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?

1. Proposition 60 - Both the original property (former residence) and its replacement must be located in the same county.
2. Proposition 90 - The original property is located in a different county from replacement, (see Proposition 90 information above).
3. 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.
4. The original property must have been eligible for the Homeowners' Exemption or entitled to the Disabled Veterans' Exemption.
5. The replacement dwelling must be of equal or lesser value than the original property.
6. The replacement dwelling must have been purchased or newly constructed on or after 11/06/86.
7. Without exception, the replacement dwelling must be purchased or newly constructed within two years (before or after) of the sale of the original property.
8. 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.
9. 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.

The IRS has reminded taxpayers who are earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year.

The IRS has reminded taxpayers who are earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year. Before 2022, Form 1099-K was issued for third party payment network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. However, now, a single transaction exceeding $600 can trigger a 1099-K The Service emphasized that money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable. Taxpayers can access Form 1099-K, its instructions and a set of answers to frequently asked questions on the IRS web site.

In addition, the Service reminded taxpayers that they must pay income tax either through withholding or estimated tax payments. Taxpayers should use estimated tax payments to pay other taxes such as self-employment tax and the alternative minimum tax. IRS Publication 17, Your Federal Income Tax (for Individuals), provides general rules to help taxpayers pay the income taxes they owe. Additional helpful information is available in Chapter 5, Business Income, of Publication 334, Tax Guide for Small Business; Publication 525, Taxable and Nontaxable Income, and on the IRS website at Understanding Your Form 1099-K.

Many taxpayers may be surprised in early 2023 when they receive a Form 1099-K, Payment Card and Third-Party Network Transactions, to report income earned in the “gig economy” or in sales of goods and services through certain internet sites. The number of taxpayers receiving the forms is expected to skyrocket because the threshold for reporting payments made through third-party processors has plummeted.

Many taxpayers may be surprised in early 2023 when they receive a Form 1099-K, Payment Card and Third-Party Network Transactions, to report income earned in the “gig economy” or in sales of goods and services through certain internet sites. The number of taxpayers receiving the forms is expected to skyrocket because the threshold for reporting payments made through third-party processors has plummeted.

Before 2022, reporting was required only when a third-party settlement organization (TPSO) made more than 200 payments to a payee that totaled more than $20,000 for the year. However, beginning in 2022, a TPSO must report a payee’s payments once they total $600, regardless of their number.

The IRS recently updated its Form 1099-K Frequently Asked Questions (FAQs) to help taxpayers understand who files the form, who receives it, and what it means. The updated FAQs are divided into five sections.

1. General

The General section of the FAQs explains that the IRS will also use Forms 1099-K for systemic computer matching to tax returns to identify potential unreported income. The agency will also use the information to develop taxpayer education and outreach efforts, as well as new approaches to audits and collection.

2. Definition

The second section of the FAQs defines several relevant terms, including:

• Payment cards (credit cards, debit cards, gift cards, etc.)
• Merchant category code
• Third-party settlement organization (TPSO)
• Merchant acquiring entity
• Participating payee
• Gross amount of reportable transactions.

3. Individuals

The third section of the FAQs explains who will receive a Form 1099-K and who will not. An individual who receives a form should use the information to compute gross sales and receipts, and correctly calculate gross income.

An individual who has questions about the form, believes it was issued in error, or believes it includes incorrect information should generally contact the form’s issuer. The individual may also contact the payment settlement entity (PSE) whose name and phone number appear on the form.

4. Reporting

The reporting section of the FAQs explains due dates for filing Form 1099-K with the IRS and providing a copy to the payee. This section also reiterates that the form must report the gross amount of the payee’s reportable transactions, with no adjustments for fees, refunds, and other adjustments.

5. Filing Form 1099-K

Finally, the last section of the FAQs explains which party is responsible for filing which forms. For example, a merchant acquiring entity is responsible for filing some Forms 1099-K, while a third-party settlement organization is responsible for filing others.

Reportable payments include payments to a government unit or a foreign payee. However, they do not include payments that are reportable under Code provisions other than Code Sec. 6050W.

