Taxpayer First Act of 2019

On July 1, 2019, the President signed the Taxpayer First Act of 2019 (the Act). The Act changes the management and oversight of IRS with the aim of improving customer service and the process for assisting taxpayers with appeals; modifies IRS’s organization; and provides some new safeguards to taxpayers in their interactions with IRS. Key provisions of the law are listed below.

INDEPENDENT APPEALS PROCESS

Establishment of IRS Independent Office of Appeals

Under pre-Act law, IRS sends taxpayers a report and/or letter that explains proposed adjustments or proposed or taken collection action. The correspondence tells taxpayers of their right to request a conference with the IRS Office of Appeals (Appeals) or a Settlement Officer.

Although the Code makes frequent reference to Appeals, and Section 8 of the Internal Revenue Manual sets out IRS internal rules with respect to Appeals and the appeal process, under pre-Act law, the Code did not set out rules for Appeals.

New law.  The Act codifies the requirements of an independent administrative appeals function at IRS. In so doing, it renames the IRS Office of Appeals as the IRS Independent Office of Appeals (Independent Appeals). (Code Sec. 7803(e) as amended Act Sec. 1001)

Independent Appeals is intended to continue to resolve tax controversies and review administrative decisions of IRS in a fair and impartial manner. (Code Sec. 7803(e)(3)), as amended by Act Sec. 1001(a)) Resolution of tax controversies in this manner is generally available to all taxpayers, subject to reasonable exceptions that IRS may provide. (Code Sec. 7803(e)(4)))

The new rules require that the administrative case file referred to Independent Appeals be available to certain individual and small business taxpayers. Eligible taxpayers are those that, for the tax year to which the dispute relates, are: (1) individuals with adjusted gross incomes not exceeding $400,000, and (2) entities with gross receipts not exceeding $5 million for the tax year. (Code Sec. 7803(e)(7))

In cases in which IRS has issued a notice of deficiency to a taxpayer, IRS must prescribe notice and protest procedures for taxpayers whose request for Independent Appeals consideration is denied. (Code Sec. 7803(e)(5))

The Independent Appeals rules are generally effective upon the date of enactment, except with regard to the change allowing taxpayer access to case files, which is effective for cases in which the conference occurs more than one year after the date of enactment. (Act Sec. 1001(e))

IMPROVED IRS SERVICE

Comprehensive customer service strategy

New law. The Act requires IRS to develop a comprehensive strategy for customer service, to submit such plan to Congress not later than the date which is one year after the date of enactment, and to make the plan and training materials available to the public within two years of that date.

The strategy will include, among other things, a plan to determine appropriate levels of online services, telephone call back services, and training of employees providing customer services, based on best practices of businesses and designed to meet reasonable customer expectations. (Act Sec. 1101)

Low-income exceptions regarding offers-in-compromise

Under pre-Act law, IRS is authorized to enter into an offer-in-compromise (OIC) agreement with a taxpayer to settle a tax debt for less than the taxpayer's actual liability. Generally, when proposing an OIC to IRS, the taxpayer must pay an application fee and provide an initial non-refundable lump sum payment. IRS has the authority to waive these payments. Under this authority, IRS does not require taxpayers certified as low-income, defined as those with incomes below 250% of the Federal poverty level, to include the application fee and initial payment. 

New law. With respect to offers-in-compromise submitted after the date of enactment, the Act codifies the current low-income taxpayer exception for the user fee or upfront partial payment. The Act also provides that the determination of low income is based on the individual's adjusted gross income as determined for the most recent tax year for which such information is available. (Code Sec. 7122(c)(3) as amended Act Sec. 1103)

IRS ENFORCEMENT

Structuring transactions and IRS seizures

The Bank Secrecy Act (BSA) mandates reporting and recordkeeping requirements, including reporting currency transactions exceeding $10,000, to assist Federal law enforcement and regulatory agencies in the detection, monitoring, and tracing of certain monetary transactions. To circumvent these reporting requirements, some individuals structure cash transactions to fall below the $10,000 reporting threshold (also known as “structuring”). Structuring can be used to conceal illegal cash-generating activities or income earned legally in order to evade the payment of taxes. Structuring (or attempts to structure) for the purpose of evading the reporting and record-keeping requirements is subject to both civil and criminal penalties.

New law.  Effective on the date of enactment, the Act provides that, in the case of a suspected structuring violation, IRS may only pursue seizure or forfeiture of assets if either the property to be seized was derived from an illegal source or the transactions were structured for the purpose of concealing a violation of a criminal law or reg other than rules against structuring. 

The Act also establishes post-seizure notice and review procedures for IRS seizures based on suspected structuring violations. (31 USC 5317(c)(2), as amended Act Sec. 1201)

Also, effective for interest received on or after the date of enactment, the Act amends the Code to exclude from gross income any interest received from the Federal government in connection with an action to recover property seized by IRS pursuant to a claimed violation of the structuring provisions of the BSA. (Code Sec. 139H, as added by Act Sec. 1202)

Innocent spouse relief

In general, married couples who file tax returns jointly are both responsible for the entire tax liability that should be reported on the return. However, under certain circumstances, the tax code provides relief from joint liability for certain innocent spouses. (Code Sec. 6015) One such type of relief is equitable relief; this relief is granted only if, taking into account all facts and circumstances, it is inequitable to hold the individual liable for the unpaid portion of tax or for a deficiency with respect to the joint return.

