wenstrup to serve as a member of the Ways and Means Committee. Wenstrup is a doctor, war veteran, and small business owner. He would replace Rep. Patrick Meehan, R-Pa., who resigned last month.
The IRS’s "Achilles’ heel" is using outdated software originating from the 1960s, Acting IRS Commissioner David Kautter told Senate lawmakers. Kautter and Treasury Secretary Steven Mnuchin testified in a May 22 Senate Appropriations Financial Services and General Government Subcommittee hearing.
The IRS’s "Achilles’ heel" is using outdated software originating from the 1960s, Acting IRS Commissioner David Kautter told Senate lawmakers. Kautter and Treasury Secretary Steven Mnuchin testified in a May 22 Senate Appropriations Financial Services and General Government Subcommittee hearing.
System Shut Down
2.3 million cyber attacks are launched against the IRS each day, one million of which are sophisticated, Kautter told Senate appropriators. Kautter and Mnuchin testified before the Subcommittee on the Trump Administration’s fiscal year (FY) 2019 Treasury and IRS budget request.
Underscoring the numerous cyber threats against the IRS is its antiquated technology systems currently in use, Kautter said. "59 percent of IRS hardware and 32 percent of IRS software is obsolete," Kautter told Senate appropriators.
Tax Day Glitch. However, the outdated technology at the IRS was not the cause of the partial system shut down that occurred this year on Tax Day, April 17. For eleven hours, certain taxpayers were unable to electronically submit payments through the IRS’s Direct Pay feature. The particular hardware that failed on Tax Day, however, is only a year-and-a-half old, Kautter said.
Five-Year Plan
The IRS and Treasury are currently crafting a new five-year plan to update the IRS’s information technology (IT) systems, both Kautter and Mnuchin testified. A preliminary draft of the plan is expected within 90 days, Mnuchin said.
"The IRS has not done a good job in the past with regard to its technology dollars," Kautter said. However, the leadership team at the IRS is new, energetic, and knowledgeable, and will thus render a different result, he added.
Tax Reform
Technology is the most time consuming and expensive aspect of tax reform implementation, according to Kautter. Additionally, Kautter expects that guidance on all major aspects of tax reform under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) will be out by fall. Recently, Kautter said that proposed guidance on the Code Sec. 199A pass-through deduction will be released in July.
Tax Gap
"In 2016, IRS estimated that the average annual gross tax gap—the difference between taxes owed and taxes paid on time—was $458 billion for tax years 2008-2010," Subcommittee Chairman James Lankford, R-Okla. said during his opening statement. However, the tax gap is most attributable to the "cash" economy, Kautter told lawmakers.
"An individual taxpayer making more than $1 million a year is seven times more likely to be audited than a taxpayer making under $200,000 a year," Kautter said. "The problems with the tax gap tend to be in the cash economy."
Budget
The Trump Administration’s FY 2019 budget request proposes a total of $12.3 billion for Treasury’s operations and bureaus. The budget request proposes $11.135 billion in IRS funding. This figure for the IRS includes "savings and reductions" of $24.5 million compared to the FY 2018 enacted levels, according to Kautter.
The FY 2019 budget request allocates IRS funding for the following:
- taxpayer services: $2.24 billion;
- operations support: $4.16 billion;
- enforcement: $4.63 billion; and
- business systems modernization: $110 million.
The Treasury Department and the IRS, along with the Department of Labor and the Department of Health and Human Services, issued a notice of clarification to more thoroughly explain their decision not to adopt recommendations made by the American College of Emergency Physicians (ACEP) and certain other commenters regarding T.D. 9744. The challenged regulations govern the coverage of emergency services by group health plans and health insurance issuers under the ACA’s copayment and coinsurance limitations.
