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Click Here to Read the 2023 1040 Letter

Click Here to Read the 2023 1040 Letter

Internal Revenue Service Commissioner Daniel Werfel is looking to build on the successes the agency has experienced with the first year of supplemental funding provided to the agency by the Inflation Reduction Act.

Internal Revenue Service Commissioner Daniel Werfel is looking to build on the successes the agency has experienced with the first year of supplemental funding provided to the agency by the Inflation Reduction Act.

"I look at yeartwo through the lens of what do we need to do with the next filing season to build on the successes of the previous filing season," Werfel said during an August 15 teleconference with press as he highlighted a couple of key objectives he has for the second year of supplemental funding.

"First of all, we had a really strong filing season," he said. "It could be stronger. We want to achieve the highest level of service we can achieve."

Among the improvements he wants to see are a further reduction in wait times on calls to the IRS; expanding the number of self-service options that taxpayers can engage in when they call so they don’t have to wait to be connected to an agency representatives; and getting more people to sign up for an online account with the agency, as well as improving the online account functionality.

"The idea would be from a service standpoint, the filing features should feel very different than the previous year," he said.

Werfel also wants to see more expansion in the walk-in service centers, including hiring more workers to allow for more Saturday hours to help people who might not be able to get there during the week due to work, as well as utilizing more pop-up walk-in centers to help reach people in more remote areas of the United States.

On the enforcement side, Werfel wants to see the "anemic" audit rates of high-wealth individuals, large corporations and complex partnerships continue to rise.

"We started to see real meaningful results there," he noted. "I want to be able to report to the American people that we’re putting the Inflation Reduction Act to work to create and drive a more equitable tax system that’s returning money to the government’s bottom line."

Werfel also said the IRS will continue with reporting the "dirty dozen" tax scams and will continue to be looking at ways to help taxpayers avoid these scams as well as helping the victims of those scams. He highlighted the recent action of ending nearly all unannounced visits by IRS representatives to homes and businesses as a way that taxpayers are being protected.

"My hope is that in each successive year, we’re putting tools out there that taxpayers are leveraging and saying, ‘this is helpful,’ and are appreciative of the fact that the IRS is functioning better than it did in previous years," Werfel said.

Recapping The First Year

Much of the press call focused on highlighting the successes of the first year, with Werfel highlighting that the agency provided better service, including providing assistance to more than 7 million taxpayers over the phone, an increase of 3 million over the previous tax filing season and increased face-to-face help to more than 500,000 people at the taxpayer assistance centers, a 30 percent increase. Werfel also mentioned the use of call-back technology so taxpayers don’t have to wait on the phone on hold and can receive a call-back without losing their place in the queue to talk to an agency representative.

He reiterated gains in enforcement as well as improvements on the technology side such as highlighting the recent announcement of more forms being able to be filed electronically and improvements to document scanning of tax forms.

Another aspect of the Inflation Reduction Act that was highlighted during the law’s one year anniversary was by Treasury Secretary Janet Yellen, who highlighted the green energy tax provisions at a recent speech in Las Vegas.

She noted a variety of ways the IRA is helping to spur investment in clean energy, including in buildings and in clean vehicles and is helping the nation meet international climate standards.

"The IRA is helping re-shape some of the production that is critical to our clean economy," Yellen said, according to prepared remarks that were published on the Treasury Department website.

She also highlighted that earlier this summer, "Treasury also released proposed guidance that would make it easier for these tax credits to reach a broad range of institutions. We are implementing innovative tools that will enable states, cities, towns, and tax-exempt organizations – like schools and hospitals – to directly access these credits."

By Gregory Twachtman, Washington News Editor

The Financial Crimes Enforcement Network is seeing a "concerning" increase in state and federal payroll tax evasion and workers’ compensation fraud in the U.S. residential and commercial real estate construction industries.

The Financial Crimes Enforcement Network is seeing a "concerning" increase in state and federal payroll tax evasion and workers’ compensation fraud in the U.S. residential and commercial real estate construction industries.

"FinCEN is committed to combating fraud by shedding light on how illicit actors within the construction industry are using shell corporations and other tactics to commit workers’ compensation fraud and avoid payroll taxes," FinCEN Acting Director Himamauli Das said in a statement.

The agency in a FinCEN Notice issued August 15, 2023, highlighted how companies evade payroll taxes. Step one has construction contractors writing checks payable to the shell corporation, which creates the façade that the shell company is performing construction projects. Step two sees the shell company operator deposit cash the checks at a check cashing facility or deposit them into a shell company bank account. Step three sees the shell company return the cash to the construction contractor, minus a fee, for renting the workers’ compensation insurance policy and conducting payroll-related transactions. The final step is the construction contractors using the cash to pay the workers without withholding appropriate payroll-related taxes or paying any workers’ compensation premiums.

The notice also draws attention "a range of red flags to assist financial institutions in detecting, preventing, and reporting suspicions transactions associated with shell companies perpetrating payrolltax evasion and workers’ compensation fraud in the construction industry." Among the 11 red flags highlighted are:

• The customer is a new (i.e., less than two years old) small construction company specializing in one type of construction trade (e.g., framing, drywall, stucco, masonry, etc.) with minimal online presence and has indicators of being a shell company;
• Beneficial owners of the shell company have no known prior involvement with, or in, the construction industry, and the individual opening the account provides a non-U.S. passport as a form of identification;
• A customer receives weekly deposits in their account that exceed normal account activity from several construction contractors involved in multiple construction trades;
• Large volumes of checks for under $1,000 are drawn on the company’s bank account and made payable to separate individuals (i.e., the workers) which are subsequently negotiated for cash by the payee, and
• The company’s bank account has minimal to no tax- or payroll-related payments to the Internal Revenue Service, state and local tax authorities, or a third-party payroll company despite a large volume of deposits from client.

The statement did not provide any statistical data that reflect the rise in payroll tax evasion or workers’ compensation fraud, but said that every year, "state and federal tax authorities lose hundreds of millions of dollars to these schemes, which are perpetrated by illicit actors primarily through banks and check cashers."

The notice also reminds financial institutions’ obligations to file a suspicious activity report if a transaction could be conducted with the intent for fraud or tax evasion, and it provides instructions on how to file the SAR.

By Gregory Twachtman, Washington News Editor

NATIONAL HARBOR, Md.—National Taxpayer Advocate Erin Collins is hoping that collections notices from the Internal Revenue Service will resume in the coming months.

NATIONAL HARBOR, Md.—National Taxpayer Advocate Erin Collins is hoping that collections notices from the Internal Revenue Service will resume in the coming months.

The agency suspended automated collections notices in response to the backlog of unprocessed mail correspondence that resulted from the shutdowns due to the COVID-19 pandemic and have yet to resume sending notices out.

Collis said that the agency is developing a plan on how those collections notices will resume and she said it is an important piece of information that taxpayers with balances due need.

Speaking here August 9, 2023, at the IRS Nationwide Tax Forum event, Collins expressed concern that people are saying "hey, the IRS probably forgot about me because it’s been 18 months. And I am concerned that people do not realize that interest and the failure to pay [penalty] is kicking in."

And while she urged IRS to resume collections notices, she also cautioned that it needs to be done in a staggered fashion so that the agency, as well as tax professionals are not simultaneously inundated with calls about these notices all at once, potentially creating another backlog as the agency continues to clear backlog pandemic inventories.