New law. The Act provides that the standard of review for innocent spouse relief by the Tax Court is to be conducted on a de novo basis, meaning that the Tax Court would take a fresh look at the case without taking previous decisions into account. The review would be based on the administrative record and any newly discovered or previously unavailable evidence. (Code Sec. 6015(e)(7), as amended Act Sec. 1203(a)(1))

The Act also allows taxpayers to request equitable relief with respect to any unpaid liability before the expiration of the collection period or, if paid, before the expiration of the applicable limitations period for claiming a refund or credit. (Code Sec. 6015(f), as amended by Act Sec. 1203(a)(2))

The new provisions are effective for petitions or requests filed or pending on or after the date of enactment. (Act Sec. 1203(b))

John Doe summonses

IRS may issue a third-party summons that doesn't identify the taxpayer (a "John Doe summons"), but only if there has been a court proceeding in which IRS proves that it meets certain requirements. (Code Sec. 7609(f))

New law.  Effective for summonses served after the date that is 45 days after the date of enactment, the Act prevents IRS from issuing a John Doe summons unless the information sought to be obtained is narrowly tailored and pertains to the failure (or potential failure) of the person or group or class of persons referred to in the statute to comply with one or more provisions of the Code which have been identified. (Code Sec. 7609(f), as amended Act Sec. 1204(a))

 Taxes collected by private collection agencies

The Code permits IRS to establish a program that refers certain inactive tax receivable accounts to private collection agencies. (Code Sec. 6306(a))

The Code defines the term "inactive tax receivables." One type of inactive tax receivable is a receivable for which more than one third of the applicable limitations period has lapsed and no IRS employee has been assigned to collect the receivable. (Code Sec. 6306(c)(2)(A))

Certain tax receivables are not eligible for collection by private collection agencies. (Code Sec. 6306(d))

New law. Effective with respect to tax receivables identified by IRS after Dec. 31, 2020:

...The Act makes the following additional tax receivables of individual taxpayers ineligible for collection under qualified tax collection contracts—receivables with respect to a taxpayer: (1) substantially all of whose income comes from supplemental security income benefits or disability insurance benefit payments, or (2) whose adjusted gross income does not exceed 200% of the applicable poverty level. (Code Sec. 6306(d)(3), as amended by Act Sec. 1205(a))

...The Act also modifies the definition of inactive tax receivable by replacing the condition that more than 1/3 of the applicable limitations period has lapsed with the requirement that "more than two years has passed since assessment." (Code Sec. 6306(c)(2)(A)(ii), as amended by Act Sec. 1205(b))

And, effective for contracts with private collectors that are entered into after the date of enactment, the Act also substitutes "seven years" for "five years" in a rule that currently allows private debt collectors to offer a taxpayer an installment agreement providing for payment over a period as long as five years. (Code Sec. 6306(b)(1)(B), as amended by Act Sec. 1205(c))

Notice to taxpayer of IRS contact with third party

IRS may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of the taxpayer without providing reasonable notice in advance to the taxpayer that IRS may contact persons other than the taxpayer. (Code Sec. 7602(c)(1))

New law.  Effective for notices provided, and contacts of persons made, more than 45 days after the date of enactment, the Act replaces the above requirement with a requirement that the taxpayer be provided with notice at least 45 days before the beginning of the period of contact. The period of contact may not be greater than one year. The Act requires that notice be provided only if there is a present intent at the time such notice is given for IRS to make such contacts. (Code Sec. 7602(c)(1), as amended Act Sec. 1206)

Designated summonses

A designated summons is an administrative summons that is issued to a large corporation (or person to whom the corporation has transferred the requested books and records) with respect to one or more tax periods currently under examination. It has the effect of extending a limitations period on IRS making an assessment against the corporation. (Code Sec. 6503(j))

New law. Effective for summonses issued more than 45 days after the date of enactment, the Act requires that prior to issuing a designated summons, the Commissioner of the relevant operating division of IRS and the Chief Counsel must review and provide written approval of the summons. The written approval must state facts establishing that IRS had previously made reasonable requests for the information and must be attached to the summons. The provision also requires that IRS certify in any subsequent judicial proceedings that a reasonable request for the information were made. (Code Sec. 6503(j), as amended by Act Sec. 1207)

Limits on actions by IRS contractors

Code Sec. 7602(a) provides that IRS is authorized to examine books and records, issue summonses seeking documents and testimony, and take testimony from witnesses under oath. Use of outside specialists, e.g., economists, engineers, and actuaries, is appropriate to assist IRS in determining the correctness of the taxpayer's self-assessed tax liability.

Code Sec. 6103(n) and Reg. § 301.6103(n)-1(a) authorize IRS to disclose returns and return information to these specialists. Reg. § 301.7602-1(b)(3) provides that persons described in Code Sec. 6103(n) may receive and review books, papers, records, or other data summoned by IRS and, in the presence and under the guidance of an IRS officer or employee, participate fully in the interview of a person who IRS has summoned as a witness to provide testimony under oath. 2018 proposed regs would narrow this authority. (Prop Reg § 301.7602-1(b)(3))

New law.  The Act provides that IRS cannot, under the authority of Code Sec. 6103(n), provide books and records that IRS obtained under its authority, to a contractor described in Code Sec. 6103(n), other than when the contractor requires such information for the sole purpose of serving as an expert.

This provision also ensures that only IRS employees or the Office of Chief Counsel are able to question a witness under oath, where the witness's testimony was obtained pursuant to Code Sec. 7602. (Code Sec. 7602(f), as amended Act Sect 1208(a))

These changes are generally effective on the date of enactment and apply to any tax administration contracts under Code Sec. 6103(n) in effect on the date of enactment.

ORGANIZATION OF IRS

Office of the Taxpayer Advocate

The Office of the Taxpayer Advocate ("OTA") is expected to represent taxpayer interests independently in disputes with IRS. The National Taxpayer Advocate ("NTA") supervises the OTA. (Code Sec. 7803(c)(1))

Taxpayer Advocate Directives (TADs) are directives from the NTA to IRS that identify systemic problems and mandate changes to IRS tax administration or other processes. Certain IRS Deputy Commissioners have the authority to modify or rescind a TAD.