The Treasury Department and the IRS, along with the Department of Labor and the Department of Health and Human Services, issued a notice of clarification to more thoroughly explain their decision not to adopt recommendations made by the American College of Emergency Physicians (ACEP) and certain other commenters regarding T.D. 9744. The challenged regulations govern the coverage of emergency services by group health plans and health insurance issuers under the ACA’s copayment and coinsurance limitations.
The ACEP had sued the federal government over the final regulations, which were issued in 2015 under the Patient Protection and Affordable Care Act (ACA) ( P.L. 111-148). Among other things, ACEP argued that the federal government did not adequately respond to their public comments regarding the regulations. On August 31, 2017, the court sent the matter back to the Departments of Health and Human Services, Labor, and Treasury to respond to the public comments from ACEP.
Greatest of Three Regulations
Under T.D. 9744, a plan or issuer satisfies the copayment and coinsurance limitations in the statute if it provides benefits for out-of-network emergency services in an amount equal to the greatest of three possible amounts:
- the amount negotiated with in-network providers for the emergency service furnished;
- the amount for the emergency service calculated using the same method the plan generally uses to determine payments for out-of-network services (such as the usual, customary, and reasonable charges), but substituting the in-network cost-sharing provisions for the out-of-network cost sharing provisions; or
- the amount that would be paid under Medicare for the emergency service.
Each of these amounts is calculated excluding any in-network copayment or coinsurance imposed with respect to the participant, beneficiary, or enrollee. This is sometimes referred to as the "Greatest of Three" or the "GOT" regulation because it sets a floor on the amount that nongrandfathered group health plans, and health insurance issuers offering nongrandfathered group or individual health insurance coverage, are required to pay for out-of-network emergency services under this provision at the greatest of the three listed amounts.
Clarification of Regulations
In their clarification, the departments state that the regulations provide a reasonable and transparent methodology to determine appropriate payments by nongrandfathered group health plans and health insurance issuers offering nongrandfathered group or individual health insurance coverage for out-of-network emergency services. In addition, the departments maintain that ACEP and other commenters did not provide adequate information to support their assertion that the methods used for determining the minimum payment for out-of-network emergency services under the GOT regulation are not sufficiently transparent or reasonable.
The IRS has issued a new five-year strategic plan to guide its programs and operations and to help meet the changing needs of taxpayers and members of the tax community. "Providing service to taxpayers is a vital part of the IRS mission and the new Strategic Plan lays out a vision of ways to help improve our tax system," remarked IRS Acting Commissioner David Kautter.
The IRS has issued a new five-year strategic plan to guide its programs and operations and to help meet the changing needs of taxpayers and members of the tax community. "Providing service to taxpayers is a vital part of the IRS mission and the new Strategic Plan lays out a vision of ways to help improve our tax system," remarked IRS Acting Commissioner David Kautter.
The Fiscal Year 2018-2022 IRS Strategic Plan focuses on six goals aimed at improving customer service:
- empowering and enabling all taxpayers to meet their tax obligations;
- protecting the integrity of the tax system by encouraging compliance through administering and enforcing the tax code;
- proactively collaborating with external partners to improve tax administration;
- cultivating a well-equipped, diverse, flexible and engaged workforce;
- advancing data access, usability and analytics to inform decision-making and improve operational outcomes; and
- driving increased agility, efficiency, effectiveness and security in IRS operations.
The Service further urged taxpayers to be aware of their fundamental rights under the Taxpayer Bill of Rights when dealing with the IRS.
The IRS Large Business and International (LB&I) Division has identified and selected six additional compliance campaigns. The IRS previously announced 13 campaigns on January 31, 2017, followed by an additional 11 on November 3, 2017, and five more on March 13, 2018. These campaigns help LB&I move in the direction of issue-based examinations. In addition, a compliance campaign process helps the organization decide which compliance issues present risks and the best way to respond to such risks.