"So what they’re trying to do is stagger them," Collins said. "Have then come out in different timeframes so that all of them don’t hit at the same time, … because if they turn the spigot on, how many phone calls are they going to get that next day? They won’t be able to handle that volume."

Collins said the agency is looking at how to prioritize which notices should be going out first as well as possibly changing the notices to make them more informative for taxpayers.

"So, stay tuned on that," he told attendees. "I don’t think it’ll be tomorrow, but I’m hoping that it’ll be months from now, not two years from now that we turn it back on."

Another area Collins expressed concerns about is the changing of the 1099-K threshold to $600. She said that her office has been in touch with "the Venmos of the world" to try to get them to put systems in place that will help their customers differentiate between personal transactions and business transactions to help ensure that 1099-Ks that will be issued because of the new threshold will accurate.

"I don’t know what’s going to happen between now and January, but the IRS, and our office as well, has been trying to work on this so it’s not as big a problem," she said. "But I am a little concerned because there’s going to be a lot of 1099 cases, potentially."

Collins also offered a "spoiler alert" that the online accounts for tax professionals "will become useful." She suggested it will not be the fully functioning portal she has been calling for, but there will be more functions added to it to make it a useful tool for tax practitioners.

"It will no longer be just a glorified Power of Attorney form, or the ability to file one,” she said. “It will actually have some usefulness. … Stay tuned."

By Gregory Twachtman, Washington News Editor

Taxpayers, by the 2024 filing season, will be able to digitally submit all correspondence, non-tax forms, and notice responses electronically to the Internal Revenue Service, the agency announced.

Additionally,"by Filing Season 2025, the IRS is committing to digitally process 100 percent of tax and information returns that are submitted by paper, as well as half of all paper correspondence, non-tax forms, and notice responses,"Department of the Treasury Secretary Janet Yellen said August 2, 2023. "It will also digitalize historical documents that are currently in storage at the IRS."

Taxpayers, by the 2024 filing season, will be able to digitally submit all correspondence, non-tax forms, and notice responses electronically to the Internal Revenue Service, the agency announced.

Additionally,"by Filing Season 2025, the IRS is committing to digitally process 100 percent of tax and information returns that are submitted by paper, as well as half of all paper correspondence, non-tax forms, and notice responses,"Department of the Treasury Secretary Janet Yellen said August 2, 2023. "It will also digitalize historical documents that are currently in storage at the IRS."

Taxpayers will still have the option of mailing in paper-based correspondence.

Yellen cited the supplemental funding provided by the Inflation Reduction Act to the IRS for giving the agency the ability to transition from "a paper-based agency" to a "digital-first agency."

"This ‘PaperlessProcessing’ initiative is the key that unlocks other customer service improvements," Yellen said. "It will enable taxpayers to see their documents, securely access their data, and save time and money. And it will allow other parts of the IRS to rely on these digital copies to provide faster refunds, reduce errors in tax processing, and delivery a more seamless and responsive customer service experience."

According to a fact sheet issued by the IRS, the agency estimates that "more than 94 percent of individual taxpayers will no longer ever need to send mail to the IRS," and will enable up to 152 million paper documents to be submitted digitally per year.

Additionally, taxpayers will be able to e-file 20 additional tax forms, enabling up to 4 million additional tax forms to be filed digitally each year, including amendments to Forms 940, 941, 941SSPR.

"At least 20 of the most used non-tax forms will be available in digital, mobile-friendly formats that make them easy for taxpayers to complete and submit," the fact sheet continues. "These forms will include a Request for Taxpayer Advocate Service Assistance, making it easier for taxpayers to get the help they need."

The fact sheet also outlines some more targets for the 2025 filing season, including:

• making an additional 150 of the most used non-tax forms available in digital, mobile-friendly formats;
• digitally processing all paper-filed tax and information returns;
• processing at least half of paper-submitted correspondence, with all paper documents – correspondence, non-tax forms, and notice responses – to be processed digitally by Filing Season 2026; and
• digitizing up to 1 billion historical documents.

"When combined with an improved data platform, digitization and data extraction will enable data scientists to implement advanced analytics and pattern recognition methods to pursue cases that can help address the tax [gap], including wealthy individuals and large corporations using complex structures to evade taxes they owe," the fact sheet states.

By Gregory Twachtman, Washington News Editor

An IRS Notice provides a transition rule that generally allows taxpayers to claim the Code Sec. 25C energy efficient home improvement credit for home energy audits conducted in 2023 even if the auditor is not certified. The Notice also describes regulations the IRS intends to propose for qualified home energy audits.

An IRS Notice provides a transition rule that generally allows taxpayers to claim the Code Sec. 25C energy efficient home improvement credit for home energy audits conducted in 2023 even if the auditor is not certified. The Notice also describes regulations the IRS intends to propose for qualified home energy audits.

Taxpayers may rely on the Notice until the proposed regs are issued. The proposed regs are expected to apply to tax years ending after December 31, 2022 .

Energy Efficient Home Improvement Credit for Home Energy Audits

The energy efficient home improvement credit is generally equal to 30 percent of amounts paid or incurred for qualified energy efficiency improvements, residential energy property expenditures, and home energy audits placed in service after 2022. The credit is generally limited to $1,200 per year, but different annual limits apply to particular types of expenses.

The annual credit for home energy audits is limited to $150 per year. For example, if a taxpayer pays $900 for a home energy audit, the credit is limited to $150 rather than 30 percent of the expense ($300).

A qualified home energy audit must:

Transition Rule for 2023

A transition rule applies to home energy audits conducted on or before December 31, 2023, during a tax year ending after December 31, 2022. An audit during this transition period may qualify for the credit even if it is not conducted by a certified home energy auditor. However, an audit conducted after December 31, 2023, will not qualify for the credit unless the auditor is certified.

Proposed Regs: Certified Home Energy Auditor

The proposed regs will define a "qualified home energy audit" as an inspection conducted by or under the supervision of a qualified home energy auditor. The audit must be consistent with the Jobs Task Analysis led by the Department of Energy (DOE) and validated by the industry.

A qualified home energy auditor will have to be certified by a Qualified Certification Program at the time of the audit. DOE maintains a list of qualified certified programs on its website at https://www.energy.gov/eere/buildings/25c-energy-efficient-home-improvement-credit. These are the only programs that may certify a qualified home energy auditor.

Proposed Regs: Written Report

Under the proposed regs, a qualified home energy audit must include a written report prepared and signed by the qualified home energy auditor. The report must include:

Proposed Regs: Substantiation

Finally, the proposed regs will require the taxpayer to substantiate the home energy audit expenditure by maintaining the certified home energy auditor’s signed written report as a tax record. The taxpayer must also comply with the instructions for Form 5695, Residential Energy Credits, or any successor form.

The Internal Revenue Service will end, except in very limited circumstances, the practice of making unannounced visits to taxpayers’ homes and businesses."This change is effective immediately,"IRS Commissioner Daniel Werfel said during a July 24, 2023, teleconference with reporters. Werfel said the change is being made in reaction to an increase in scam activity as well as for IRS employee safety."With a growth in scam artists, taxpayers are increasingly uncertain who was knocking on their doors," Werfel said. "For IRS employees, there were fears about their own personal safety on these visits. I also learned that these concerns were shared by our partners as the National Treasury Employees Union."