New law.  The Act requires certain responses to TADs from the IRS Commissioner or Deputy Commissioner and clarifies the time period required for such a response. (Code Sec. 7803(c)(5), as amended by Act Sec. 1301(a)(1))

The Act makes other changes to the NTA’s responsibilities. It requires the NTA to report to Congress any TADs not addressed by IRS, requires IRS to provide statistical support to the NTA upon request to the extent practicable, and requires the NTA to coordinate research efforts with the Treasury Inspector General for Tax Administration (TIGTA). (Code Sec. 7803(c)(2), as amended by Act Sec. 1301(b)(2); Code Sec. 6108(d), as amended by Act Sec. 1301(b)(3))

These changes are effective on the date of enactment. (Act Sec. 1301(d)(1))

IRS organizational structure

New law. Under the Act, the Treasury Department is required to submit to Congress by Sept. 30, 2020, a comprehensive written plan to redesign the organization of IRS. The Act requires the plan to, among other things: (a) streamline the structure of the agency including minimizing the duplication of services and responsibilities; (b) best position IRS to combat cybersecurity and other threats to IRS; and (c) address whether the Criminal Division of IRS should report directly to the Commissioner. 

Beginning one year after the date on which the plan is submitted to Congress, a requirement, contained in earlier legislation, that IRS's organizational structure feature operating units serving particular groups of taxpayers with similar needs, will cease to apply. (Act Sec. 1302)

OTHER PROVISIONS

Community Volunteer Income Tax Assistance programs

IRS, through its Volunteer Income Tax Assistance (VITA) Program, currently partners with IRS-certified volunteer organizations to provide free tax return filing assistance to low-income populations, persons with disabilities, taxpayers with limited English proficiency, and other underserved communities.

New law. The Act codifies the VITA program. The Secretary of the Treasury, unless otherwise provided by specific appropriation, may allocate from otherwise appropriated funds up to $30 million per year in matching grants to qualified entities for the development, expansion, or continuation of qualified tax return preparation programs assisting low-income taxpayers and members of underserved populations. Additionally, the provision allows IRS to use mass communications and other means to promote the benefits and encourage the use of the program. (Code Sec. 7526A, as added by Act Sec. 1401)

Low Income Taxpayer Clinics

The Code provides that IRS may provide up to $6 million per year in matching grants to Low Income Taxpayer Clinics which assist low-income taxpayers with representation and controversies with IRS. (Code Sec. 7526) 5 CFR §3101.106(a) prohibits Treasury Department personnel from referring taxpayers to qualified low-income taxpayer clinics for advice and assistance.

New law. Effective on the date of enactment, the Act allows Treasury Department personnel to advise taxpayers of the availability of, and eligibility requirements for receiving, advice and assistance from qualified low-income taxpayer clinics that receive funding under the Code, and to provide location and contact information for such clinics. (Code Sec. 7526(c), as amended by Act Sec. 1402) 

Taxpayer assistance center closures

IRS operates taxpayer assistance centers (TACs) around the country to provide face-to-face assistance with preparing tax returns and understanding tax laws.

New law. The Act requires IRS to provide public notice, including by non-electronic means, to affected taxpayers 90 days prior to the closure of a TAC. The notice must include information on alternative forms of assistance available for affected taxpayers and the date of the proposed closure. (Act Sec. 1403)

Seizure and sale of perishable goods

Under pre-Act law, if it is determined that any tangible property seized to satisfy unpaid taxes: (1) is liable to perish, (2) is liable to become greatly reduced in price or value by keeping, or (3) cannot be kept without great expense, the property may be sold after it has been appraised and the owner has been given an opportunity to pay the appraised value or furnish bond for payment. The general procedures governing the sale of seized property do not apply.

New law. Effective for property seized after the date of enactment, the Act limits the property that may be sold pursuant to the above procedures to property that is liable to perish. (Code Sec. 6336, as amended by Act Sec. 1404)

Whistleblower reforms

Under Code Sec. 7623, individuals who submit information leading to detection of underpayment of tax or to detection, trial, and punishment of persons guilty of violating internal revenue laws, may file a claim for an award.

New law. With respect to disclosures made after the date of enactment, the Act  allows IRS to exchange information with whistleblowers where doing so would be helpful to an investigation. It also requires IRS to notify whistleblowers of the status of their claims at certain points in the review process and authorizes, but does not require, IRS to provide status updates at other times upon written request of the whistleblower. To protect taxpayer privacy, it would prohibit whistleblowers from disclosing publicly information they receive from IRS, under penalty of law. (Code Sec. 6103(k)(13), as amended by Act Sec. 1405(a))

In addition, effective on the date of enactment, the Act amends the Code to extend anti-retaliation provisions to IRS whistleblowers similar to those that are provided to whistleblowers under the False Claims Act and the Sarbanes-Oxley Act. (Code Sec. 7623(d) as amended by Act Sec. 1405(b))

Information IRS is to provide during phone calls

New law. Effective on the date of enactment, the Act requires IRS to provide the following information over the telephone, while taxpayers are on hold with the IRS call center: information about common tax scams, direction to the taxpayer on where and how to report such activity, and tips on how to protect against identity theft and tax scams. (Act Sec. 1406)

Misdirected tax refund deposits

New law. The Act requires IRS to prescribe regs, within six months of the date of enactment, to establish procedures to allow taxpayers to report instances in which a refund made by electronic funds transfer was not transferred to the account of the taxpayer, to coordinate with financial institutions to identify and recover these payments, and to deliver refunds to the correct accounts of taxpayers. (Code Sec. 6402(n) as amended Act Sec. 1407)

CYBERSECURITY AND IDENTITY PROTECTION

Public-private partnership to address refund fraud

New law.  The Act requires IRS to work collaboratively with the public and private sectors to protect taxpayers from identity theft refund fraud. (Act Sec. 2001)

Electronic Tax Administration Advisory Committee

'98 tax legislation authorized the Electronic Tax Administration Advisory Committee (ETAAC); ETAAC provides input to IRS on electronic tax administration.

New law. Effective on the date of enactment, the act adds the following to the current requirements regarding ETAAC: ETAAC is to study and make recommendations to IRS regarding methods to prevent identity theft and refund fraud. (Act Set 2002)

Information Sharing and Analysis Center

The Security Summit, a partnership of IRS, State tax agencies, and the private-sector tax industry to address tax refund fraud caused by identity theft, in 2016, created an Identity Theft Tax Refund Fraud Information Sharing and Analysis Center ("ISAC"). The ISAC enables IRS and the States to work together with external third parties to serve as an early warning system for tax refund fraud, identity theft schemes, and cybersecurity issues.

