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Category Archives: Tax News

Some refunds delayed as IRS battle against fraud intensifies

The Internal Revenue Service’s battle against fraud and identity theft is intensifying as the tax filing season opens, and some of the neediest taxpayers are getting caught in the middle.

The agency is barred from issuing refunds before Feb. 15 on any returns claiming the Earned Income Tax Credit or the Additional Child Tax Credit. Congress mandated the delay to give the IRS more time to review returns to try to catch fraudulent ones before refunds are paid out.

In reality, taxpayers taking these credits probably will have to wait even longer to get their refunds — until the week of Feb. 27, the IRS says, because of weekends and the President’s Day holiday.

Dave DuVal, vice president of customer advocacy at TaxAudit.com, said the impact on these taxpayers could be tremendous. “They live paycheck to paycheck, and this is money they’re counting on,” he said.

Still, the attempt to reduce fraud “is a positive thing overall,” said Greg Rosica, tax partner at Ernst & Young.

The IRS will begin accepting returns on Jan. 23, and tax experts recommend that Americans continue to file their returns early, even with the refund delays.

“For this tax season, it’s more important than ever for taxpayers to plan ahead,” IRS Commissioner John Koskinen said in a statement.

This year’s filing deadline is Tuesday April 18, since the traditional April 15 date falls on a Saturday, and D.C. Emancipation Day is observed on April 17.

By Carole Feldman, The Associated Press

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Posted by on January 30, 2017 in Tax News

 

IRS and States Swamped by Last-Minute Tax Filings

The Internal Revenue Service is struggling to respond to an onslaught of tax returns filed on April 15, which is delaying acknowledgements to both federal and state returns.

Due to the significant increase in federal and state submissions transmitted on April 15th, the length of time to create federal acknowledgments and make them available for retrieval is taking longer than expected,” the IRS said in an email to tax professionals Tuesday evening. “The IRS is closely monitoring the acknowledgment rates and is working to close the gap as a top priority.”

The IRS added that the majority of state tax returns are linked to the acceptance of the federal return, so the length of time it takes to make the state return available for state retrieval has also increased. It asked tax professionals not to re-transmit any tax returns if they have not yet received an acknowledgment.

“As the federal backlog decreases, the state submissions will then be ready for state pickup,” said the IRS. “In the interim, please do not retransmit any submissions awaiting acknowledgment if the IRS has issued a receipt. We thank you again for your patience and support.”

The IRS is working its way through the backlog. Anecdotally, Intuit sent back an acknowledgment Tuesday afternoon that the IRS had accepted a tax return that had been filed close to midnight on April 15 with TurboTax.

Washington, D.C. (April 17, 2013)
By Michael Cohn

 
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Posted by on April 22, 2013 in Tax News

 

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

 

IRS Proposes Regs on Additional Medicare Surtax

The Internal Revenue Service has issued proposed regulations on the 0.9 percent Additional Medicare Tax for upper-income taxpayers scheduled to take effect next year as a result of the Affordable Care Act.

The proposed regulations in REG-130074-11 provide guidance for employers and individuals relating to the implementation of Additional Medicare Tax. The guidance also contains proposed regulations relating to the requirement to file a return reporting Additional Medicare Tax, the employer process for making adjustments of underpayments and overpayments of Additional Medicare Tax, and the employer and employee processes for filing a claim for refund for an overpayment of Additional Medicare Tax. In addition, the document provides notice of a public hearing on the proposed rules.

In addition, the IRS posted a FAQ on the Net Investment Income Tax of 3.8 percent on the net investment income of individuals, estates and trusts above a certain threshold. It too takes effect next year as a result of the Affordable Care Act.

The IRS noted that calculating wages for purposes of withholding Additional Medicare Tax would be no different than calculating wages for FICA generally. Thus, for example, if an employee has amounts deferred under a nonqualified deferred compensation plan and the nonqualified deferred compensation is taken into account as wages for FICA tax purposes under the special timing rule, the NQDC would likewise be taken into account under the special timing rule for purposes of determining an employer’s obligation to withhold Additional Medicare Tax.