The Internal Revenue Service will end, except in very limited circumstances, the practice of making unannounced visits to taxpayers’ homes and businesses."This change is effective immediately,"IRS Commissioner Daniel Werfel said during a July 24, 2023, teleconference with reporters. Werfel said the change is being made in reaction to an increase in scam activity as well as for IRS employee safety."With a growth in scam artists, taxpayers are increasingly uncertain who was knocking on their doors," Werfel said. "For IRS employees, there were fears about their own personal safety on these visits. I also learned that these concerns were shared by our partners as the National Treasury Employees Union."

Unannounced visits will be replaced with scheduled visits. If the IRS needs to meet with a taxpayer, that taxpayer will receive an appointment letter, known as a 725-B letter, to schedule a time for a revenue officer to meet with the taxpayer."This will help taxpayers feel more prepared when it is time to meet," Werfel said."“Taxpayers whose cases are assigned to a revenue officer will now be able to schedule face-to-face meetings at a set place and time. They will have the necessary information and documents in hand to reach a resolution of their cases more quickly."

In addressing what the IRS will do if a taxpayer is not reachable by mail or is not responding to a meeting scheduling letter, Werfel stated that there are other actions that the agency can take to help drive compliance, such as imposing a lien or a levy, which can be done remotely. He also stressed that in past cases where revenue officers made unannounced visits, they were in situations where the revenue officer was attempting to collect a sizable debt with a median in these cases of $110,000."These homevisits were not occurring for small tax debt," Werfel said. "These are for big tax debts." Werfel outlined what he described as "rare instances" when unannounced visits will continue to occur, including service of a summons and subpoena as well as in the conduct of sensitive enforcement activities such as the seizure of assets."These activities are just a drop in the bucket compared to the number of visits that have taken place in the past," Werfel said, noting that there were a few hundred each year compared to the tens of thousands of other visits that occurred each year under the decades-old policy.

Werfel said that this policy will not impact activities conducted by the Criminal Investigations division, which operates under its own rules and protocols."Today’s decision is part of a broader plan that will help us work smarter and be more efficient," he said, noting this action is part of the larger IRS transformation effort taking place with the help of the supplemental funding provided by the Inflation Reduction Act.

By Gregory Twachtman, Washington News Editor

The IRS has released a revenue ruling providing additional guidance concerning receipt of cryptocurrency. If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the tax year in which the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and receives additional units of cryptocurrency as rewards as a result of the validation

The IRS has released a revenue ruling providing additional guidance concerning receipt of cryptocurrency. If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the tax year in which the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and receives additional units of cryptocurrency as rewards as a result of the validation

Scenario in the Ruling

The revenue ruling presents a scenario in which transactions in a cryptocurrency that is convertible virtual currency are validated by a proof-of-stake consensus mechanism. A cash-method taxpayer validates a new block of transactions on the cryptocurrency blockchain, receiving two units of the cryptocurrency as validation rewards. Pursuant to the cryptocurrency protocol, during a brief period ending on Date 2, the taxpayer lacks the ability to sell, exchange, or otherwise dispose of any interest in the two units of cryptocurrency in any manner. On the following day (Date 3), the taxpayer has the ability to sell, exchange, or otherwise dispose of the two cryptocurrency units.

Analysis and Holding

Cryptocurrency that is convertible virtual currency is treated as property for Federal income tax purposes and general tax principles applicable to property transactions apply to transactions involving cryptocurrency. For example, a taxpayer who receives cryptocurrency as a payment for goods or services or who mines cryptocurrency must include the fair market value of the cryptocurrency in the taxpayer's gross income in the tax year the taxpayer obtains dominion and control of the cryptocurrency.

In the scenario, two units of cryptocurrency represent the taxpayer's reward for staking units and validating transactions on the blockchain. On Date 3, the taxpayer has an accession to wealth as the taxpayer gains dominion and control through the taxpayer's ability, as of this date, to sell, exchange, or otherwise dispose of the two units of cryptocurrency received as validation rewards. Accordingly, the fair market value of the two units of cryptocurrency is included in taxpayer's gross income for the tax year that includes Date 3.

Problems with the Internal Revenue Service’s handling of the Employee Retention Tax Credit took center stage before a House committee hearing, with tax professionals airing issues they have experienced and ongoing concerns they have.

Problems with the Internal Revenue Service’s handling of the Employee Retention Tax Credit took center stage before a House committee hearing, with tax professionals airing issues they have experienced and ongoing concerns they have.

Testifying at a July 28, 2023, hearing of the House Ways and Means Subcommittee on Oversight, Larry Gray, partner at AGC CPA, said that as the pandemic started and he started to make educational YouTube videos to help other practitioners navigate the tax law, he found issues with the ERTC, including the growing industry of ERTC mills and the potential for fraud that comes with them.

He noted that many of these mills are simply taking their fee for providing essentially clerical assistance. However, Gray noted that in these ERTC mills, the agreements stated that"they don’t do audit," but they might be able to help find someone of a business does get audited because of the ERTC filing. And unfortunately, as was discussed throughout the hearing, people are falling for these ERTC mills and putting their businesses at risk.

And Gray put the problems that have arisen squarely on the IRS.

"We are getting no guidance," Gray said. "There should have been an ERTC implementation team to coordinate from the top down. We need education. We need guidance."

To that end, the IRS did issue a legal advice memorandum on July 20, 2023, that shows the application of the statutory requirements of the ERTC across five different scenarios.

Gray also took a subtle dig at Congress, acknowledging in his testimony that part of the issues could be related to an IRS that was "understaffed, and they were underfunded" when the COVID-19 pandemic began three years ago.

Roger Harris, President of accounting and tax firm Padgett Advisors, also highlighted issues, starting with the first which was "how we submitted claims to the IRS," which was exclusively on paper at a time when no one was present to handle the processing of paper correspondence because of the pandemic, creating a significant backlog.

"And it’s still ongoing," he continued, causing a "delay in getting the money out to the people who need it."

And with all the moving parts related to potential people who need to amend returns depending on how the business is structured, a mistake in any of these forms could be generating penalties and interest, a problem that is magnified when combined with Gray’s observation of the lack of available guidance to help taxpayers who are trying to do the right thing and collect money they are legitimately owed.

Ahead of the subcommittee hearing, the IRS announced in a July 26, 2023, statement that it received more than 2.5 million claims since the ERTC program began and it has "made substantial progress on these claims this year, with 99 percent of claims approximately three-months old as of mid-July."

However, throughout the hearing, witnesses and committee members questioned the integrity of that figure, noting that IRS has changed numbers on its website as to how many claims remain in the backlog. There also were question on how the figure itself is determined.

Harris also pointed out the problems the ERTC mills are causing with his business and for other tax professionals looking to do the right thing by their clients.

"We have had clients that we have dealt with for many years who have trusted our advice," Harris testified. "But all of a sudden when someone is telling them, ‘Your advisor doesn’t know what they are doing, and if you listen to me, I can give you a half million dollars,’ it’s very hard for as the people who are working with these small businesses to win that argument, in many instances, just because of the sheer amount of money that is being dangled in front of them."

Harris continued: "And as we have heard, the IRS has no choice but to begin enforcement actions to try and correct this."

