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Category Archives: New Rulings

IRS To Accept Returns Claiming Education Credits by Mid-February

As preparations continue for the Jan. 30 opening of the 2013 filing season for most taxpayers, the Internal Revenue Service announced today that processing of tax returns claiming education credits will begin by the middle of February.

Taxpayers using Form 8863, Education Credits, can begin filing their tax returns after the IRS updates its processing systems. Form 8863 is used to claim two higher education credits — the American Opportunity Tax Credit and the Lifetime Learning Credit.

The IRS emphasized that the delayed start will have no impact on taxpayers claiming other education-related tax benefits, such as the tuition and fees deduction and the student loan interest deduction. People otherwise able to file and claiming these benefits can start filing Jan. 30.

As it does every year, the IRS reviews and tests its systems in advance of the opening of the tax season to protect taxpayers from processing errors and refund delays. The IRS discovered during testing that programming modifications are needed to accurately process Forms 8863. Filers who are otherwise able to file but use the Form 8863 will be able to file by mid-February. No action needs to be taken by the taxpayer or their tax professional. Typically through the mid-February period, about 3 million tax returns include Form 8863, less than a quarter of those filed during the year.

Issue Number: IR-2013-10

The IRS remains on track to open the tax season on Jan. 30 for most taxpayers. The Jan. 30 opening includes people claiming the student loan interest deduction on the Form 1040 series or the higher education tuition or fees on Form 8917, Tuition and Fees Deduction. Forms that will be able to be filed later are listed on IRS.gov.
Updated information will be posted on IRS.gov.

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Posted by on January 31, 2013 in New Rulings, Tax News

 

IRS Loses Lawsuit Challenging Authority to Regulate Tax Preparers

In a stunning blow to the Internal Revenue Service’s efforts to regulate the tax preparation profession, a federal judge struck down the IRS’s licensing requirements for tax preparers on Friday, including testing and continuing education.

Three independent tax preparers—Sabina Loving of Chicago, John Gambino of Hoboken, N.J., and Elmer Kilian of Eagle, Wisc.—joined forces with the Institute for Justice, a libertarian public interest law firm, in filing suit against the IRS in the U.S. District Court for the District of Columbia.

U.S. District Court Judge James E. Boasberg ruled against the IRS and in favor of the tax preparers in enjoining the agency against enforcing its Registered Tax Return Preparer requirements.

“Today’s ruling is a victory for hundreds of thousands of tax preparers across the country and the tens of millions of taxpayers who rely on them to prepare their taxes,” said lead attorney Dan Alban. “This was an unlawful power grab by one of the most powerful federal agencies and thankfully the court stopped the IRS dead in its tracks. The court ruled today that Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power.”

The opinion is available online at http://www.ij.org/images/pdf_folder/economic_liberty/irs_tax_preparers/irs-opinion-1-18-13.pdf. The court enjoined the IRS from enforcing its new licensing scheme for tax preparers. The ruling does not affect CPAs, Enrolled Agents and tax attorneys, who were exempted from the RTRP regime as they are already regulated under Circular 230 requirements.

“Through these regulations, the IRS set itself up as king and sought to license hundreds of thousands of tax preparers without being authorized to so do under the law,” said Institute for Justice senior attorney Scott Bullock. “But as Judge Boasberg noted, under our system of law, ‘statutory text is king.’”

Former IRS Commissioner Doug Shulman made tax preparer regulation a priority, aiming to root out tax preparers who were unqualified, filed fraudulent refund claims and even cheated clients, with the further goal of improving tax compliance. Shulman ended his term last November and is now a guest scholar at the Washington, D.C., think tank, the Brookings Institution. His successor, IRS Acting Commissioner Steven T. Miller will now have to deal with the fallout from the lawsuit.

Boasberg recognized that the IRS recently did a “flip-flop” with regard to its ability to license tax preparers, the Institute for Justice noted, declaring for years it did not have the authority to do so but only recently claiming that it did have that power.

The IRS can appeal the ruling to the U.S. Court of Appeals for the District of Columbia Circuit. The IRS had no immediate comment on the ruling, according to IRS spokesman Dean Patterson.

“They may very well appeal, but the District Court ruled that the IRS is enjoined from enforcing the RTRP licensing regulations,” said Alban. “Assuming the ruling stands, tax preparers no longer are going to need to comply with the IRS licensing requirements. It returns things to the way they were before the IRS passed those regulations in the first place. No longer do you have to get the IRS’s permission to work as a tax return preparer.”

He noted that the IRS’s continuing education requirements only just went into effect on January 1. “The timing on this really couldn’t have been any better,” said Alban. “Tax preparers should be able to prepare tax returns in this 2013 tax season without getting permission from the IRS. Tens of thousands of tax preparers who would have otherwise been put out of business, including two of our clients, can now continue to prepare returns.”

