News and miscellaneous legal topics – 2014

IRS Chief Counsel advice – payments to limited liability companies (LLCs) must be reported to the IRS, as required by Code Sec. 6041 (i.e. 1099s) 12/24/14

Chief Counsel Advice Memorandum (Jun. 19, 2014) CCA 201447025, June 19, 2014. Payments to LLCs are exempt from section 6041 reporting requirements only if the LLC has elected to be classified for federal tax purposes as a corporation by filing Form 8832. All persons engaged in a trade or business who, in the course of that trade or business, make payments of $600 or more to another person are required to report the payments to the IRS. I.R.C. § 6041(a). There are, however, exemptions under Treasury regulation section 1.6041-3. Generally, returns of information are not required under section 6041 for payments made to a corporation described in §1.6049-4(c)(1)(ii)(A). Treas. Reg. §1.6041-3(p)(1). LLCs are not within the definition of corporation unless they elect to be classified as associations for federal tax purposes. See Treas. Reg. § 301.7701-3(a).

Revised Offer in Compromise Booklet and Application Available in January 2015 8/13/14

A new revision of the Form 656-B booklet, with forms and instructions for submitting an Offer in Compromise (OIC), will be available on IRS.gov in January, 2015. The use of earlier versions after January 1, 2015 will delay the processing of OIC applications.

IRS Notice of Proposed Rulemaking, Removal of the 36-Month Non-Payment Testing Period Rule for Issuing Cancellation of Debt form 1099C under §1.6050P-1 12/1/14

Published in Fed. Reg. Vol. 79, No. 199, p. 61791 on October 15, 2014, the proposed regulations would remove the 36-month non-payment testing period as an identifiable event. The notice of proposed rulemaking for this proposed regulation does not contain a proposed effective date. http://www.irs.gov/irb/2014-45_IRB/ar12.html

Before these proposed regulations are adopted as final regulations the IRS will consider will any comments that are submitted timely to the IRS before January 15, 2015, and a public hearing will be held.

Income Tax Regulations (26 CFR Part 1) issued under Internal Revenue Code §6050P provided that a debt is deemed to be discharged for information reporting purposes only upon the occurrence of one of eight “identifiable events,” triggering an information reporting obligation for discharge of indebtedness by certain entities, rather than adopt a facts and circumstances test.

The first seven identifiable events are specific occurrences that typically result from an actual discharge of indebtedness.

The eighth identifiable event is a 36-month non-payment testing period, although the expiration of a 36-month non-payment testing period may not result from an actual discharge of indebtedness.

One result is that some taxpayers may conclude that the debts have, in fact, been discharged, and include in income the amounts reported on Forms 1099-C even though creditors may continue to attempt to collect the debt after issuing a Form 1099-C as required by the 36-month rule.

Also, issuing a Form 1099-C before a debt has been discharged may also cause the IRS to initiate compliance actions even though a discharge has not occurred.

Eliminating the 36-month rule for information reporting purposes may also lead courts to cease using it as an identifiable event for purposes of determining when an actual discharge occurs, thereby eliminating the issue of the IRS being precluded from assessing tax on discharge of indebtedness before the form 1099-C has been issued.

Missouri Department of Revenue Director’s rejection of offer in compromise was not reviewable 9/17/14

Under Mo. Rev. Stat. § 32.378(6) the Director’s decision to reject or accept an offer in compromise is not subject to review by the AHC or any court. Meshack, Yourshack, & Abedtogo/MYA, LLC v. Director of Revenue, Mo. Admin. Hearing Commission, No. 14-1091 RS, 08/05/2014.

IRS Issues Draft Instructions For 2014 Form 990-EZ 9/3/14

The 2013 version of Form 990-EZ is four pages, compared to 12 pages for the 2013 Form 990. Organizations must file certain schedules in addition to Form 990 or Form 990-EZ.

Smaller organizations can choose to file Form 990-EZ if they have gross receipts of less than $200,000, and total assets of less than $500,000 at the end of the organization’s tax year.

Form 990 (or Form 990-EZ) must be filed annually by tax-exempt organizations, nonexempt charitable trusts, and Code Sec. 527 political organizations. Certain organizations cannot file Form 990-EZ, including sponsoring organizations of donor advised funds, organizations that operate a hospital facility, nonprofit health insurance issuers under Code Sec. 501(c)(29), and certain controlling organizations described in Code Sec. 512(b)(13).

The IRS recently issued new Form 1023-EZ, a shorter application for small charitable organizations to submit to the IRS when seeking a determination of tax-exempt status.