He said he is asking the IRS "for some help [with] a real-world solution to give us the ability to try to bring these people back into compliance. … [It] is going to take a concerted effort by our industry, the tax practitioner community, to help solve this problem," especially when people may have already spent the money because they were unaware that the weren’t entitled to under the ERTC program and fell for the fraud being perpetrated by the ERTC mills. And that does not even account for the fees that were paid to the ERTC mills that will never be recovered.

He did note that IRS Commissioner Daniel Werfel, at last week’s IRS-sponsored tax forum in Atlanta did ask tax practitioners what they needed in regard to the ERTC.

In its July 26 statement, the IRS offered a series of recommendations on how to avoid ERTC scams. At the tax forum, Werfel said that the "amount of misleading marketing around this credit is staggering, and it is creating an array of problems for taxprofessionals and the IRS while adding risk for businesses improperly claiming the credit. A terrible scenario is unfolding that hurts everyone involved – except the promoters" of the misleading ERTC marketing.

By Gregory Twachtman, Washington News Editor

The IRS announced substantial progress in the ongoing effort related to the dubious Employee Retention Credit (ERC) claims. The IRS successfully cleared the backlog of valid ERCs. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and December. 31, 2021. Under the current law, businesses can typically continue to file claims for the credit until April 15, 2025.

The IRS announced substantial progress in the ongoing effort related to the dubious Employee Retention Credit (ERC) claims. The IRS successfully cleared the backlog of valid ERCs. The period of eligibility for the credit for affected businesses is very limited, covering only between March 13, 2020, and December. 31, 2021. Under the current law, businesses can typically continue to file claims for the credit until April 15, 2025.

"The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining," IRS Commissioner Danny Werfel told attendees at the IRS Nationwide Tax Forum in Atlanta. "Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area," he added.

Taxpayers should be wary of certain signs including (1) unsolicited calls or advertisements mentioning an easy application process; (2) statements that the promoter or company can determine ERC eligibility within minutes; and (3) large upfront fees to claim the credit. Eligible employers who need help claiming the credit should work with a trusted tax professional. Finally, taxpayers can report ERC abuse by submitting Form 14242, Report Suspected Abusive Tax Promotions or Preparers and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations.

The Internal Revenue Service is looking for ways get its post-filing alternative dispute resolution programs greater exposure and use.

The agency recently issued a public call for comment on a variety of topics related to the use of ADR, including learning why taxpayers choose not to use ADR; issues that keep taxpayers from using ADR that should be changed to allow for inclusion; how best to improve ADR; how best to education about ADR; feedback on when ADR proved particularly useful; and ideas on how to achieve tax certainty or resolution sooner beyond existing ADR programs, including ideas for new programs.

The Internal Revenue Service is looking for ways get its post-filing alternative dispute resolution programs greater exposure and use.

The agency recently issued a public call for comment on a variety of topics related to the use of ADR, including learning why taxpayers choose not to use ADR; issues that keep taxpayers from using ADR that should be changed to allow for inclusion; how best to improve ADR; how best to education about ADR; feedback on when ADR proved particularly useful; and ideas on how to achieve tax certainty or resolution sooner beyond existing ADR programs, including ideas for new programs.

A list of specific issues the IRS has outlined can be found here, though comments submitted about the ADR should not necessarily be limited to the subject areas listed.

Indu Subbiah, supervisory appeals officer and acting senior advisor in the IRS Independent Office of Appeal, explained the genesis of this request for comment.

"We had a sense the ADR [programs] weren’t being used quite as robustly as we would have liked,” she said in an interview with Federal Tax Daily, adding that a recently issued U.S. Government Accountability Office report “really brought that to our attention."

According to the report, “IRS Could Better Manage Alternative Dispute Resolution Programs To Maximize Benefits,"IRS Could Better Manage Alternative Dispute Resolution Programs To Maximize Benefits," GAO found that while the agency offers six alternative dispute resolution programs,"IRS used ADR programs to resolve disputes in less than half of one percent of all cases reviews by its Independent Office of Appeals"from fiscal year 2013 to 2022. In this time period, the number of cases closed using ADR annually peaked in 2014 (429 cases closed) and then steadily declined during the review period, reaching a low point of 119 cases closed in 2022.

"Beyond these data on ADR usage, IRS does not have the data necessary to manage the ADR programs, such as data on taxpayer requests to use ADR; IRS’ acceptance or rejection of those requests; and the results from using ADR, including rate of resolution, time, and costs," the GAO report states. "Although IRS does not know definitively why ADR usage has declined, potential reasons include taxpayers do not perceive the benefits of using ADR, according to IRS officials"

The report continues: "IRS is missing opportunities to use several management practices for its ADR programs to help increase taxpayers’ willingness to use ADR as well as maximize the programs’ benefits. IRS does not have clear and measurable objectives for its ADR programs that contribute to achieving IRS’s strategic goals and objectives, such as its ability to resolve disputes over specific tax issues and reduce the investment of time and money to do so. IRS does not analyze data to assess whether ADR is achieving benefits. … IRS has not regularly monitored the taxpayer experience with ADR to address problems in real-time."

With these critical observations about the ADR programs being put forth by GAO, the Independent Office of Appeals is now proactively looking at what is going on to make the ADR programs work better for taxpayers and the agency, the first step being this request for comments.

"The whole point of ADR programs is so that taxpayers and the IRS can use ADR to resolve issues, potentially at a lower cost," Subbiah said. "I think everybody would agree that when the process works, the IRS and the taxpayer can avoid costly litigation."

"The question for us is how can we is how can we even improve the ability to resolve a case with Appeals, and to me, it’s maybe can we resolve those cases sooner," Andrew Keyso, chief of the IRS Office of Independent Appeals, said during the interview.

"I think this is a good time to reconsider how we do alternative dispute resolution and mediation because of the" supplemental funding the agency received as part of the Inflation Reduction Act, Keyso said, noting that there are more resources to apply to appeals officers and mediators.

Keyso said that one of the ways the Office of Appeals measures success of ADR "based on how many people are coming in to use ADR and those numbers are fairly small. So I think we’d like to see those numbers increase."

One thing that the IRS will be looking for in the questions is the need for education as a potential way to increase the use of ADR. In fact, one of the questions the agency asked is directly focused on education.

"One of the questions we really focused on was education," Subbiah said, noting that they are looking for stakeholders to "tell us [and] to help us understand whether it is [lack of] education [on ADR and its benefits] or is it something else. I think it will be very telling and very interesting to us to really get at the heart of why it isn’t being used."

Elizabeth Askey, deputy chief of the Office of Independent Appeals, noted, anecdotally, that larger businesses and wealthier taxpayers seem to be a lot more aware of the various tools at their disposal, including ADR. However, the Office also is hearing situations where there is a reluctance on the part of compliance officers to use ADR tools.

Keyso added that while larger businesses and wealthier taxpayers might be more aware of ADR, there needs to be more education for smaller businesses and lower income taxpayers, in addition to education across the IRS itself.

"So, in those cases, it may be a matter of us getting to the root of why some compliance personnel are less inclined to go this route than others," Askey said during the interview. "It’s not just the education of taxpayers and their practitioners, but of our own compliance personnel."

Keyso stressed that this effort was broad, not only in the scope of which taxpayers and practitioners might need education about the availability and use of ADR, but also within the agency. And he remains optimistic that this effort to request commentary from the public will help that.