New law. Effective on the date of enactment, the Act authorizes IRS to participate in the ISAC. (Act Sec. 2003(a))

Effective for disclosures made after the date of enactment, the Act provides that IRS may disclose specified return information to specified ISAC participants if such disclosure is in furtherance of effective Federal tax administration relating to the following: (1) the detection or prevention of identity theft tax refund fraud; (2) validation of taxpayer identity; (3) authentication of taxpayer returns; or (4) the detection or prevention of cybersecurity threats to IRS. (Code Sec. 6103(k)(14), as amended Act Sec. 2003(c))

Confidentiality safeguards for Federal, state contractors

Code Sec. 6103 permits the disclosure of returns and return information to State agencies, as well as to other Federal agencies for specified purposes.

Employees of a State tax agency may disclose returns and return information to contractors for tax administration purposes. (Code Sec. 6103(n)) These disclosures can be made only to the extent necessary to contractually procure equipment, other property, or services, related to tax administration. The contractors can make redisclosures of returns and return information to their employees as necessary to accomplish the tax administration purposes of the contract. (Reg. §31.6013(n)-1)

New law. Effective for disclosures made after Dec. 31, 2022,  the Act provides that IRS will not be able to provide taxpayer information to any contractors or other agents of a Federal, state, or local agency unless the contractor has safeguards in place to protect the confidentiality of return information and agrees to conduct on-site compliance reviews every three years. The Federal, state, or local agency is required to submit a report of its findings to IRS and certify annually that such contractors and other agents are in compliance with the requirements to safeguard the confidentiality of Federal returns and return information. (Code Sec. 6103(p)(9), as amended by Act Sec. 2004(a))

Identity Protection Personal Identification Numbers

An Identity Protection Personal Identification Number (IP PIN) is a 6-digit number assigned to eligible taxpayers that allows their tax returns/refunds to be processed without delay and helps prevent the misuse of their Social Security Numbers (SSNs) on fraudulent Federal income tax returns. While the IP PIN program was initially restricted to taxpayers affected by identity theft, as a result of expansion that begun in 2014, the program is now also available to taxpayers in nine states plus the District of Columbia who request an IP PIN.

New law. Within five years of the date of enactment, the Treasury Department is required to establish a program to issue an IP PIN to any U.S. resident individual who requests one. And, for each calendar year beginning after the date of enactment, the Treasury Department is required to expand the issuance of IP PINs to individuals residing in such states as IRS deems appropriate, provided that the total number of states served by the program continues to increase. (Act Sec. 2005)

Point of contact for identity theft victims

New law. Responding to concerns over the lack of continuity of assistance when taxpayers are victims of tax-related identity theft, the Act, effective on the date of enactment, requires IRS to establish procedures to implement a single point of contact for taxpayers adversely affected by identity theft. (Act Sec. 2006)

Notification of suspected identity theft

Often identity theft and refund fraud victims may be unaware that their identity has been used fraudulently or, when they are aware, may not be fully informed of the outcome of their case.

New law. Effective for determinations made after the date that is six months after the date of enactment, the Act requires IRS to notify a taxpayer if it determines there has been any suspected unauthorized use of a taxpayer’s identity, or that of the taxpayer’s dependents, if an investigation has been initiated and its status, whether the investigation substantiated any unauthorized use of the taxpayer’s identity, and whether any action has been taken (such as a referral for prosecution). Furthermore, when an individual is charged with a crime, IRS must notify the victim as soon as possible, giving such victims the ability to pursue civil action against the perpetrators. (Code Sec. 7529(a), as added by Act Sec. 2007(a))

For purposes of this provision, the unauthorized use of the identity of an individual includes the unauthorized use of the identity of the individual to obtain employment. (Code Sec. 7529(b), as added by Act Sec. 2007(a))

IRS management of stolen identity cases

The National Tax Advocate has noted that identity theft victims are often required to deal with multiple persons within IRS to resolve their issues.

New law. The Act requires that, not later than one year after the date of enactment, IRS, in consultation with the NTA, develop and implement publicly available caseworker guidelines that reduce the burdens for identity theft tax refund fraud (IDTTRF) victims as they work with IRS to sort out their tax affairs. The guidelines may include procedures to reduce the amount of time victims would have to wait to receive their tax refunds, the number of IRS employees with whom victims would need to interact, and the timeframe within which the issues related to the IDTTRF should be resolved. (Act Sec. 2008)

Improper disclosure by return preparers

A tax return preparer who discloses any information furnished to the preparer for, or in connection with, the preparation of a return or uses such information for any purpose other than to prepare or assist in preparing, any such return, is subject to penalty. There is a $250 civil penalty for each unauthorized disclosure or use up to $10,000 per calendar year. (Code Sec. 6713) The corresponding criminal penalty under Code Sec. 7216 provides that knowing or reckless conduct is a misdemeanor, subject to a fine up to $1,000, one year of imprisonment, or both, together with the costs of prosecution.