The IRS Large Business and International (LB&I) Division has identified and selected six additional compliance campaigns. The IRS previously announced 13 campaigns on January 31, 2017, followed by an additional 11 on November 3, 2017, and five more on March 13, 2018. These campaigns help LB&I move in the direction of issue-based examinations. In addition, a compliance campaign process helps the organization decide which compliance issues present risks and the best way to respond to such risks.
The additional campaigns were identified through LB&I data analysis, and suggestions from IRS employees. LB&I’s goal is to improve return selection, identify issues representing a risk of noncompliance, and make the greatest use of limited resources.
The six campaigns selected for the rollout are:
- Interest Capitalization for Self-Constructed Assets;
- F3520/3520-A Non-Compliance and Campus Assessed Penalties;
- Forms 1042/1042-S Compliance;
- Nonresident Alien Tax Treaty Exemptions;
- Nonresident Alien Schedule A and Other Deductions; and
- NRA Tax Credits.
The campaigns themselves fall within the Withholding & International Individual Compliance practice area.
The IRS intends to provide guidance on the new information reporting obligations for certain life insurance contract transactions under Code Sec. 6050Y. The proposed regulations will provide guidance on the modifications to the transfer for valuable consideration rules for life insurance contracts under Code Sec. 101(a). In addition, the IRS has delayed the reporting requirements under Code Sec. 6050Y until the final regulations are issued.
The IRS intends to provide guidance on the new information reporting obligations for certain life insurance contract transactions under Code Sec. 6050Y. The proposed regulations will provide guidance on the modifications to the transfer for valuable consideration rules for life insurance contracts under Code Sec. 101(a). In addition, the IRS has delayed the reporting requirements under Code Sec. 6050Y until the final regulations are issued.
Transfers for Value Rules
For transfers after December 31, 2017, the exceptions to the transfer for value rules do not apply to the transfer of a life insurance contract, or any interest in such a contract, that is a reportable policy sale. Thus, some portion of the death benefit ultimately payable under the contract may be includable in income. A "reportable policy sale" means the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer’s interest in the life insurance contract. A "reportable death benefit" is an amount paid at the death of the insured under a life insurance contract that was transferred in a reportable policy sale.
Reporting Requirements Delayed
The new reporting requirements of Code Sec. 6050Y apply to reportable death benefits paid and reportable policy sales made after December 31, 2017. However, the transition guidance delays any reporting under Code Sec. 6050Y until final regulations are issued.
Under Code Sec. 6050Y, information returns must be filed in the following situations:
- By anyone who acquires a life insurance contract, or any interest in a life insurance contract, in a reportable policy sale;
- By an issuer of a life insurance contract upon notice of a transaction required to be reported above, or upon any notice of a transfer of a life insurance contract, or any interest in a life insurance contract, to a foreign person; and
- By any payor of reportable death benefits.
Proposed Regulations
The proposed regulations will describe the manner by which and time at which the reporting requirements of Code Sec. 6050Y must be satisfied. They will also clarify which parties are subject to the reporting requirements and other definitional issues. For example, Treasury and the IRS intend to define the term "reportable policy sale" in the proposed regulations to include a viatical settlement. In addition, the proposed regulations will clarify the extent to which Code Sec. 6050Y applies to sales or acquisitions effected by transferors and transferees outside the United States, and to sellers and issuers that are foreign persons for purposes of these reporting rules.
The IRS is requesting public comment on the intended proposed regulations implementing these reporting requirements.
All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year. President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year. At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.
All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year. President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year. At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.
Taxes and spending
Almost immediately after President Obama won re-election, Democrats and Republicans scrambled to stake out their positions over the fiscal cliff. Unless the White House and the GOP reach an agreement, the Bush-era tax cuts will expire for all taxpayers after 2012 and across-the-board spending cuts will take effect. Many popular but temporary tax incentives, known as tax extenders, expired after 2011, with many more scheduled to expire after 2012. The alternative minimum tax (AMT), intended many years ago to apply to wealthy taxpayers, is on track to encroach on more middle income taxpayers because it is not indexed for inflation. Also, the employee-side payroll tax cut is scheduled to expire after 2012.