"We’re optimistic that the public will come in and tell us why we don’t make use of more ADR. We don’t find it productive, for instance, or we can’t get the agency to cooperate," he said. And with the additional IRA funding in hand, the agency can respond and look to see how ADR can be restructured to make it more useful for everyone to help get more issues resolved in a more timely and cost-efficient manner.

"I hope that mindset is shared across the agency," Keyso said."I think it is and is becoming more so in the effort to help resolve cases quickly." He noted there will always be cases where resolution needs a more traditional path, but when this process is complete, there will be a greater recognition where ADR can be and is used.

IRS is asking the public to submit its comments on the ADR programs by August 25, 2023, via email at ap.adr.programs@irs.gov.

By Gregory Twachtman, Washington News Editor

National Taxpayer Advocate Erin Collins is reiterating her call for the Internal Revenue Service to stop automatically assessing penalties related to international information returns.

National Taxpayer Advocate Erin Collins is reiterating her call for the Internal Revenue Service to stop automatically assessing penalties related to international information returns.

In an August 22, 2023, blog post, she also called on the agency to "provide taxpayers due process by affording them the opportunity to administratively present their reasonable cause defense and request FTA [first time abatement] and consideration by the Independent Office of Appeals prior to any assessment."

The blog post noted that relief was needed because there is "a misconception that IIRpenalties affect primarily bad-faith, wealthy taxpayers who are experiencing consequences of their own making."

However, that is not the case. Collins wrote that the automatic penalty regime "disproportionately affects individuals and businesses of more moderate resources, and is by no means just a rich person’s problem. Wealthy individuals and large businesses tend to have knowledgeable and well-informed representation and as a result have fewer foot faults. Immigrants, small businesses, and low-income individuals may not be as well-informed about IIRpenalties and may not have return preparers with the same technical expertise on international penalties."

NTA noted that from 2018-2021, 71 percent of the penalties were assessed to taxpayers with incomes of $400,000 or less, with an average penalty to these people being more than $40,000.

One example of how penalties can be triggered is when an immigrant who is a U.S. citizen starts a small business and includes family members who live abroad. This arrangement could trigger the need for an IIR and if it is not filed, the taxpayer could be automatically assessed penalties, which are defined in Internal Revenue Code Sec. 6038 and 6038A. The blog goes through a number of other scenarios which would require an IIR and penalties for failure to do so.

However, when "taxpayers voluntarily correct their failure to file, this good-faith action can sometimes have the unexpected effect of causing the IRS to automatically assess the penalty,"the blog states. "If the IRS does not administratively abate the penalty, taxpayers will need to pay the penalty in full before challenging by filing suit refund in the United States District Court or the United States Court of Federal Appeals."

Collins continues to advocate for legislative changes that would allow for changes in due process that would allow for cases to be heard in court before any penalties are paid, as well as providing a more "efficient and equitable regime governing the initial imposition of IIRpenalties and the mechanisms by which they can be challenged by taxpayers while also protecting their rights."

By Gregory Twachtman, Washington News Editor

With the subprime mortgage mess wreaking havoc across the country, many homeowners who over-extended themselves with creative financing arrangements and exotic loan terms are now faced with some grim tax realities. Not only are they confronted with the overwhelming possibility of losing their homes either voluntarily through selling at a loss or involuntarily through foreclosure, but they must accept certain tax consequences for which they are totally unprepared.

Many homeowners - whether in connection with their principal residence or a vacation property - may not anticipate that foreclosure and a home sale that produces a loss can trigger significant and unexpected income tax liabilities, especially when the sale does not produce enough gain to pay off outstanding mortgage debt.

Selling at a loss

Homeowners may be unpleasantly surprised to learn that they can not write-off losses incurred from the sale of their home. When a homeowner is forced to sell their personal residence for less than the price they paid, the loss incurred on the sale is considered to be a non-deductible personal expense for federal income tax purposes. What's more, if the homeowner eventually buys another home that is sold down the road at a taxable profit, previous losses cannot be used to offset that gain.

Faced with such a situation, the technique of renting out the home, rather than selling it, might help some homeowner buy time until better times. If renting eventually stops making financial sense, the homeowner who sells at a loss might then succeed in establishing a deductible business loss from the business of renting property. However, only losses incurred after the property is converted may be deducted.

Debt forgiveness

Homeowners who sell their property when their mortgage debt exceeds the net sale price of the home (a so-called "short sale") may find that they owe taxes to the IRS. For example, assume you paid $500,000 for a home that you sell for a net sale price of $400,000, but you have a mortgage of $550,000 on the property. For tax purposes, you have incurred a $100,000 loss on the sale because the sale price is lower than your tax basis in the property ($400,000 sale price - $500,000 basis = $100,000 loss). Moreover, you still owe $150,000 to your mortgage lender since a mortgage note is a personal liability in addition to being an encumbrance on the house itself. If the lender refuses to discharge the remaining debt, you'll have to pay off the loan and there is no tax break or write-off for doing so.

On the other hand, if the mortgage lender forgives part or all of the remaining $150,000 debt, the amount discharged is considered taxable income. With few exceptions, discharged debt of all types is treated as income, taxable at ordinary rates just like a salary. It is irrelevant to the IRS that no tangible income was actually received on the sale of the home or forgiveness of debt by the lender. You will owe taxes on the amount of mortgage debt that the lender discharges. What's more, there is no offset from your $100,000 loss on the sale of the property; nor is this income covered by the $250,000 exclusion on taxable gain on the sale of a principal residence ($500,000 for joint filers).

A lender who discharges any part or all of a homeowner's debt must report the forgiven debt on Form 1099-C (Cancellation of Debt) to you and to the IRS. You must report the amount of discharged debt as income on your tax return in the year the mortgage debt is forgiven.

Foreclosure

Foreclosure also produces tax consequences that may be wholly unanticipated by the homeowner. Taxable gains and income from mortgage debt forgiveness also occur in foreclosure. Tax liability upon foreclosure depends on whether you have a nonrecourse or recourse loan. A recourse loan permits the lender to sue the borrower for any outstanding debt. When a foreclosure occurs on the property of a homeowner with a nonrecourse loan, however, the lender is only entitled to collect the amount that the home is sold for, and the borrower has no further liability.

Example. Your tax basis in your home is $400,000. You have a recourse loan and your mortgage debt totals $350,000. But at the time of foreclosure the fair market value of your home has decreased to $325,000. However, the lender forgives the remaining unpaid mortgage debt of $25,000 (usually because the lender sees that the former homeowner has little assets left, the remaining debt would be hard to collect, and an immediate write off gives the lender an immediate tax deduction). Tax law treats you as having received ordinary income from the cancellation of the debt in the amount of $25,000.

Alternatively, if you had a nonrecourse loan in the amount of $350,000 and your home sold at auction for $325,000, you would have no further liability to the lender since it cannot pursue you for the lost $25,000. Therefore, since your mortgage lender cannot legally pursue you for the remaining $25,000, there will be no debt for them to discharge. Such nonrecourse loans, however, are very rare in personal, non-business settings.

Moreover, if property is foreclosed and sold at auction for more than the home's tax basis, the sale produces taxable gain. In this case, however, the gain from a foreclosure sale of an individual's principal residence may be excluded to the extent of up to $250,000 ($500,000 for married homeowners filing jointly), depending on the length of homeownership. No exclusion, however, is given on vacation property that is not a principal residence.