Similarly, when an employee is concurrently employed by related corporations and one of the corporations disburses wages for services performed for each of the employers and the arrangement otherwise satisfies the common paymaster provisions, the liability for FICA tax with respect to the wages disbursed by the common paymaster is computed as if there was a single employer. In this case, the obligation to withhold Additional Medicare Tax on wages in excess of $200,000 disbursed by the common paymaster would also be determined as if there was a single employer.

The proposed regulations provide rules for the withholding, computation, reporting and payment of Additional Medicare Tax on wages, self-employment income and Railroad Retirement Tax Act compensation. The proposed regulations also provide rules for when and how employers may make an interest-free adjustment to correct an overpayment or an underpayment of Additional Medicare Tax and how employers and employees may claim refunds for overpayments of Additional Medicare Tax. These procedural rules for interest-free adjustments and claims for refund track the existing rules that apply to income tax withholding rather than the rules that apply to FICA tax. The regulations take this approach because Additional Medicare Tax, like income tax withholding, does not include an employer portion, and the ultimate liability is reconciled on the individual employee’s income tax return.

The proposed regulations also update the rates of tax for the Social Security and Medicare tax on employees, and add a paragraph describing the rate of Additional Medicare Tax. The proposed regulations provide an updated example illustrating that the Social Security and Medicare rates applicable to the calendar year in which wages are received apply to compute the tax liability.

The proposed regulations describe the extent to which an employer is required to withhold Additional Medicare Tax. The proposed regulations provide that an employer must withhold Additional Medicare Tax from an employee’s wages only to the extent that the employee receives wages from the employer in excess of $200,000 in a calendar year. In determining whether wages exceed $200,000, an employer does not take into account the employee’s filing status or other wages or compensation which may impact the employee’s liability for the tax. An employee may not request that the employer deduct and withhold Additional Medicare Tax on wages of $200,000 or less.

However, an employee who anticipates liability for Additional Medicare Tax may request that the employer deduct and withhold an additional amount of income tax withholding under Section 31.3402(i)-2 on Form W-4. This additional ITW can apply against taxes shown on Form 1040, including any Additional Medicare Tax liability. An employee might request that the employer deduct and withhold an additional amount of ITW on wages that are not in excess of $200,000 if, for example, the employee is married and files a joint return, and anticipates liability for Additional Medicare Tax because the combined wages of the employee and the employee’s spouse will exceed $250,000.

The proposed regulations include examples illustrating the extent of the employer’s obligation to withhold Additional Medicare Tax.

Further, the proposed regulations under section 3102(f) provide that to the extent Additional Medicare Tax is not withheld by the employer, the employee is liable for the tax. The proposed regulations also provide that the IRS will not collect from an employer the amount of Additional Medicare Tax it failed to withhold from wages paid to an employee if the employee subsequently pays the Additional Medicare Tax.

However, the proposed regulations also specify that the employer would remain subject to any applicable penalties or additions to tax for failure to withhold Additional Medicare Tax as required.

Washington, D.C. (December 4, 2012)
By Michael Cohn

 
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Posted by on December 6, 2012 in Tax News

 

The New Upcoming Tax Rates

As the saying goes, nothing is certain but death and taxes. we’d like to clarify that bit of common wisdom. You see, as certain as the payment of taxes may be, what isn’t certain is how much individual Americans will be paying. If the legislature and the president can figure out a way to work together, it is likely that at least those Americans making over $200,000 (or married taxpayers making $250,000) will see their top marginal rates go back up to the pre-Bush Tax Cuts level of 39.6%.

So what does that mean?

As we explained in January, the current top marginal rate for 2012 is 35% on every dollar of taxable ordinary income earned by an individual or married couple over $388,350.00. President Obama has proposed increasing that rate to 39.6% for every dollar of taxable earned income earned over $390,051. He has also proposed raising the second-highest marginal rate from 33% to 36%, so that every dollar of taxable ordinary income earned between $193,501 ($241,901 for married couples) and $390,051 will be subject to 3% additional taxes. The result, if President Obama gets his way, is that many middle-class families will be paying higher taxes in 2013.