Beginning with their 2021 tax years, partnerships with "items of international tax relevance" must file Schedule K-2, Partners’ Distributive Share Items—International, and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

Beginning with their 2021 tax years, partnerships with "items of international tax relevance" must file Schedule K-2, Partners’ Distributive Share Items—International, and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

Draft partnership instructions for the 2022 Schedules K-2 and K-3 (Form 1065) and partner’s instructions for the 2022 Schedule K-3 were released October 25. The instructions add a “domestic filing exception” for a partnership that meets all four of the following requirements for its 2022 tax year:

• The partnership has:
  • no foreign activity, defined as foreign income taxes paid or accrued, foreign source income or loss, or an ownership interest in a foreign partnership, corporation, foreign branch, or foreign disregarded entity, or
  • foreign activity that is limited to passive category foreign income generating no more than $300 of taxes subject to the foreign tax credit (and shown on a payee statement);
• All of the partners are U.S. citizens or resident aliens, domestic decedent’s estates with only U.S.-citizen or resident-alien beneficiaries, domestic grantor trusts with only U.S.-citizen or resident-alien grantors and beneficiaries, or domestic non-grantor trusts with only U.S.-citizen resident-alien beneficiaries;
• The partners receive a notification from the partnership electronically or by mail, dated no later than two months before the due date of the partnership’s return, that the partners will not receive Schedules K-3 unless they request them; and
• The partnership does not receive a request from any partner for Schedule K-3 at least one month before the due date of the return (that is, a calendar-year partnership does not receive any requests by February 15, 2023).

A partnership that receives a timely request from a partner for a Schedule K-3 does not qualify for the domestic filing exception and must file Schedules K-2 and K-3 with the IRS and provide Schedule K-3 to the requesting partner. However, the partnership only needs to complete the parts of Schedules K-2 and K-3 that are relevant to that partner.

If a partnership receives a request from a partner for a Schedule K-3 after the one-month date but no requests by that due date, the partnership only needs to provide Schedule K-3 to the requesting partner by the date on which the partnership files its return or one month after it receives the request, whichever is later.

The draft instructions note that if a partnership fails the domestic filing exception test, it may still qualify for an exception to the filing requirement if all of its partners are eligible for the exemption from filing Form 1116.

A regularly updated IRS FAQ sheet on Schedules K-2 and K-3 states that "comments on the draft instructions can be provided to lbi.passthrough.international.form.changes@irs.gov on or before November 8, 2022."

The draft instructions also add guidance on when a domestic partnership with only domestic activity needs to file Schedules K-2 and K-3, on reporting capital gains and losses and foreign tax redeterminations, and on reporting income inclusions required by 2022 regulations that apply aggregate treatment to domestic partnerships in some situations.

Draft instructions for S corporations’ 2022 Schedules K-2 and K-3 have not been issued yet.

The Tax Court set aside Notice 2017-10, 2017-4 I.R.B. 544, while adjudicating a series of consolidated cases involving limited liability companies (LLCs) and conservation easements, because it was improperly issued by the IRS without meeting the notice and comment requirements under the Administrative Procedure Act (APA).

The Tax Court set aside Notice 2017-10, 2017-4 I.R.B. 544, while adjudicating a series of consolidated cases involving limited liability companies (LLCs) and conservation easements, because it was improperly issued by the IRS without meeting the notice and comment requirements under the Administrative Procedure Act (APA). Notice 2017-10 identified as listed transactions for purposes of Reg. §1.6011-4(b)(2) all syndicated conservation easement transactions, including all substantially similar transaction, entered into on or after January 1, 2010. The IRS had conducted examinations of the taxpayers’ Forms 1065, U.S. Return of Partnership Income, and disallowed the claimed deductions for noncash charitable contributions. In addition, each notice of final partnership administrative adjustment asserted a gross valuation misstatement penalty, a substantial valuation misstatement penalty, a negligence penalty, a substantial understatement penalty and an additional reportable transaction penalty.

The Tax Court held that Notice 2017-10 was a legislative rule because it created new substantive reporting obligations for taxpayers and material advisors, the violation of which prompted exposure to financial penalties and sanctions. Because the notice was a legislative rule, it should have gone through the notice-and-comment rulemaking under the APA. Moreover, Congress did not expressly authorize the IRS to identify a syndicated conservation easement transaction as a listed transaction without following the APA’s notice-and-comment procedures. In these consolidated cases, Notice 2017-10 was not issued until the tax year at issue. Accordingly, the court did not apply Notice 2017-10 retrospectively and disagreed that prior notice and comment made at the time of promulgation of Reg. §1.6011-4 satisfied the IRS’s ongoing obligation to comply with the APA when issuing Notice 2017-10. The Tax Court also concluded that the Congress had made it clear that each substantive rule of general applicability, including any amendment or revision, must comply with the APA. Consequently, the taxpayers’ cross-motions for summary judgment was granted in part, and Notice 2017-10 was set aside. Finally, Code Sec. 6662A penalties were not imposed with respect to reportable transactions.