Future relief for homeowners?

In mid-April, Reps. Robert E. Andrews (D-New Jersey) and Ron Lewis (R-Kentucky), introduced the Mortgage Cancellation Relief Act of 2007 (H.R. 1876), a bill that would assist many homeowners affected by the loss of their home through foreclosure or short sale. The legislation would exempt discharged debt on primary home mortgages from treatment as income subject to income taxation. Currently, the bill is before the House Ways and Means Committee.

If you would like more information on the tax consequences of foreclosure or the potential implications of taking a loss on the sale of your home or vacation property, please call our office and we can discuss your options for minimizing your tax liabilities.

These days, both individuals and businesses buy goods, services, even food on-line. Credit card payments and other bills are paid over the internet, from the comfort of one's home or office and without any trip to the mailbox or post office.

Now, what is probably your biggest "bill" can be paid on-line: your federal income taxes.

There are three online federal tax payment options available for both businesses and individuals: electronic funds withdrawal, credit card payments and the Electronic Federal Tax Payment System. If you are not doing so already, you should certainly consider the convenience -and safety-- of paying your tax bill online.  While all the options are now "mainstream" and have been used for at least several years, safe and convenient, each has its own benefits as well as possible drawbacks. The pros and cons of each payment option should be weighed in light of your needs and preferences.

Electronic Funds Withdrawal

Electronic funds withdrawal (or EFW) is available only to taxpayers who e-file their returns. EFW is available whether you e-file on your own, or with the help of a tax professional or software such as TurboTax. E-filing and e-paying through EFW eliminates the need to send in associated paper forms.

Through EFW, you schedule when a tax payment is to be directly withdrawn from your bank account. The EFW option allows you to e-file early and, at the same time, schedule a tax payment in the future. The ability to schedule payment for a specific day is an important feature since you decide when the payment is taken out of your account. You can even schedule a payment right up to your particular filing deadline.

The following are some of the tax liabilities you can pay with EFW:

• Individual income tax returns (Form 1040)
• Trust and estate income tax returns (Form 1041)
• Partnership income tax returns (Forms 1065 and 1065-B)
• Corporation income tax returns for Schedule K-1 (Forms 1120, 1120S, and 1120POL)
• Estimated tax for individuals (Form 1040)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax return (Form 944)
• Private foundation returns (Form 990-PF)
• Heavy highway vehicle use returns (Form 2290)
• Quarterly federal excise tax returns (Form 720)

For a return filed after the filing deadline, the payment is effective on the filing date. However, electronic funds withdrawals can not be initiated after the tax return or Form 1040 is filed with the IRS. Moreover, a scheduled payment can be canceled up until two days before the payment.

EFW does not allow you to make payments greater than the balance you owe on your return. Therefore, you can't pay any penalty or interest due through EFW and would need to choose another option for these types of payments. While a payment can be cancelled up to two business days before the scheduled payment date, once your e-filed return is accepted by the IRS, your scheduled payment date cannot be changed. Thus, if you need to change the date of the payment, you have to cancel the original payment transaction and chose another payment method. Importantly, if your financial institution can't process your payment, such as if there are insufficient funds, you are responsible for making the payment, including potential penalties and interest. Finally, while EFW is a free service provided by the Treasury, your financial institution most likely charges a "convenience fee."

Credit Card Payments

Do you have your card ready? The Treasury Department is now accepting American Express, Discover, MasterCard, and VISA.

Both businesses and individual taxpayers can make tax payments with a credit card, whether they file a paper return or e-file. A credit card payment can be made by phone, when e-filing with tax software or a professional tax preparer, or with an on-line service provider authorized by the IRS. Some tax software developers offer integrated e-file and e-pay options for taxpayers who e-file their return and want to use a credit card to pay a balance due.

However, there is a convenience fee charged by service providers. While fees vary by service provider, they are typically based on the amount of your tax payment or a flat fee per transaction. For example, you owe $2,500 in taxes and your service provider charges a 2.49% convenience fee. The total fee to the service provider will be $62.25. Generally, the minimum convenience fee is $1.00 and they can rise to as much as 3.93% of your payment.

The following are some tax payments that can be made with a credit card:

• Individual income tax returns (Form 1040)
• Estimated income taxes for individuals (Form 1040-ES)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax returns (Form 944)
• Corporate income tax returns (Form 1120)
• S-corporation returns (Form 1120S)
• Extension for corporate returns (Form 7004)
• Income tax returns for private foundations (Form 990-PF)

However, as is the case is with the EFW option, if a service provider fails to forward your payment to the Treasury, you are responsible for the missed payment, including potential penalties and interest.

Electronic Federal Tax Payment System

EFTPS is a system that allows individuals and businesses to pay all their federal taxes electronically, including income, employment, estimated, and excise taxes. EFTPS is available to both individuals and businesses and, once enrolled, taxpayers can use the system to pay their taxes 24 hours a day, seven days a week, year round. Businesses can schedule payments 120 days in advance while individuals can schedule payments 365 days in advance. With EFTPS, you indicate the date on which funds are to be moved from your account to pay your taxes. You can also change or cancel a payment up to 2 business days in advance of the scheduled payment date.

EFTPS is an ideal payment option for taxpayers who make monthly installment agreement payments or quarterly 1040ES estimated payments. Businesses should also consider using EFTPS to make payments that their third-party provider is not making for them.

EFTPS is a free tax payment system provided by the Treasury Department that allows you to make all your tax payments on-line or by phone. You must enroll in EFTPS, however, but the process is simple.

We would be happy to discuss these payment options and which may best suit your individual or business needs. Please call our office learn more about your on-line federal tax payment options.

A taxpayer who may have misplaced or lost a copy of his tax return that was already filed with the IRS or whose copy may have been destroyed in a fire, flood, or other disaster may need information contained on that return in order to complete his or her return for the current year. In addition, an individual may be required by a governmental agency or other entity, such as a mortgage lender or the Small Business Administration, to supply a copy of his or a related party's tax return.

A taxpayer who may have misplaced or lost a copy of his tax return that was already filed with the IRS or whose copy may have been destroyed in a fire, flood, or other disaster may need information contained on that return in order to complete his or her return for the current year. In addition, an individual may be required by a governmental agency or other entity, such as a mortgage lender or the Small Business Administration, to supply a copy of his or a related party's tax return.

In such circumstances, you may obtain a copy of your tax return by filing Form 4506, Request for Copy or Transcript of Tax Form, along with the applicable fee, to the IRS Service Center where the return was filed. Also, tax account information based on the return may be obtained free of charge from IRS Taxpayer Service Offices. You may also request a transcript that will show most lines from the original return, including accompanying forms and schedules.

Fees

There is no charge to request a tax return transcript of the Form 1040 series filed during the current calendar year and the three preceding calendar years. For other requests, a fee of $23.00 per tax period requested must be paid in order to obtain copies of a return. Taxpayers seeking tax account information (such as adjusted gross income, amount of tax, or amount of refund) should contact their local IRS Taxpayer Service Office, which will provide the account information free of charge.