Since winning a second term, President Obama has repeated that the Bush-era tax cuts should expire for higher income individuals after 2012. The top two tax rates would rise to 36 percent and 39.6 percent after 2012. All of the remaining rates would be extended. Tax rates on capital gains and dividends would also increase for higher income individuals. On the campaign trail, President Obama described higher income taxpayers as individuals with incomes above $200,000 and families with incomes above $250,000.
President Obama has talked about trimming $4 trillion from the federal budget deficit. Approximately $1.6 trillion would come from increased taxes on higher income individuals. To achieve a target of $1.6 trillion in tax revenue, the Bush-era tax cuts could not be extended for higher income individuals. Other incentives for higher income individuals would likely be curtailed or possibly eliminated under the President’s plan. These include the personal exemption phaseout (PEP) and the Pease limitation on itemized deductions. President Obama may also re-propose his “Buffett Rule,” which, the President has explained, would ensure that individuals making over $1 million a year pay a minimum effective tax rate of at least 30 percent.
The GOP, its majority reduced in the House after the November elections, has offered few details about its plans to avoid the fiscal cliff. House Speaker John Boehner, R-Ohio, has indicated that the GOP may be open to raising revenue by closing tax loopholes and capping certain unspecified deductions for higher income individuals. Revenue could also be raised by limiting or abolishing business tax deductions and credits. Among the business tax incentives most often hinted at for elimination are ones for oil and gas producers. President Obama, however, has said that he will not support a deficit reduction plan that relies on closing undefined tax loopholes.
Possible scenarios
Looking ahead, several scenarios may play out before year-end. President Obama and the GOP could agree on a tax and deficit reduction package that meets or comes close to the President’s targets. President Obama and the GOP may agree to extend the Bush-era tax cuts and delay the spending cuts for three or six months to give everyone more time to negotiate a long-term deal. On the other hand, both sides could fail to reach any agreement before year-end and the Bush-era tax cuts would expire as scheduled. The spending cuts also would kick-in as scheduled.
Filing season
Whenever Congress changes the tax laws, the IRS has to reprogram its return processing systems. Tax laws passed late in 2012 have the potential to delay the start of the 2013 filing season depending on how long it takes the IRS to reprogram its systems.
IRS officials have told Congress that they are preparing for late tax legislation, especially legislation on the AMT. In past years, Congress has routinely “patched” the AMT to shield middle income taxpayers from its reach. The IRS appears to be anticipating that Congress will patch the AMT for 2012. If Congress does not, the IRS has warned that the start of the 2013 filing season could be delayed for as many as 60 million taxpayers.
The IRS also must reprogram its processing systems for the tax extenders. These tax law changes generally do not require the level of reprogramming the AMT patch requires. The IRS has predicted that any year-end extension of the extenders will be manageable.
Please contact our office if you have any questions about the tax and spending negotiations underway in Washington.
President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
Additional tax on higher-income earners
There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.
The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).
Passthrough treatment
For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.
Withholding rules
Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.
Planning techniques
One planning device to minimize the tax would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.
Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.
If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.
Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.
Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.
Home sale exclusion
Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.
To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.
Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.
Unforeseen circumstances safe harbors
The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.
Facts and circumstances test
If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.
Events deemed as unforeseen circumstances
Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.
If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.
More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.
More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.
Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:
- Who are your taxable workers?
- What payroll taxes apply?
- What compensation is taxable?
- When are your payroll taxes due?
- What payroll and other returns should you file?
Taxable workers
The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.
It's more likely that you hire employees. In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.
There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.
If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.
What taxes apply
Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.
You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.
Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.
Compensation
Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.
There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.
Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.
Deposit schedule
Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.
Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.
Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.
Forms
If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.
The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.
Penalties are costly
Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.
The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.
You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.
Reporting obligations
Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.
Staying out of trouble with the IRS
Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.