And wait there’s more in the package

On top of these proposed increases in marginal rates, additional taxes are set to be imposed on middle and upper-income families by the Affordable Care Act (AKA Obamacare.) Individuals will also pay an additional 0.9% in hospital insurance payroll taxes on wages over $200,000.

And I haven’t even discussed changes in the dividend and capital gains tax rates yet. The preference for qualified dividends is set to expire in 2013. That means that the qualified dividend will disappear without government intervention. And even if the government can reach a deal, it is likely that President Obama will insist that dividend taxes go up as part of any grand bargain. This goes along with his desire to impose the so-called “Buffet Rule.” Top rates on dividends would increase to 39.6% under Obama’s proposals during the presidential campaign. Right now, qualified dividends are taxed at similar rates as long-term capital gains, with a top rate pegged at 15%. No matter where the top rate on dividends ends up, Obamacare tacks on an additional 3.8% to all dividends and capital gains for certain taxpayers. The result is staggering. If you were paying 15% on dividends in 2012, you could be paying almost three times as much (or 43.6%) on those same exact dividends in 2013. Capital gains rates are also set to increase. In 2012, the top rate on Long-Term Capital Gains was 15%. The top rate is set to increase to 20%, and it is also subject to the 3.8% Medicare contribution tax discussed above.

The Republican-led House wants to see the Bush Tax Cuts extended for all Americans in 2013. If the House gets its way, people will be paying roughly the same amount in taxes that they paid in 2012. However, this is unlikely because of what will happen in the case of a political stalemate on this issue. It’s likely that President Obama will get what he has been asking for the entire campaign season. “Wealthy” (but really middle class) Americans will pay “a little bit” more and that’s because if a deal can’t be struck, everyone loses.

To see why, let’s imagine a deal can’t be struck. What happens then? In that case, the Bush tax cuts will expire for everyone. That’s right, everyone’s taxes will go up. Currently, income that falls within the lowest tax bracket is taxed at a rate of 10%. That rate will increase automatically to 15% if our government fails to act. The other rates will changes as follows: 25% to 28%, 28% to 31%, 33% to 36%, and 35% to 39.6%. One result of this scenario is that less Americans will be subject to the Alternative Minimum Tax. Instead of 36% of taxpayers being exposed to the AMT under current tax rates, 20% will be exposed to the AMT if congress does nothing. That’s because they will be paying more in taxes under the progressive tax structure.

Worse news. It gets worse. For everyone.

Right now, anyone receiving W-2 income is receiving a 2% break on their portion of payroll taxes (as are those individuals required to pay Self-Employment taxes), and that break will disappear if congress fails to act (and is likely going away even if a deal is struck.) The bottom line is that we all should be prepared to deal with an increase in our 2013 income tax rates. There isn’t much that can be done to avoid whatever the government tosses at our feet. Taxes are certain. If you thought the coming changes in income tax rates is scary, then you’ll want to take a look at our other article about death taxes, gift taxes, and how to plan for the coming changes in 2013. (link coming) We will continue to follow developments in the changes to tax rates and tax brackets as our government begins the grueling process of avoiding taxmaggedon and other parts of the looming fiscal cliff, so be sure to check for updates at: http://www.irsmedic.com.

 
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Posted by on November 15, 2012 in Tax News

 

IRS Modifies FATCA Timelines

The Internal Revenue Service has delayed the timelines for withholding agents and foreign banks to complete the due diligence requirements of the Foreign Account Tax Compliance Act.

FATCA, which was included as part of the HIRE Act of 2010, requires foreign financial institutions, including hedge funds, to report on the holdings of U.S. taxpayers to the IRS or face stiff penalties. The law has attracted considerable controversy and criticism from foreign banks, dual citizens living abroad and expatriates. The IRS and the Treasury Department have needed to postpone some of the requirements and modify its proposed regulations in the past (see FATCA Requirements a Work in Progress for IRS).