New law.  Effective with respect to disclosures or uses made on or after the date of enactment, the Act increases the civil penalty for the unauthorized disclosure or use of information by tax return preparers from $250 to $1,000 for cases in which the disclosure or use is made in connection with a crime relating to the misappropriation of another person's taxpayer identity ("taxpayer identity theft"). The proposal also increases the calendar year limitation from $10,000 to $50,000. The calendar year limitation is applied separately with respect to disclosures or uses made in connection with taxpayer identity theft. (Code Sec. 6713(b), as amended by Act Sec. 2009(a)(2))

The Act also increases the criminal penalty for knowing or reckless conduct to $100,000 in the case of disclosures or uses in connection with taxpayer identity theft. (Code Sec. 7216(a), as amended by Act Sec. 2009(b))

IRS INFORMATION TECHNOLOGY

Management of IRS information technology

New law.  Effective on the date of enactment, the IRS Commissioner is required to appoint an IRS Chief Information Officer (CIO). The IRS CIO will be responsible for, among other things, the development, implementation, and maintenance of information technology for IRS, ensuring that the information technology of IRS is secure and integrated, maintaining operational control of all information technology for IRS, and acting as the principal advocate for the information technology needs of IRS. (Code Sec. 7803(f), as amended by Act Sec. 2101(a))

Also, IRS must finish its plans for the completion of the Customer Account Data Engine (CADE 2) and have a third party independently verify and validate planning for CADE 2 and Enterprise Case Management system(s) generally within a year of enactment. (Act Sec. 2101(b))

Internet platform for Form 1099 filings

New law.  The Act requires IRS to, by Jan. 1, 2023, develop an internet portal that facilitates taxpayers filing Forms 1099 with IRS. The internet portal is to be modeled after a Social Security Administration (SSA) system that allows individuals to file Forms W-2 with SSA. The website will provide taxpayers with access to resources and guidance provided by IRS, and allow taxpayers to prepare, file, and distribute Forms 1099, and create and maintain taxpayer records. (Act Sec. 2102)

IRS information technology jobs

'98 legislation provided IRS with certain personnel flexibilities, one of which was the streamlined critical pay (SCP) authority. The purpose of the SCP authority was to provide IRS a management tool to quickly recruit and retain employees with high levels of expertise in technical or professional fields critical to the success of IRS’s restructuring efforts. The authority was originally authorized for ten years and extended two times.

New law. The Act reauthorizes SCP authority for IRS but only with respect to IT positions. Such authority is effective on the date of the enactment and ends on Sept. 30, 2025. (Code Sec. 7812, as added by Act Sec. 2103)

CONSENT-BASED DISCLOSURES OF RETURN INFORMATION

Disclosures for third-party income verification

Under Code Sec. 6103(c), the IRS may disclose the return or return information of a taxpayer to a third party designated by the taxpayer in a request for or consent to such disclosure.

The Income Verification Express Service (IVES) is a program run by IRS, which is used to verify a taxpayer’s income. The program is most often used when a taxpayer is applying for a mortgage or other loan and the lender is seeking to verify the taxpayer’s income. The current IVES program requires that transcript information requests be submitted to the IRS by fax.

New law. No later than three years after the first day of the sixth calendar month after enactment, the Act requires IRS to develop an automated system to receive these forms in lieu of the current system, which relies on the forms to be sent to IRS via secure fax. 

Additionally, the provision authorizes IRS to charge a separate user fee over a two-year period on all IVES requests, in order to fund the development of the new system. (Act Sec. 2201)

Limit on re-disclosures of consent-based disclosures

Under Code Sec. 6103(c), a taxpayer may designate in a request or consent to the disclosure by IRS of his or her return or return information to a third party.

New law. Effective for disclosures made after 180 days after the date of enactment, the Act provides that persons designated by the taxpayer to receive return information must not use the information for any purpose other than the express purpose for which consent was granted and must not disclose return information to any other person without the express permission of, or request by, the taxpayer. (Code Sec. 6103(c), as amended by Act Sec. 2202)

EXPANDED USE OF ELECTRONIC SYSTEMS

Electronic filing of returns

The Code requires that Federal income tax returns prepared by tax return preparers be filed electronically other than returns prepared by any preparer that reasonably expects to file 10 or fewer individual tax returns during the calendar year. (Code Sec. 6011(e)(3).

For taxpayers other than partnerships, the statute prohibits any requirement that persons who file fewer than 250 returns during a calendar year file electronically. (Code Sec. 6011(e)(2)(A)) For partnerships, a lower number than 250 applies; the exact number goes from 200 in 2018 to 20 for calendar years after 2021. (Code Sec. 6011(e)(5)(A)) Notwithstanding Code Sec. 6011(e)(2)(A) and Code Sec. 6011(e)(5)(A), all partnerships with more than 100 partners are required to file electronically. (Code Sec. 6011(e)(5)(B))

New law.  Under the Act, the above 250 amount is reduced to 100 in the case of calendar year 2021, and from 100 to 10 in the case of calendar years after 2021. (Code Sec. 6011(e)(2)(A), as amended by Act Sec. 2301(a); Code Sec. 6011(e)(5)(A), as amended by Act Sec. 2301(b)) The Act maintains the pre-Act rules regarding partnerships, except that it substitutes 50 for 20 in the above rule regarding calendar years after 2021. (Code Sec. 6011(e)(5)(B) and Code Sec. 6011(e)(6), as amended by Act Sec. 2301(b))

The Act also authorizes IRS to waive the requirement that a Federal income tax return prepared by a tax return preparer be filed electronically; such a waiver applies where the tax return preparer applies for a waiver and demonstrates that the inability to file electronically is due to lack of internet availability (other than dial-up or satellite service) in the geographic location in which the return preparation business is operated. (Code Sec. 6011(e)(3)(D), as amended by Act Sec. 2301(c))

Electronic signatures by taxpayers to authorize action by their practitioner

New law. For a request for disclosure to a practitioner with consent of the taxpayer, or for any power of attorney granted by a taxpayer to a practitioner, the Act requires IRS to publish guidance to establish uniform standards and procedures for the acceptance of taxpayers' signatures appearing in electronic form with respect to such requests or power of attorney. Such guidance must be published within six months of the date of enactment. (Code Sec. 6061(b)(3), as amended by Act Sec. 2302)

Payment of taxes by debit and credit cards

The Code generally permits the payment of taxes by commercially acceptable means such as credit cards. (Code Sec. 6311) IRS may not pay any fee or provide any other consideration in connection with the use of credit, debit, or charge cards for the payment of income taxes. (Code Sec. 6311(d)(2))

New law. Effective on the date of enactment, the Act removes the prohibition on paying any fees or providing any other consideration in connection with the use of credit, debit, or charge cards for the payment of income taxes to the extent the fees, etc. are fully recouped by IRS in the form of fees paid to IRS by persons paying taxes. (Code Sec. 6311(d)(2), as amended by Act Sec. 2303)

Authentication of users of IRS E-Services accounts

In the past, unscrupulous tax return preparers have used IRS’s suite of electronic services (eServices) to perpetrate tax refund fraud.