Four concurring and two dissenting opinions were filed. The dissenting opinions focused on the express reference to Code Sec. 6011 in Code Sec. 6707A when it was enacted, and that the IRS had already identified 30 listed transactions by 2004 when Code Sec. 6707A was enacted without adherence to the APA's notice-and-comment requirements. In addition, when Code Sec. 4965 was enacted in 2006, the conference report defined a listed transaction as a tax avoidance transaction "identified by notice, regulation, or other form of published guidance as a listed transaction."

The Department of the Treasury outlined how the Inflation Reduction Act’s tax incentives will support the building of an equitable clean energy economy.

The Department of the Treasury outlined how the Inflation Reduction Act’s tax incentives will support the building of an equitable clean energy economy.

In a fact sheet issued October 26, 2022, the Treasury Department highlighted four key areas the tax policy built on the Inflation Reduction Act will drive clean energy:

• the IRA will provide targeted incentives to drive investment and create opportunity in communities across the country;
• the IRA will encourage clean energy project developers to meet strong labor standards, so that the benefits of building a clean energy economy are felt by workers making it happen;
• the IRA will lower the costs of energy-saving property improvements and rooftop solar installation, saving working families and small businesses money on their monthly utility bills and empowering families and businesses to shield themselves from volatile fossil energy prices; and
• The IRA allows state, local, and Tribal governments, as well as non-profit organizations and other tax-exempt entities, such as rural electric co-operatives, to receive certain tax credits as payments, expanding the range of actors that will have a direct incentive to invest in their communities.

According to the fact sheet, the law will "provide bonuses for investing in low-income communities, as well as in communities that have historically depended on the energy sector for jobs and economic activity."

To help incentivize this, the IRA modifies and extends the clean energy Investment Tax Credit "to provide a 30 percent credit for qualifying investments in wind, solar, energy storage, and other renewable energy projects that meet prevailing wage standards and employ a sufficient portion of qualified apprentices from registered apprenticeship programs."

It also modifies and extends the Renewable Energy Production Tax Credit "to provide a credit of 2.5 cents per kilowatt-hour in 2021 dollars (adjusted for inflation annually) of electricity generated from qualified renewable energy sources."

Other tax credits extended and/or expanded include the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit, and the Energy Efficient Commercial Buildings Deduction.

These incentives were discussed as part of an October 26, 2022, virtual roundtable hosted by Treasury Secretary Janet Yellen, during which she "emphasized that the Inflation Reduction Act provides long-term clarity and certainty for the clean energy sector, and underscored Treasury’s commitment to work expeditiously to provide guidance so that investments can move forward and our climate and economy can realize the benefits of the law as quickly as possible."

The IRS-Criminal Investigation (IRS-CI) has released its Fiscal Year 2022 Annual Report. The report details statistics, important partnerships and significant criminal enforcement actions from IRS-CI, the criminal investigative arm of the IRS, for the past fiscal year, which began October 1, 2021 and ended September 30, 2022. Over 2,550 criminal investigations, the identification of more than $31 billion from tax fraud and financial crimes, and a 90.6 percent conviction rate are just a few highlights of the report.

The IRS-Criminal Investigation (IRS-CI) has released its Fiscal Year 2022 Annual Report. The report details statistics, important partnerships and significant criminal enforcement actions from IRS-CI, the criminal investigative arm of the IRS, for the past fiscal year, which began October 1, 2021 and ended September 30, 2022. Over 2,550 criminal investigations, the identification of more than $31 billion from tax fraud and financial crimes, and a 90.6 percent conviction rate are just a few highlights of the report.

In fiscal year 2022, IRS-CI expanded partnerships with foreign counterparts to help combat tax and financial crimes on a global level. IRS-CI special agents delivered trainings in countries like Argentina, Germany, Colombia, and Palau on topics ranging from cybercrime to human trafficking. IRS-CI Mexico City, after changes to Mexico law that enabled the extradition of tax fugitives, launched an initiative to identify fugitives who had absconded to Mexico and nearby countries. This initiative resulted in the location of 79 criminal fugitives and the apprehension of eight during the first year. The report also includes additional case examples for each U.S. field office, an overview of IRS-CI’s international footprint, details about the specialized services provided by IRS-CI and investigative statistics, broken down by discipline, for fiscal year 2022.

Report Details

The Internal Revenue Service’s Criminal Investigations division earned convictions in 90.6 percent of its cases in fiscal year 2022, according to the division’s annual report.