All three prongs of the IRS tax preparer regulation regime were affected by the ruling, including the testing, continuing education and RTRP registration requirements. However, the Preparer Tax Identification Number, or PTIN, which is part of the registration requirements, is not affected by the lawsuit.

“Anything that’s part of the RTRP regulations is struck down by this decision today,” Alban explained. “The PTIN is a separate regulation and it’s done under separate statutory authority. It’s a ‘shall issue’ type of permit. If you pay the fee, if you pay that amount of about $65, you’ll get a PTIN. The IRS was going to make the PTINs conditional on having the RTRP credentials, but now they’re not allowed to do that. It will go back to how it was last year, when you had to get a PTIN, but anyone could get one and you didn’t have to pass an exam or complete any continuing education.”

It is unclear how the IRS will deal with tax preparers who were scheduled to take the competency exam. “I don’t know how the IRS is going to wind things down,” said Alban. “As of the court’s ruling today, those regulations are null and void. Tax preparers don’t have to take that exam and they don’t have to comply with those regulations. The court ruled that these regulations did not have statutory authority.”

Judge Boasberg found that the text of the relevant statute does not support what the IRS claims as its authority to regulate tax preparers.

“Without deciding whether any of these three textual points alone would be dispositive, the Court concludes that together the statutory text and context unambiguously foreclose the IRS’s interpretation of 31 USC Section 330,” the judge wrote, adding, “The IRS also makes a number of nontextual arguments in favor of its interpretation, but none of these can overcome the statute’s unambiguous text here. In the land of statutory interpretation, statutory text is king.”

“They found that the IRS misinterpreted the statute and was basically trying to use it to expand its own authority in ways that the statute didn’t authorize,” said Alban. “On the first page of the opinion, they said that ‘the statute’s text and context unambiguously foreclose the IRS’s interpretation.’”

“With an invalid regulatory regime on the IRS’s side of the scale and a threat to plaintiff’s livelihood on the other, the balance of hardships tips strongly in favor of plaintiffs,” Boasberg wrote later in the ruling.

There was no trial in the case because there were no disputed facts, Alban noted. The ruling came after cross-motions for summary judgment. The lawsuit was originally announced in March (see Tax Preparers Sue IRS over New Requirements). The Institute for Justice filed a motion for summary judgment in September, and the IRS filed a cross-motion for summary judgment in October. “We trialed a couple of reply briefs, and that was it,” said Alban. “It was just in front of the court on the papers to rule on the case.”

The IRS had argued that the statute was unambiguous and could be read expansively to give the agency the authority that it claimed. “They also claimed that they had inherent authority as an agency to regulate anything related to what they do and the court rejected both of those arguments,” said Alban.

On the first page of the opinion, the court said, “Agency action, however, requires statutory authority. The IRS interpreted an 1884 statute as enabling these new regulations. That statute allows the IRS to regulate ‘representatives’ who ‘practice’ before it. Believing that tax-return preparers are not covered under the statute, and thus cannot be regulated, Plaintiffs—three independent tax-return preparers—brought this suit.”

“That was pretty much the basis of its decision,” Alban explained. “An agency can’t act without statutory authority, without Congress giving them authorization to do something.”

If the IRS appeals the ruling, which it is almost certain to do, Alban said the Institute would then argue the case in front of the D.C. Circuit court, and to higher courts if necessary. “If the IRS loses again in front of the D.C. Circuit, we’d be happy to argue it in front of the Supreme Court if they take the case. But all of that is speculative. I have no idea if the IRS is going to appeal the decision on this. We’ll certainly take it as far as it goes. We’re willing to represent the rights of independent tax preparers.”

Washington, D.C. (January 18, 2013)
By Michael Cohn

 
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Posted by on January 20, 2013 in New Rulings, Tax News

 

Foreign Asset Reporting

Reporting of foreign asset ownership may require filing more than one form starting this filing season.

Enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, the Foreign Account Tax Compliance Act (FATCA) is an attempt to minimize tax evasion by United States taxpayers holding investments in offshore accounts. The reporting provisions of FATCA are being phased in over the next few years to require U.S. taxpayers, as well as foreign financial institutions, to report directly to the IRS the ownership interests of certain financial interests.

U.S. Taxpayers Holding Foreign Financial Assets

FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938, Statement of Specified Foreign Financial Assets) that the taxpayers must attach to their annual tax returns. For most taxpayers, the first use of this form will be as part of the 2011 tax return filed during the 2012 tax filing season. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to nondisclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40% Although the IRS anticipates issuing regulations to include domestic entities in the filing requirement, if the entities are formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, as of this date the filing requirement of Form 8938 applies only to individuals.