New law. Beginning 180 days after the date of enactment, the Act requires IRS to verify the identity of any individual opening an e-Services account before he is able to use such services. (Act Sec. 2304)

OTHER IRS PROVISIONS

Repeal of requirements regarding return-free tax system

'98 legislation requires IRS to study the feasibility of, and develop procedures for, the implementation of a return-free tax system for appropriate individuals for tax years beginning after 2007. IRS is required annually to report on the progress of the development of such system.

New law. Effective on the date of enactment, the Act repeals these requirements. (Act Sec. 2401)

Training of IRS employees

New law. Not later than one year after the date of enactment, the Act requires IRS to submit to Congress a written report providing a comprehensive training strategy for IRS employees. (Act Sec. 2402)

Prohibition on IRS rehiring certain fired employees

New law.   Effective with respect to the hiring of employees after the date of enactment, the Act prohibits IRS from rehiring any employee of IRS who has been involuntarily separated for misconduct. (Code Sec. 7804(d), as amended by Act Sec. 3001)

Notification of unauthorized inspection, etc. of returns

Code Sec. 7431 provides for civil damages resulting from an unauthorized disclosure or inspection of returns or return information. 

New law.  Effective for determinations proposed after 180 days after the date of enactment, the Act requires IRS to notify a taxpayer if IRS or a Federal or State agency (upon notice to IRS by such Federal or State agency) proposes an administrative determination as to disciplinary or adverse action against an employee arising from the employee's unauthorized inspection or disclosure of the taxpayer's return or return information. (Code Sec. 7431(e), as amended by Act Sec. 3002)

EXEMPT ORGANIZATION PROVISIONS

E-filing by exempt organizations

In general, only the largest and smallest tax-exempt organizations are required to electronically file their annual information returns. Tax-exempt corporations that have assets of $10 million or more and that file at least 250 returns during a calendar year must electronically file their Form 990 information returns. (Reg. § 301.6011-5 and Reg. § 301.6033-4(a)) Private foundations and charitable trusts, regardless of asset size, that file at least 250 returns during a calendar year are required to file electronically their Form 990-PF information returns. (Reg. § 301.6033-4(a)) Finally, organizations that file Form 990-N (the e-postcard) also must electronically file. (Instructions for Form 990-N)

New law.  The Act extends the requirement to e-file to all tax-exempt organizations required to file statements or returns in the Form 990 series or Form 8872 (Political Organization Report of Contributions and Expenditures). (Code Sec. 6033(n), as amended by Act Sec. 3101(a))

The Act also requires that IRS make the information provided on the forms available to the public (consistent with the disclosure rules of Code Sec. 6104) in a machine-readable format as soon as practicable. (Code Sec. 6104(b), as amended Act Sec. 3101(c))

These changes are generally effective for tax years beginning after the date of enactment. Transition relief is provided for certain organizations. First, for certain small organizations or other organizations for which IRS determines that application of the e-filing requirement would constitute an undue hardship in the absence of additional transitional time, the requirement to file electronically must be implemented not later than tax years beginning two years following the date of enactment. In addition, the Act grants IRS the discretion to delay the effective date not later than tax years beginning two years after the date of enactment for the filing of Form 990-T (reports of unrelated business taxable income or the payment of proxy tax under Code Sec. 6033(e)). (Act Sec. 3101(d))

IRS notice to tax-exempt organizations that fail to file

Charities and other nonprofits automatically lose their tax-exempt status if they do not file annual information returns—including the e-postcard return for very small organizations—for three consecutive years. Once revoked, the organization must refile for exempt status. (Code Sec. 6033(j))

New law.  The Act requires that IRS provide notice to an organization that fails to file a Form 990-series return or postcard for two consecutive years. The notice must state that IRS has no record of having received such a return or postcard from the organization for two consecutive years and inform the organization that the organization's tax-exempt status will be revoked if the organization fails to file such a return or postcard by the due date for the next such return or postcard. The notice must also contain information about how to comply with the annual information return and postcard requirements. (Code Sec. 6033(j)(1), as amended by Act Sec. 3102(a))

This provision applies to failures to file returns or postcards for two consecutive years if the return or postcard for the second year is required to be filed after Dec. 31, 2019. (Act Sec. 3102(b))

REVENUE PROVISION

Penalty for failure to file

If a return is filed more than 60 days after its due date, and unless it is shown that such failure is due to reasonable cause, the failure to file penalty may not be less than the lesser of $205 or 100% of the amount required to be shown as tax on the return. (Code Sec. 6651(a)) The $205 amount is subject to an inflation adjustment. (Code Sec. 6651(j))

New law.  Effective for returns required to be filed after Dec. 31, 2019, $330 (adjusted for inflation for returns required to be filed in a calendar year beginning after 2020) is substituted for $205 in the above rule. (Code Sec. 6651(a) and Code Sec. 6651(j), as amended Act Sec. 3201)

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

Q1 2019

Dear Tax Constituent:

The following is a summary of important tax developments that occurred in January, February, and March of 2019 that may affect you, your family, your investments, and your livelihood.

Estimated tax penalty relief. The IRS announced that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year. This waiver covers taxpayers whose total withholding and estimated tax payments are equal to or greater than 80% of their taxes owed, rather than the usual statutory percentage threshold of 90%. This relief expanded that initially offered by IRS; the earlier relief pertained to taxpayers who had paid 85% of their taxes owed. The relief was prompted by changes in the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017), some of the which might impact withholding (e.g., the repeal of the personal exemptions and many itemized deductions and the capping the state and local income tax deduction at $10,000). A Government Accountability Office (GAO) report estimated that nearly 30 million taxpayers could be underwithheld in 2018. IRS also provided procedures for requesting the waiver and procedures under which taxpayers who have already paid underpayment penalties but who now qualify for relief may request a refund.