Timing of requests

A request for a copy of a return must be received by the IRS within 60 days following the date when it was signed and dated by the taxpayer. It may take up to 60 calendar days to get a copy of a tax form or Form W-2 information. If a return has been recently filed, the taxpayer must allow six weeks before requesting a copy of the return or other information. The IRS cautions that returns filed more than six years ago may not be available for making copies; tax account information, however, is generally available for these periods.

You may be able to save some time by going directly to your tax return preparer for the information. Although a return preparer may retain a copy of the taxpayer's return, however, there is no absolute requirement to do so. Preparers must retain for three years either a copy of each completed return and claim for refund or a list of the names and taxpayer identification numbers of taxpayers for whom returns or claims have been prepared.

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

Paperless

EFTPS is one of the most user-friendly programs developed by the IRS. EFTPS is totally paperless. Everything is done by telephone or computer. Because it's electronic, it's available 24 hours a day, seven days a week.

You make your tax payments electronically by:

• · Calling EFTPS; or

• · Using special computer software or the Internet.

Who can use EFTPS

EFTPS is available to businesses and individuals but businesses have more options.

Businesses: If your total deposits of federal taxes are more than $200,000 each year, you must use EFTPS. If not, you can still use EFTPS but you're not required to.

To calculate the $200,000 threshold, you have to include every federal tax your business pays, such as payroll, income, excise, social security, railroad retirement, and any other federal taxes.

The IRS wants businesses to use EFTPS and makes it difficult to stop using it. Once you meet the $200,000 threshold, you have to continue using EFTPS even if your annual tax deposits fall below $200,000 in the future.

Individuals: Individuals can also use EFTPS. Many of the individuals using EFTPS are making quarterly estimated tax payments but it's also available to people paying federal estate and gift taxes and installment payments.

How EFTPS works

There are two versions of EFTPS: direct and through a financial institution.

Direct: EFTPS-Direct is just what the name suggests. You access EFTPS directly - by telephone or computer - and make your tax payments. You tell EFTPS when you want to deposit your taxes and on that date EFTPS tells your bank to transfer the funds from your account to the IRS. At the same time, the IRS updates your payroll tax records to reflect the deposit.

Example. Your payroll taxes are due on the 15th. You have to contact EFTPS by 8PM at least one day before your tax due date. You either call EFTPS or log-on using special software or through the Internet. You enter your payment and EFTPS automatically debits your bank account and transfers the funds to the IRS on the date you indicate.

If you're a business, you can schedule your tax deposits up to 120 days before the due date. Individuals can schedule tax deposits up to 365 days before the due date.

Through a financial institution: You can also access EFTPS through a bank or credit union. Instead of contacting EFTPS directly and making your tax payments, your bank does it for you. Not all banks and credit unions participate in EFTPS so you have to check with your financial institution.

Only businesses can use EFTPS through a financial institution. If you're an individual and you want to use EFTPS, you have to use it directly. Also, while EFTPS-Direct is free, some financial institutions charge a fee for accessing EFTPS.

Getting started

To access EFTPS, you have to enroll. Your tax advisor can help you navigate the enrollment process and, once you're part of EFTPS, he or she can make the payments for you.

Making gifts is a useful, and often overlooked, tax strategy. However, when thinking about whether to make a gift, or gifts, to your children or other minors, the tax consequences must be evaluated very carefully. Many times, though, the tax consequences can be beneficial and lower your tax bill.

When thinking about whether to make a gift, or gifts, to your children or other minors, the tax consequences must be evaluated very carefully. Many times, though, the tax consequences can be beneficial and lower your tax bill.

Different strategies, whether used alone or in combination, can produce the most advantageous tax results for you and the recipients of your generosity. However, everyone's situation is unique so before you start making gifts, talk to a tax professional.

Basic considerations

-- Generally, a minor is any person under age 18.

-- Different tax rules apply to gifts to minors under age 19 and minors under age 14.

-- Unearned income exceeding $950 (the 2009 amount) of a minor who is under 19 years of age (and college students who are under 24 years of age) will generally be taxed at the highest marginal rate of his or her parents under the "kiddie tax" rules.

-- Income from property given to a minor who is 14 years old or older will be taxed at the minor's marginal income tax rate.

-- If a minor's gift is in trust, there is a 15 percent tax rate on the first $2,300 (the 2009 amount) each year that grows in the trust.

Estate tax

The tax on your estate is determined at the time of your death. Making gifts over your lifetime is often overlooked and undervalued as a means of reducing your estate tax. When you make gifts of money or property during your life the net result is a smaller estate and a smaller tax. Also, when you give a gift of property to a minor, which later increases in value, your estate will not be taxed on this increase in value.

Annual exclusion

In general, you can give away up to $13,000 in 2009 to anyone (including minors) during the year, tax-free. You and your spouse, together, can also give up to $26,000, tax-free, in 2009, to each donee.

UGMA/UTMA accounts

Under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), annual gifts can be made by individuals to a custodial account.

Tax-free gifts can be made under the UGMA. In 2009, each taxpayer can transfer up to $13,000--and each married couple can transfer up to $26,000--to a custodial account. Some of the earnings will receive tax exemption while some or all of the earnings will receive taxation at the minor's tax rate. One drawback to UGMA accounts, however, is that the gifts are irrevocable. Another drawback is that if a student applies for financial aid, UGMA accounts may be deemed assets of the student that are part of the student's contribution toward his or her educational expenses.

UGMA and UTMA accounts have another downside that many parents dislike. When the minor reaches 18 or 21 years of age (depending upon state law), the child can generally do whatever he or she wants with the custodial account money. (That's why some individuals prefer "Crummey" trusts, which are discussed below.)

UTMA accounts operate very similarly to UGMA accounts. However, UTMA accounts let individuals make property gifts to their children that are tax-free.

Trusts

If you use property that does not produce income (such as a life insurance policy) to fund a minor's trust, this can have bad tax consequences. The IRS could assert that the true value of the gift cannot be determined, causing unavailability of the annual exclusion.

With a "Crummey" trust, your gift can stay in trust for as long as you desire without giving up the annual exclusion. However, contributions to a "Crummey" trust do not qualify for the annual exclusion unless the beneficiary receives notification that the contributions were made and is given a limited time (usually 30 days) to withdraw the contribution.

It is understood that the beneficiary will not withdraw the money or property. However, such an understanding should not be written because the IRS will use any evidence to say that the beneficiary had no withdrawal power.

If you are planning to make some gifts to your children or other minors, contact the office for additional guidance so we can make sure you get the best tax breaks possible.

An employee stock ownership plan (ESOP) is a retirement plan option that offers even greater tax advantages than many other retirement plans. However, for the small business owner, ESOPs have another significant advantage: in the right situation, an ESOP can be an extraordinarily useful estate and business succession planning tool.

An employee stock ownership plan (ESOP) is a retirement plan option that offers even greater tax advantages than many other retirement plans. However, for the small business owner, ESOPs have another significant advantage: in the right situation, an ESOP can be an extraordinarily useful estate and business succession planning tool.

The Internal Revenue Code offers great benefits for tax-qualified retirement plans such as ESOPs. Employers can get a tax deduction for contributions made on employee's behalf to the plan, while employees do not have to pay immediate income tax on these contributions. An employee stock ownership plan (ESOP) is a very specialized type of qualified retirement plan that offers even greater tax advantages than many other retirement plans. However, for the small business owner, ESOPs have another significant advantage: in the right situation, an ESOP can be an extraordinarily useful estate and business succession planning tool.