CI Chief Jim Lee called the conviction rate "the statistic I continue to be most proud of" in the division’s annual report released November 4, 2022. "We are thorough and good at what we do. As I tell crowds around the country, if a CI special agent has you in their crosshairs, there is a good chance you are going to jail."

The report notes that of the 1,837 cases referred for prosecution, 1,564 cases resulted in convictions. CI identified $32.6 billion in financial crimes, $5.7 billion of which were classified as tax fraud.

"While navigating our way through the backend of a global pandemic, we seized record amounts of data and cryptocurrency, led some of the largest tax cases on record and spearheaded first-of-its-kind national and international initiatives aimed at developing and strengthening partnerships in the public and private sectors," Lee said in the report.

In terms of tax crimes, the report highlights four key areas that the division focused on

• General tax fraud;
• Refund Fraud Program;
• Abusive tax schemes; and
• Employment tax fraud.

The Refund Fraud Program has three parts – the Questionable Refund Program, the Stolen Identity Refund Fraud investigations, and the Return Preparer Program for both individuals and businesses. Each of these programs looks out for criminals who file fraudulent tax returns to steal government funds.

"This type of theft erodes voluntary compliance and taxpayer confidence in the integrity of the tax system," the report states. "It also results in the loss of vital funds needed to support government programs, many of which impact the most vulnerable Americans."

Areas the division focus on related to non-tax crimes include money laundering, public corruption, corporate fraud, general fraud, and the Bank Secrecy Act Program, which focuses on fraud using foreign bank accounts.

CI also focuses on cybercrimes and in 2022, it was a part of the largest single financial seizure in government history with "the arrest of Ilya Lichtenstein and his wife, Heather Morgan, for an alleged conspiracy to launder cryptocurrency that was stolen during the 2016 hack of Bitfinex, a virtual currency exchange," the report states. "Approximately 119,754 bitcoin (BTC) was stolen from the exchange and was valued at approximately $4.5 billion at the time of the arrest. The CI Cyber Crime Unit, with the assistance of other U.S. authorities traced the stolen funds."

Changes made by the Inflation Reduction Act of 2022 ( P.L. 117-169) are reflected in draft forms and instructions

Changes made by the Inflation Reduction Act of 2022 ( P.L. 117-169) are reflected in draft forms and instructions for:

• Form 8908, Energy Efficient Home Credit, and
• Form 8911, Alternative Fuel Vehicle Refueling Property Credit

Energy Efficient Home Credit

The Inflation Reduction Act extends the Code Sec. 45L energy efficient home credit to cover qualified new energy efficient homes sold or leased after 2021 and before 2033. The Act also increases and modifies the credit for homes sold after 2022.

The draft Form 8908 and the draft instructions reflect both the 2022 version of the credit and the post-2022 version. The IRS intends that contractors use the revised form and instructions for tax years beginning in 2022 or later. For tax years beginning before 2022, contractors should use the appropriate prior revision of the form.

Alternative Fuel Vehicle Refueling Property Credit

The Inflation Reduction Act extends the Code Sec. 30C alternative fuel vehicle refueling property credit to cover refueling property placed in service after 2021 and before 2033. The Act also modifies the credit for certain refueling property placed in service after 2022.

The draft Form 8911 and the draft instructions reflect both the 2022 version of the credit and the post-2022 version. The draft form divides Lines 4 and 5 to break out amounts subject to the lower credit rate for refueling property placed in service after 2022 that does not meet new prevailing wage and apprenticeship requirements.

The IRS intends that taxpayers use the revised form and instructions for tax years beginning in 2022 or later. For tax years beginning before 2022, the taxpayers should use the appropriate prior revision of the form.

The Internal Revenue Service is estimating the tax gap on tax years 2014-2016 to be $496 billion, an increase of more than $58 billion from the prior estimate.

The Internal Revenue Service is estimating the tax gap on tax years 2014-2016 to be $496 billion, an increase of more than $58 billion from the prior estimate.

"The increase in the tax gap estimates reflects that the IRS needs to do more, both in improving taxpayer service as well as working to improve tax compliance," IRS Commissioner Charles Rettig said in a statement, adding that the recent funding in the Inflation Reduction Act "will help the IRS in many ways, increasing taxpayer education, significantly improving services to all taxpayers and focusing on high-income/high-wealth non-compliance in a fair and impartial manner supporting compliant taxpayers."

IRS published a report on the new estimate on October 28, 2022.

According to the report, the estimated net compliance rate is 87 percent, defined as tax paid voluntarily and timely plus enforced and other late payments divided by the total true tax. The voluntary compliance rate, which is the amount of tax paid voluntarily and timely divided by the total true tax is estimated to be 85.0 percent.