Employer identification number (EIN). As part of its ongoing security review, the IRS announced that, starting May 13, only individuals with tax identification numbers may request an Employer Identification Number (EIN) as the "responsible party" on the application. Individuals named as responsible party must have either a Social Security number (SSN) or an individual taxpayer identification number (ITIN). Under Code Sec. 6109(a)(1), persons are required to include taxpayer identifying numbers on returns, statements, or other documents filed with the IRS. One of the principal types of taxpayer identifying numbers is an EIN. IRS generally assigns an EIN for use by employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes. A person required to furnish an EIN must apply for one with the IRS on a Form SS-4 (Application for Employer Identification Number). The new change will prohibit entities from using their own EINs to obtain additional EINs. The requirement will apply to both the paper Form SS-4 and online EIN application.

Electric car credit declines. IRS announced that, during the fourth quarter of 2018, General Motors (GM) reached a total of more than 200,000 sales of vehicles eligible for the plug-in electric drive motor vehicle credit under Code Sec. 30D(a). Accordingly, the credit for all new qualified plug-in electric drive motor vehicles sold by GM will begin to phase out Apr. 1, 2019. Qualifying vehicles from GM purchased for use or lease are eligible for a $7,500 credit if acquired before Apr. 1, 2019. Beginning Apr. 1, 2019, the credit will be $3,750 for GM's eligible vehicles. Beginning Oct. 1, 2019, the credit will be reduced to $1,875. After Mar. 31, 2019, no credit will be available.

Deduction for back alimony. The Tax Court held that an ex-husband's payment of alimony arrearages resulted from a contempt order by a Family Court was not a "money judgment", and so qualified as deductible alimony. With respect to divorce instruments executed before Jan. 1, 2019, amounts received as alimony or separate maintenance payments are taxable to the recipient and deductible by the payor in the year paid. An alimony payment is one that meets the certain specific requirements, such as it must be made under a divorce or separation instrument and the payor's obligation to make the payment must end at the death of the payee spouse. On the other hand, a money judgment is a document issued by a court stating that the creditor (or other plaintiff) has won a lawsuit and is entitled to a certain amount of money. A New York court found a taxpayer to be in contempt due to his failure to make his alimony payments and sentenced him to 150 days in jail unless he paid $225,000 to his former spouse. The taxpayer paid the $225,000 at issue and claimed an alimony deduction. The Tax Court found that the court's order was not a money judgment, but rather a contempt order to achieve the payment of alimony arrearages which retained their character as alimony.

Qualified business income deduction: final regulations. The IRS issued final Code Sec. 199A regulations for determining the amount of the deduction of up to 20% of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate (the qualified business income deduction). The regulations cover a wide range of topics and discuss the operational rules, including definitions, computational rules, special rules, and reporting requirements; the determination of W-2 wages and unadjusted basis immediately after acquisition of qualified property; the computation of qualified business income, qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnership income; the optional aggregation of trades or businesses; the treatment of specified services trades or businesses and the trade or business of being an employee; and the rules for relevant passthrough entities, publicly traded partnerships, beneficiaries, trusts, and estates.

Qualified business income deduction: calculating W-2 wages. IRS provided three methods for calculating W-2 wages under Code Sec. 199A, the qualified business income deduction, for purposes of the deduction limitation based on W-2 wages and for purposes of the deduction reduction for certain specified agricultural and horticultural cooperative patrons. Under Code Sec. 199A, W-2 wages include:

1. The total amount of wages as defined in Code Sec. 3401(a) (dealing with income tax withholding);

2. The total amount of elective deferrals (within the meaning of Code Sec. 402(g)(3));

3. Compensation deferred under Code Sec. 457; and

4. The amount of designated Roth contributions.

For any taxable year, a taxpayer must calculate W-2 wages for purposes of Code Sec. 199A using one of the three methods provided by IRS. The first method (the unmodified Box method) allows for a simplified calculation, while the second and third methods (the modified Box 1 method and the tracking wages method) provide greater accuracy. The Box numbers referenced under each method refers to those on the Forms W-2 (Wage and Tax Statement).

Qualified business income deduction: rental real estate safe harbor. The IRS provided a safe harbor under which a rental real estate enterprise will be treated as a trade or business for purposes of the qualified business income deduction under Code Sec. 199A. That Code provision provides a deduction to non-corporate taxpayers of up to 20% of the taxpayer's qualified business income from each of the taxpayer's qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship, as well as a deduction of up to 20% of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. Solely for this purpose, a rental real estate enterprise will be treated as a trade or business if:

1. Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

2. For tax years beginning prior to Jan. 1, 2023, 250 or more hours of rental services were performed per year with respect to the rental enterprise; and

3. The taxpayer maintains contemporaneous records on the hours of all services performed; a description of all services performed; the dates on which such services were performed; and who performed the services. (This contemporaneous records requirement doesn't apply to tax years beginning before Jan. 1, 2019).

For more information, see Rental Real Estate Safe Harbor for 20% QBI Deduction

Options for those unable to pay the taxman. The April 15th deadline for filing 2018 income tax returns (for most taxpayers, at least; April 17 for Maine, Massachusetts and the District of Columbia) has recently passed. The IRS advised taxpayers who don't have cash to pay the balance due on their returns, that taxpayers can avoid penalties but not interest if they can get an extension of time to pay from the IRS. However, such extensions merely postpone the day of reckoning for the period of the extension (generally, six months). The IRS outlined other ways in which financially distressed clients may be able to defer paying their income taxes, including installment agreements (a short-term 120-day payment plan and a long-term payment plan) and an offer in compromise with the IRS.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

Rental Real Estate Safe Harbor for 20% QBI Deduction

A significant question related to the new Sec. 199A 20% Qualified Business Income (QBI) deduction provisions is when a real estate rental will be eligible for the 20% deduction. On January 18, 2019, in an Notice that contains a proposed revenue procedure, IRS provided a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for the purposes of Code Sec. 199A, the QBI deduction.