Inadequate planning can be costly

Unfortunately, it is all too common for owners of closely held businesses to approach retirement age without having an adequate business succession plan in place that will allow them to comfortably retire and enjoy the fruits of their labor. In many cases, these businesses may be very successful but not readily marketable due to heavy dependence on the input from the business owners on an ongoing basis. In these situations, the owner may find it very difficult to sell the business for its full value and due to inadequate planning, may have to sell the business for a fraction of its worth at retirement.

ESOP to the rescue

If you are a business owner considering selling your business at retirement and are concerned about getting the full fair market value for your business, the answer may be right in front of you. In many cases, the most logical buyers for your business may be your key employees. These key employees are familiar with your business including customers, vendors, and processes as well as your long-term vision for the business. They have an excellent chance to continue fostering the success of your business after your departure.

However, in many circumstances, your employees will not have the cash to buy your business outright and therefore, the business must, in one way or another, provide them with the means to pay the purchase price. This is a situation when an ESOP can be used as an effective planning tool to "save the day" by providing a financially effective way to help fund the sale of your business to your key employees at full market value.

Tax benefits are many

There are numerous tax benefits that are available to you as an owner to sell your business to your employees through the use of an ESOP. These benefits allow you t

These benefits mean that by using an ESOP, you can sell your business tax-free and at full value (as determined by an appraiser) to your employees who are more able to pay because they can deduct the purchase price. These tax benefits provide a mechanism for you to receive maximum value for your business in cases where there may not be any other way to accomplish this.

Benefits that keep on giving

Providing business succession to key employees through an ESOP may not only give you adequate funds on which to retire, but also can leave your family with a portfolio of liquid investments in the form of the proceeds from the tax-free stock sale of your stock back to the ESOP, instead of a business that your family may have not know-how to run nor have any desire to run. Further, an ESOP can also help if you have one or more children that want to remain active in the business, while others want to receive an equal share of the your estate and do not want to be required to remain involved in the operation of the business.

Special notes for S Corps

Subchapter S corporations have been permitted to establish an ESOP for the last couple of years. If you are operating as an S corporation and are interested in establishing an ESOP, it is important to be aware of the differences between ESOPs that can be established for standard corporations and S corporations.

An ESOP is an extremely specialized type of profit sharing or stock bonus plan and must comply with all of the requirements for any other tax-qualified retirement plan that are imposed under the Internal Revenue Code and the supporting Treasury regulations. However, an ESOP is only slightly more complicated to establish than a profit sharing or 401(k) plan. For more information about how an ESOP can be used in your business succession plans, please contact the office to schedule a consultation.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

A. For most people, all interest paid on a home equity loan would be fully deductible as an itemized deduction on their personal tax returns. However, due to changes made to tax laws governing home mortgage interest deduction in 1987, there are limitations and special circumstances that must be considered when determining how much of your home mortgage interest expense is deductible.

Mortgages secured by your qualified home generally fall under one of three classifications for purposes of determining the home mortgage interest deduction: grandfathered debt, home acquisition debt, and home equity debt. Grandfathered debt is simply home mortgage debt taken out prior to October 14, 1987 (including subsequent refinancing of that debt). The other two types of mortgage debt are discussed below. A "qualified home" is your main or second home and, in addition to a house or condominium, can include any property with sleeping, cooking and toilet facilities (e.g., boat, trailer).

Home Acquisition Debt

Home acquisition debt is a mortgage (including a refinanced loan) taken out after October 13, 1987 that is secured by a qualified home and where the proceeds were used to buy, build, or substantially improve that qualified home. "Substantial improvements" are home improvements that add to the value of your home, prolong the useful life of your home, or adapt your home to new uses.

In general, interest expense on home acquisition debt of up to $1 million ($500,000 if married filing separately) is fully deductible. Keep in mind, though, that to the extent that the mortgage debt exceeds the cost of the home plus any substantial improvements, your mortgage interest will be limited. Mortgage interest expense on this excess debt may be deductible as home equity debt (see below).

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to build a new addition to your home, your mortgage interest would be fully deductible.

Home Equity Debt

Home equity debt is debt that is secured by your qualified home and that does not qualify as home acquisition debt. There are generally no limits on the use of the proceeds of this type of loan to retain interest deductibility.

The amount of mortgage debt that can be treated as home equity debt for purposes of the mortgage interest deduction is the smaller of a) $100,000 ($50,000 if married filing separately) or b) the total of each qualified home's fair market value (FMV) reduced by home acquisition debt & debt secured prior to October 14, 1987. Mortgage debt in excess of these limits would be treated as non-deductible personal interest.

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to pay off your credit cards (you really like to shop!), your mortgage interest deduction would be limited to the amount paid on only $100,000 of the home equity debt.

In addition to the above limitations, there are other circumstances that, if present, can affect your home equity debt interest expense deduction. Here are a few examples:

As illustrated above, determining your deduction for mortgage interest paid can be more complex than it appears. Before you obtain a home equity loan, please feel free to contact the office for advice on how it may affect your potential home mortgage interest deduction.

Q. My wife and I are both retired and are what you might call "social gamblers". We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

Q. My wife and I are both retired and are what you might call "social gamblers." We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

A. The technical answers to your questions are "yes" and "maybe," respectively. However, does it make much practical sense to report your $50 jackpot from the Sunday afternoon bingo game at the church? Probably not. In most circumstances, the taxpayer's cumulative gambling losses far exceed any winnings he may have had.

Here are the technical rules regarding reporting gambling winnings and losses:

Gambling winnings are taxable income and should be reported on your income tax return. In addition to cash winnings, you are required to report the fair market value (FMV) of all non-cash prizes you receive. For the most part, you are on the honor system when it comes to reporting small winnings to the IRS. Large payouts, on the other hand, will most likely be accompanied by IRS Form W-2G and a substantial amount will be deducted for withholding. Gambling winnings should be reported as "Other income" on the front page of Form 1040.

Gambling losses may only be included on your tax return if you itemize your deductions and then they are only deductible up to the amount of your gambling winnings. If you do itemize, those losses would be included as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income (AGI) limit on Form 1040, Schedule A. However, keep in mind that if your AGI exceeds a certain amount, your total itemized deductions may be limited, reducing the likelihood of a direct offset of gambling income and losses.

Once you've tallied up your winnings and losses and reported them on your tax return, how do you substantiate your gambling income and deductions to the IRS? Here are some guidelines offered by the IRS that will help you in the event that your gambling claims are ever questioned:

Keep a log or a journal. The IRS suggests entering all of your gambling activities in a small diary or journal - you may want to consider one that can be carried with you when you frequent gambling establishments. Here is the information you should keep track of:

Retain documentation. As with any item of income or deduction claimed on your return, the IRS requires adequate documentation be kept to substantiate the amount claimed. Acceptable documentation to substantiate gambling winnings and losses can come in many different forms, depending on what type of activity you are engaging in. Examples include lottery tickets, canceled checks, wagering tickets, credit records, bank withdrawals and statements of actual winnings or payment slips provided by the gaming establishment.

Although it may seem difficult to keep track of your gambling activity at the time, it is obvious that keeping good records can benefit you if you ever "hit the jackpot". If you have any further questions on this matter, please contact the office for assistance.