The IRS said Wednesday that institutions will have until Jan. 1, 2017 to start withholding taxes from U.S. taxpayers’ investment gains and until Jan. 1, 2014, to put in place the reporting requirements mandated by FATCA.

Announcement 2012-42 outlines certain timelines for withholding agents and foreign financial institutions to complete due diligence and other requirements, along with additional guidance concerning gross proceeds withholding and the status of certain instruments as grandfathered obligations under Sections 1471 through 1474 of the Tax Code. The Treasury Department and the IRS intend to incorporate the rules described in this announcement in final regulations.

On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, or HIRE Act, added sections 1471 through 1474 (chapter 4) to Subtitle A of the Tax Code. These provisions are commonly referred to as the Foreign Account Tax Compliance Act, or FATCA. Chapter 4 requires withholding agents to withhold 30 percent of certain payments to an FFI unless the FFI has entered into an agreement with the IRS to, among other things, report certain information with respect to U.S. accounts. Chapter 4 also imposes on withholding agents certain withholding, documentation, and reporting requirements with respect to certain payments made to certain other foreign entities.

In February, the Treasury Department and the IRS published proposed regulations under chapter 4 in the Federal Register. In May, the IRS held a public hearing on the proposed regulations. On July 26, 2012, the Treasury Department released a model for bilateral agreements with other jurisdictions (in both reciprocal and nonreciprocal versions) under which FFIs would satisfy their chapter 4 requirements by reporting information about U.S. accounts to their respective tax authorities, followed by the automatic exchange of that information on a government-to-government basis with the United States. The model agreement outlines time frames for FFIs in partner jurisdictions to complete the necessary due diligence to identify U.S. accounts. On June 21, 2012, the Treasury Department announced its intent to develop a second model agreement, under which financial institutions in the partner jurisdiction would report specified information directly to the IRS in a manner consistent with the FATCA regulations, supplemented by government-to-government exchange of information on request. The Treasury Department intends to conclude bilateral agreements based on the model agreements.

The Treasury Department and the IRS have received comments identifying certain practical issues in implementing the chapter 4 rules within the time frames prescribed in the proposed regulations. In particular, comments have noted that the chapter 4 status of entity account holders may change during 2013 as FFIs enter into FFI agreements with the IRS, with the result that withholding agents that put in place new account opening procedures by Jan. 1, 2013, could be required to undertake duplicative efforts to verify an FFI’s status as a participating, deemed-compliant, or nonparticipating FFI. Furthermore, comments have indicated that global financial institutions intend to implement uniform due diligence procedures for all affiliates. Accordingly, these comments have suggested aligning the timelines for due diligence for U.S. withholding agents, FFIs in countries with Intergovernmental Agreements, and FFIs in countries without Intergovernmental Agreements in order to significantly reduce administrative burden.

In addition, the Treasury Department and the IRS said they have received comments requesting that obligations that may give rise to foreign pass-through payments, but not to withholdable payments, be treated as grandfathered obligations if such obligations are executed prior to the issuance of final regulations that define foreign pass-through payments. Comments also have requested that an obligation to make payments with respect to collateral posted in connection with a grandfathered derivative transaction be treated as a grandfathered obligation.

Finally, comments have expressed concern over the treatment of existing financial transactions that may begin to give rise to withholdable payments for purposes of chapter 4 due to the promulgation of regulations under Section 871(m) treating certain payments on notional principal contracts and certain other financial instruments as U.S. source dividends.

In consideration of these comments, the Treasury Department and the IRS said they intend to issue regulations that modify the rules set forth in the proposed regulations. Withholding agents, including participating FFIs and registered-deemed compliant FFIs, generally will be required to implement new account opening procedures by Jan. 1, 2014.

 
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Posted by on October 28, 2012 in Tax News