Form 8938 Does Not Replace FBAR Filing Requirements

The reporting of foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), is required under Title 31. Certain foreign financial accounts are reported on both Form 8938 and FBAR. However, the information required by the forms is not identical in all cases. Different rules, key definitions, and reporting requirements apply to Form 8938 and FBAR reporting. Because of these differences, taxpayers may be required to report certain foreign financial accounts on one but not both forms.

Because they serve different law enforcement purposes, Form 8938 and the FBAR require different categories of persons to file, have different filing thresholds for Form 8938 (i.e., minimum $50,000 threshold) and FBAR reporting (i.e., $10,000 reporting threshold), and require different assets, as well as accompanying information, to be reported on each form.

For FBAR purposes, a filer (defined broadly as a U.S. person, so it applies to individuals as well as to all types of entities) must report a financial account if the filer had a financial interest or signature authority in the financial account during the previous calendar year. Financial interest for FBAR purposes is based on whether the person is the owner of record for, or holds legal title to, the financial account. Signature authority is the authority of a person to dispose of assets held in a financial account.

For purposes of filing Form 8938, an individual has an interest in the financial account if potential tax attributes or transactions related to the account would be reported on the individual’s tax return. The concept of signature authority does not apply for purposes of Form 8938 requirements.

In certain instances, FBAR reporting is required by persons who do not have a direct financial interest in a foreign financial account. For example, an individual is required to report the foreign financial account of his or her wholly owned domestic or foreign corporation. If a domestic corporation has a direct or indirect financial interest in the foreign account, it will also be required to report the account, as would any individuals, such as employees, who have signature authority over the financial account. For purposes of Form 8938, if a foreign financial account is reported by a specific individual, the foreign account will not also be reported by a specified domestic entity, and vice versa.

The due date for filing the FBAR with the Treasury Department in Detroit is June 30 for financial accounts for which the filer had a financial interest or signature authority during the previous calendar year. Form 8938 is due with the taxpayer’s annual income tax return and filed with the applicable IRS service center.

Reporting by Foreign Financial Institutions

FATCA will also require foreign financial institutions (FFIs) to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The timeline for implementing these new reporting requirements is contained in Notice 2011-53, which requires an FFI to enter into a special agreement with the IRS by June 30, 2013. Under this agreement a “participating” FFI will be required to perform the following:

(1) Undertake certain identification and due-diligence procedures with respect to its account holders;

(2) Report annually to the IRS on its account holders who are U.S. persons or foreign entities with substantial U.S. ownership; and

(3) Withhold and remit to the IRS 30% of any payments of U.S.-source income, as well as gross proceeds from the sale of securities that generate U.S.-source income, made to (a) nonparticipating FFIs, (b) individual account holders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity account holders failing to provide sufficient information about the identity of its substantial U.S. owners.

by Mary F. Bernard, CPA

 
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Posted by on August 23, 2012 in New Rulings, Tax News

 

2012 Could See More Bank Fees

As we head into 2012, it’s out with the old, in with the new. And that goes for bank fees, too. After Bank of America’s $5 a month debit card fee blew up in the bank’s face this fall, you would think that nobody would take a chance on adding additional bank fees. But that’s not the case, according to Huffington Post.

Not only are bigger minimums in checking accounts likely to be required, but Huffington Post says that overdraft fees could go up from an average of $35 to an eye-popping $40. In addition, it is expected that basic monthly checking account fees could increase from a $12 to a $15 monthly average.

The Dodd-Frank Act, of course, is the bank’s excuse for raising the rates. (Wonder if Verizon will use Dodd-Frank as the phone company’s excuse for imposing a $2 monthly fee for people to pay their bills online!)

And given that consumers are fed up with fees in general, particularly by banks, they may walk with their feet and find other banks. For example, there are plenty of options, including community banks, credit unions, and online banking options that customers can check into, where they won’t be hit with such exorbitant charges.

Of course, some banks complain that they’re not making much money these days, which is why they need to raise the fees. Another option banks have been pushing is bundling, where you have checking, savings, and credit cards with them. “It is a way to create more of an ongoing banking relationship,” Doug Miller, analyst for Corporate Insight, notes. “They want all your basic deposit accounts.”

And bundling also has the added benefit of making it more complicated to quit the bank in a huff over yet another ridiculous fee. Sneaky!

Lisa Swan is a Feature Writer for the Compliance Exchange. She is also a columnist for The Faster Times and a blogger for Subway Squawkers. Her work has also appeared in the New York Daily News, Yahoo Sports, Huffington Post and the books Graphical Player 2011 and Graphical Player 2010.

 
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Posted by on December 31, 2011 in New Rulings