IRS issues draft instructions to forms for reporting employee health coverage 9/2/14

IRS has released draft versions of the instructions to Form 1095-A (Health Insurance Marketplace Statement), Form 1095-B (Health Coverage), Form 1095-C (Employer-Provided Health Insurance Offer and Coverage), Form 1094-B (Transmittal of Health Coverage Information Returns), and Form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns). The drafts give taxpayers an advance look at how to complete forms that will be used by Affordable Insurance Exchanges and employers to satisfy their health care coverage reporting requirements under the Affordable Care Act (ACA).

IRS Repeats Warning about Phone Scams 8/18/14

… “There are clear warning signs about these scams, which continue at high levels throughout the nation,” said IRS Commissioner John Koskinen. “Taxpayers should remember their first contact with the IRS will not be a call from out of the blue, but through official correspondence sent through the mail. A big red flag for these scams are angry, threatening calls from people who say they are from the IRS and urging immediate payment. This is not how we operate. People should hang up immediately and contact TIGTA or the IRS.” …

You can use the OIC Pre-Qualifier tool to see if you qualify and what a reasonable offer might be. 8/13/14

Use IRS Online Tools to Get Year-Round Tax Help 8/11/14

The IRS website has many online tools that you can use to get the service you need:

  • IRS Free File. You can use IRS Free File to prepare and e-file your federal tax return for free. Free File will do much of the work for you with brand-name tax software or Fillable Forms. If you still need to file your 2013 tax return, Free File is available through Oct. 15. The only way to use IRS Free File is through the IRS website.
  • Where’s My Refund? Checking the status of your tax refund is easy when you use Where’s My Refund? You can also use this tool with the IRS2Go mobile app.
  • Direct Pay. Use our Direct Pay service to pay your tax bill or pay your estimated tax directly from your checking or savings account. Direct Pay is safe, easy and free. The tool walks you through five simple steps to pay your tax in one online session.
  • Online Payment Agreement. If you can’t pay your taxes in full, apply for an Online Payment Agreement. The Direct Debit payment plan option is a lower-cost hassle-free way to make monthly payments.
  • Withholding Calculator. If you got a larger refund or owed more tax than you expected when you filed your tax return, you may need to change the amount of tax taken out of your paycheck. The Withholding Calculator tool can help you complete a new Form W-4, Employee’s Withholding Allowance Certificate to give to your employer.
  • Get Transcript. If you apply for a loan or student financial aid, you may need to get a tax transcript. With Get Transcript, you can download and print your transcript or ask the IRS to mail it to your address of record.
  • Interactive Tax Assistant. Use the Interactive Tax Assistant tool to get answers to common tax questions. The tool will guide you step-by-step to the answer to your question based on your situation.
  • Tax Map. The IRS Tax Map gives you a single point to get tax law information by subject. It integrates your topic with related tax forms, instructions and publications into one research tool.
  • IRS Select Check. If you want to deduct your gift to charity, the organization you give to must be qualified. Use the IRS Select Check tool to see if a group is qualified.

IRS YouTube Videos:

IRS Podcasts:

IRS Summertime Tax Tip 2014-15 8/6/14

Five Basic Tax Tips about Hobbies

Millions of people enjoy hobbies that are also a source of income. Some examples include stamp and coin collecting, craft making, and horsemanship. You must report on your tax return the income you earn from a hobby. The rules for how you report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions you can claim for a hobby. Here are five tax tips you should know about hobbies:

1. Is it a Business or a Hobby? A key feature of a business is that you do it to make a profit. You often engage in a hobby for sport or recreation, not to make a profit. You should consider nine factors when you determine whether your activity is a hobby.

  1. Whether you carry on the activity in a businesslike manner.
  2. Whether the time and effort you put into the activity indicate you intend to make it profitable.
  3. Whether you depend on income from the activity for your livelihood.
  4. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
  5. Whether you change your methods of operation in an attempt to improve profitability.
  6. Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business.
  7. Whether you were successful in making a profit in similar activities in the past.
  8. Whether the activity makes a profit in some years, and how much profit it makes.
  9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

Make sure to base your determination on all the facts and circumstances of your situation. For more about “not-for-profit” rules see Publication 535, Business Expenses.

2. Allowable Hobby Deductions. Within certain limits, you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.

3. Limits on Hobby Expenses. Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.

4. How to Deduct Hobby Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into three types of deductions, and special rules apply to each type. See of Publication 535 for the rules about how you claim them on Schedule A, Itemized Deductions.