The tax gap includes three components, including:

• nonfiling (tax not paid on time by those who do not file on time) - $39 billion;
• underreporting (tax understated on timely filed returns) - $398 billion; and
• underpayment (tax that was reported on time, but not paid on time) - $59 billion.

The report estimates that $68 billion of the tax gap will eventually be paid.

The IRS also reported that the tax gap for years 2017-2019 is projected to increase to $540 billion.

Former Internal Revenue Service Commissioner Charles Rettig used his farewell message to highlight the work the agency’s workforce did during his four-year term as commissioner, particularly during the COVID-19 pandemic, but also during more normal times.

Former Internal Revenue Service Commissioner Charles Rettig used his farewell message to highlight the work the agency’s workforce did during his four-year term as commissioner, particularly during the COVID-19 pandemic, but also during more normal times.

"My time as Commissioner has given me an even deeper appreciation of what our workforce is capable of achieving," Rettig wrote in his message posted November 11, 2022, on the IRS website. "I have been constantly amazed at the accomplishments of IRS employees during what has been a challenging and historic time for our nation. Time and again I have seen them deliver for taxpayers under tight timeframes and difficult circumstances – responding in a manner that demonstrates the importance of every American to the IRS and the IRS to every American."

He noted a number of accomplishments of the workforce, including disbursing COVID relief payments of more than $830 billion while the agency was still working to conduct its normal business operations, which included delivering more than $1.5 trillion in refund payments and making more than 200 million advanced payments of the Child Tax Credit totaling $93 billion.

"It's also important to realize that, during this pandemic period, our employees faced the same health and safety concerns for themselves and their families as everyone else," he added. "Nonetheless, they went the extra mile in doing their jobs, and they also made a difference in their communities."

But he also praised the employees of the agency for stepping up even when there was no disaster requiring immediate actions.

"IRS employees don’t wait for a disaster to pitch in," he wrote. "They routinely give back – by collecting food for the hungry, volunteering to help low-income people, older Americans or underserved people prepare their tax returns, and in so many other ways. IRS employees make a difference, they care, and they take pride in serving taxpayers, tax professionals, and our country, on and off the job."

Rettig also identified a number of accomplishments he was proud of during his time, particularly getting publications out in more languages to help the agency reach a wider audience and make its activities more accessible to Americans, as well as making the Form 1040 available in Spanish for the first time during the 2021 tax filing season.

He also highlighted the work of Criminal Investigations during his time.

"There are many examples, but one I’d like to highlight involves agents from CI’s Cyber Crimes Unit," he wrote. "These agents played a key role in the largest cryptocurrency seizure ever recorded for the federal government, valued at more than $3.6 billion. This involved an alleged conspiracy to launder cryptocurrency stolen from a virtual currency exchange called Bitfinex. This was also the largest single financial seizure recorded by the federal government."

The Next Steps

In addition to highlighting the accomplishments of the agency, he also pointed to the direction he leaving the agency headed, including modernizing the IRS’ information technology infrastructure, both hardware and software.

"An important part of our modernization strategy involves expanding our digital services, to give everyone a seamless experience when they interact with the IRS online," he wrote. "A great example is the IRS Online Account. We are continually working to expand the transactions that individuals can conduct through this account. Last year, for example, we launched a new feature allowing people to authorize their tax practitioner to represent them before the IRS with a Power of Attorney, and to view their tax accounts with a Tax Information Authorization."

He continued: "At the same time, we realize that there is still much for us to improve on to help taxpayers and the tax system. Our employees know we need to do more. The IRS continues to focus on reducing paper correspondence inventory and processing paper tax returns from 2021 as well as work on our response to an unprecedented level of phone demand – situations that have been compounded by the pandemic and related issues. Actions we’ve taken to address the inventory include surge teams, mandatory overtime, innovating to expedite case closures and suspending various notices. We are continuing to work hard on this area, and the efforts of our hard-working employees are enabling significant progress."

Other challenges he noted include the thwarting of identity thieves and improving work in underserved communities, areas that will benefit from the funding received from the Inflation Reduction Act. And he has faith the leadership and the workforce is up to meeting the challenges ahead.

"Although the IRS is a large government institution, it’s an institution run by people –people who care," he wrote. "The IRS has made great strides over the last four years, but as always, IRS employees want to do more, and I know they will continue moving forward in every area, in service to our great nation."

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.

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.

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.

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.

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.

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.