5. Use IRS Free File. Hobby rules can be complex and IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 15. If you make $58,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the IRS.gov website.

For more on these rules see Publication 535. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

IRS YouTube video of new, shorter application for tax-exempt status 7/24/14

The IRS posed a video about the new, shorter application form designed to help small charities apply for 501(c)(3) tax-exempt status more easily.

New 1023-EZ Form Makes Applying to be Tax-Exempt Easier; Most Charities Qualify 7/1/14

Organizations with $50,000 or less of annual gross receipts and $250,000 or less of assets are eligible. See news release for details. The new Form 1023-EZ, available today on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. The new 1023-EZ form must be filed online at www.pay.gov, with a $400 user fee. The instructions include an eligibility checklist that organizations must complete before filing the form.

Revenue Procedure 2014-40 procedures for using Form 1023-EZ 7/1/14

Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. This revenue procedure is generally available for certain U.S. organizations with assets of $250,000 or less and annual gross receipts of $50,000 or less.

IRS releases draft of easier to use Form 1023-EZ for charities seeking tax-exempt status 6/16/14

The draft Form 1023-EZ, “Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” announced in the Federal Register March 31, is a shorter and less burdensome version of the Form 1023. Most small exempt organizations will be eligible to use the Form 1023 EZ. The IRS expects the Form 1023-EZ to be in use by eligible organizations this summer.

IRS Updates Allowable Living Expense Standards for 2014 6/16/14

Use the Allowable Living Expense Standards to reduce subjectivity in determining what a taxpayer may claim as basic living expenses necessary to avoid undue hardship when the taxpayer must delay full payment of a delinquent tax. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. More information on the ALE standards and the collection process is available at Collection Financial Standards and Collection Procedures for Taxpayers Filing or Paying Late.

Individuals can pay their taxes on-line from their bank account with IRS Direct Pay 5/23/14

IR-2014-67, May 22, 2014

Washington — The Internal Revenue Service announced the successful start of its new web-based system — IRS Direct Pay — on IRS.gov, which lets taxpayers pay their tax bills or make estimated tax payments directly from checking or savings accounts without any fees or pre-registration.

“IRS Direct Pay reflects our latest effort to add more online tools to provide additional service options to help taxpayers,” said IRS Commissioner John Koskinen. “IRS Direct Pay simplifies the payment process, and taxpayers can make a payment from the convenience of a home computer.”

To date, more than 150,000 taxpayers have paid more than $340 million in taxes through the new IRS Direct Pay system. With IRS Direct Pay, taxpayers receive instant confirmation that the payment has been submitted, and the system is available 24 hours a day, 7 days a week. Bank account information is not retained in IRS systems after payments are made.

From the “Pay Your Tax Bill” icon at the top of the IRS home page, taxpayers can access IRS Direct Pay, which walks the taxpayer through five simple steps. The steps include providing your tax information, verifying your identity, entering your payment information, reviewing and electronically signing and recording your online confirmation.

IRS Direct Pay offers 30-day advance payment scheduling, payment rescheduling or cancellations, and a payment status search. Future plans include an option for e-mailed payment confirmation, a Spanish version and one-time registration with a login and password to allow quick access on return visits.

Notes:

Use this secure service to pay your tax bill or make an estimated tax payment directly from your checking or savings account at no cost to you. You’ll receive instant confirmation that your payment has been submitted. Bank account information is not retained in IRS systems after payments are made.

You must have a valid Social Security Number (SSN) to use this application. This application cannot accommodate Individual Taxpayer Identification Numbers (ITINs).

New IRS Procedure Expands Relief for Innocent Spouses in Abuse Cases 4/28/14

New Rev. Proc. 2013-34, 2013-43 IRB 397, gives greater deference to abuse than Rev. Proc. 2003-61, and recognizes abuse can be relevant to analysing other factors, and can negate the presence of certain factors.

Actual Knowledge

Actual knowledge of the item giving rise to an understatement or deficiency will no longer be weighed more heavily than other factors.

If the nonrequesting spouse:

  • abused the requesting spouse or
  • maintained control over household finances by restricting the requesting spouse’s access to financial information,

and because of the abuse or financial control, the requesting spouse was not able to challenge the treatment of any items on the joint return for fear of the nonrequesting spouse’s retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse knew or had reason to know of the items giving rise to the understatement or deficiency.

Expectation tax on return will be paid

A requesting spouse may be presumed to have reasonably expected that the nonrequesting spouse would pay the liability if a request for an installment agreement to pay the tax was filed by the later of 90 days after the due date for payment of the tax, or 90 days after the return was filed.

Abuse

if the nonrequesting spouse:

  • abused the requesting spouse or
  • maintained control over the household finances by restricting the requesting spouse’s access to financial information,

and because of the abuse or financial control:

  • the requesting spouse was not able to question the payment of the taxes reported as due on the return or
  • challenge the nonrequesting spouse’s assurance regarding payment of the taxes for fear of the nonrequesting spouse’s retaliation,

then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse knew or had reason to know that the nonrequesting spouse would not pay the tax liability.

Significant benefit

Any significant benefit a requesting spouse may have received from the unpaid tax or understatement will not weigh against relief (will be neutral) if the nonrequesting spouse:

  • abused the requesting spouse or
  • maintained financial control and made the decisions regarding living a more lavish lifestyle,

This factor will weigh in favor of relief if only the nonrequesting spouse significantly benefitted from the unpaid tax or understatement, and the requesting spouse:

  • had little or no benefit, or
  • the nonrequesting spouse enjoyed the benefit to the requesting spouse’s detriment,

This factor is neutral if the amount of unpaid tax or understatement of tax was small such that neither spouse received a significant benefit.

Requesting spouse’s own items

Although a spouse usually cannot ask for relief from the mishandling of one of that spouse’s own tax items, the innocent spouse still may be granted relief if the other spouse controlled the household finances.

Subsequence compliance

A requesting spouse’s subsequent compliance with all Federal income tax laws is a factor that may weigh in favor of relief, instead of always being neutral.

Refunds

This revenue procedure eliminates the rule that limited refunds in cases involving deficiencies to payments made by the requesting spouse pursuant to an installment agreement.

Why the IRS wants to be your Facebook friend 4/16/14

The IRS is reportedly using robots to scope out public social media accounts to catch potential tax dodgers. [engadget.com]

IRS issues new Offer in Compromise form 3/10/14

The IRS has a new Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise dated January 2014. The OIC user fee has increased from $150 to $186 in January 2014. The IRS will return applications submitted on older versions of the form with the old user fee.

Taxpayers can get IRS transcripts the same day 2/10/14

The IRS now allows taxpayers to get a record of their past taxes, also referred to as transcripts. Options include: (1) Tax Return (not a copy), (2) Tax Account, (3) Record of Account (filing date, tax, penalties and interest assessed, payments, etc.), (4) Wage and Income transcripts (W-2 and forms 1099), or (5) a Verification of Nonfiling Letter. You can download and print transcripts immediately over the internet, or receive them in 5 to 10 days by mail.

Tax Return transcripts show most line items from your tax return (Form 1040, 1040A or 1040EZ) as originally filed, including any accompanying forms and schedules, but does not reflect any changes (amended returns) that you, your representative or the IRS made after you filed your return.

IRS transcripts are often used to validate income and tax filing status for mortgage applications, student and small business loan applications, and during tax preparation. You can download and print your transcript immediately, or request the transcript be mailed to your address on record. www.irs.gov/Individuals/Get-Transcript

New IRS “get transcript” service 1/16/14

Early in 2014, the IRS will add a new online request option called “Get Transcript” on IRS.gov will allow individual taxpayers with an SSN to instantly view and print a copy of their tax transcripts. With Get Transcript, taxpayers will save both time and effort. When the new service is available, transcript requests will generally be referred to the online tool. Taxpayers will be able to use the tool to authenticate, view and print copies of their transcript in one session. Taxpayers will still also be able to request that a transcript be mailed to their address of record by using the existing online tool or sending in Form 4506T. A specific date when Get Transcript will be available will be announced early in 2014.

The tool will be available for five types of transcripts: tax account, tax return, record of account, wage and income, and verification of non-filing.

The Updated IRS Interactive Form 1023 (i1023) 1/10/14

features pop-up information boxes for most lines of the form. These boxes contain explanations and links to related information on IRS.gov and StayExempt.irs.gov, EO’s educational website. Once completed, applicants will print and mail the form and its attachments, just like the standard Form 1023.

Reinstating revoked tax-exempt status 1/5/14

Revenue Procedure 2014-11 provides procedures for reinstating the tax-exempt status of organizations that have had their tax-exempt status automatically revoked under section 6033(j) of the Internal Revenue Code for failure to file required annual returns or notices for three consecutive years.