Background. Congress enacted Code Sec. 199A to provide a deduction to non-corporate taxpayers of up to 20% of the taxpayer's qualified business income from each of the taxpayer's qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship, as well as a deduction of up to 20% of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.

Code Sec. 199A(d) defines a qualified trade or business as any trade or business other than a specified service trade or business (SSTB) or the trade or business of performing services as an employee. Reg § 1.199A-1(b)(14) defines trade or business, in relevant part, as a trade or business under Code Sec. 162 other than the trade or business of performing services as an employee.

Proposed revenue procedure safe harbor. The proposed revenue procedure provides a safe harbor for treating a rental real estate enterprise as a trade or business solely for purposes of the Code Sec. 199A deduction. If an enterprise fails to satisfy these requirements, the rental real estate enterprise may still be treated as a trade or business for purposes of Code Sec. 199A if the enterprise otherwise meets the definition of trade or business in Reg. §1.199A-1(b)(14). Relevant pass-through entities (RPEs), as defined in Reg. §1.199A-1(b)(10), may use the safe harbor in order to determine whether a rental real estate enterprise is a trade or business.

Safe harbor. Solely for the purposes of Code Sec. 199A, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the tax year with respect to the rental real estate enterprise:

1. Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

2. For tax years beginning prior to Jan. 1, 2023, 250 or more hours of rental services are performed (as described below) per year with respect to the rental enterprise. For tax years beginning after Dec. 1, 2022, in any three of the five consecutive tax years that end with the tax year (or in each year for an enterprise held for less than five years), 250 or more hours of rental services are performed (as described below) per year with respect to the rental real estate enterprise; and

3. The taxpayer maintains contemporaneous records, including time reports,logs, or similar documents, regarding the following:

   • Hours of all services performed;

   • Description of all services performed;

   • Dates on which such services were performed; and

   • Who performed the services. Such records are to be made available for inspection at the request of the IRS.

     The contemporaneous records requirement will not apply to tax years beginning prior to Jan. 1, 2019.

Rental services for purpose of the proposed revenue procedure include:

• Advertising to rent or lease the real estate;

• Negotiating and executing leases;

• Verifying information contained in prospective tenant applications;

• Collection of rent;

• Daily operation, maintenance, and repair of the property;

• Management of the real estate;

• Purchase of materials; and

• Supervision of employees and independent contractors.

Rental services may be performed by owners or by employees, agents, and/or independent contractors of the owners. The term rental services does not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

Real estate used by the taxpayer (including an owner or beneficiary of an RPE relying on this safe harbor) as a residence for any part of the year under Code Sec. 280A is not eligible for this safe harbor. Real estate rented or leased under a triple net lease is also not eligible for this safe harbor. For purposes of the revenue procedure, a triple net lease includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to be responsible for maintenance activities for a property in addition to rent and utilities.

Effective date/reliance. The proposed revenue procedure is proposed to apply to tax years ending after Dec. 1, 2017.

Until such time that the proposed revenue procedure is published in final form, taxpayers may use the safe harbor described in the proposed revenue procedure for purposes of determining when a rental real estate enterprise may be treated as a trade or business solely for purposes of Code Sec. 199A.

If you would like more information on this topic or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

Q4 2018

Dear Tax Constituent:

The following is a summary of important tax developments that occurred in October, November, and December of 2018 that may affect you, your family, your investments, and your livelihood.

Business meals. One of the provisions of the Tax Cuts and Jobs Act (TCJA) disallows a deduction for any item with respect to an activity that is of a type generally considered to constitute entertainment, amusement, or recreation. However, the TCJA did not address the circumstances in which the provision of food and beverages might constitute entertainment. The new guidance clarifies that, as in the past, taxpayers generally may continue to deduct 50% of otherwise allowable business meal expenses if:

1. The expense is an ordinary and necessary expense paid or incurred during the tax year in carrying on any trade or business;

2. The expense is not lavish or extravagant under the circumstances;

3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;

4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and

5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

Convenience of the employer. IRS provided new guidance under the Code provision allowing for the exclusion of the value of any meals furnished by or on behalf of an individual's employer if the meals are furnished on the employer's business premises for the convenience of the employer. IRS determined that the "Kowalski test" — which provides that the exclusion applies to employer-provided meals only if the meals are necessary for the employee to properly perform his or her duties — still applies. Under this test, the carrying out of the employee's duties in compliance with employer policies for that employee's position must require that the employer provide the employee meals in order for the employee to properly discharge such duties in order to be "for the convenience of the employer". While IRS is precluded from substituting its judgment for the business decisions of a taxpayer as to its business needs and concerns and what specific business policies or practices are best suited to addressing such, IRS can determine whether an employer actually follows and enforces its stated business policies and practices, and whether these policies and practices, and the needs and concerns they address, necessitate the provision of meals so that there is a substantial noncompensatory business reason for furnishing meals to employees.

Depreciation and expensing. IRS provided guidance on deducting expenses under Code Sec. 179(a) and depreciation under the alternate depreciation system (ADS) of Code Sec. 168(g), as amended by the TCJA. The guidance explains how taxpayers can elect to treat qualified real property, as defined under the TCJA, as property eligible for the expense election. The TCJA amended the definition of qualified real property to mean qualified improvement property and some improvements to nonresidential real property, such as: roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems. The guidance also explains how real property trades or businesses or farming businesses, electing out of the TCJA interest deduction limitations, can change to the ADS for property placed in service before 2018, and provides that such is not a change in accounting method. In addition, the guidance provides an optional depreciation table for residential rental property depreciated under the ADS with a 30-year recovery period.

Partnerships. IRS issued final regulations implementing the new centralized partnership audit regime, which is generally effective for tax years beginning after Dec. 31, 2017 (although partnerships could have elected to have its provisions apply earlier). Under the new rules, adjustments to partnership-related items are determined at the partnership level. The final regulations clarify that items or amounts relating to transactions of the partnership are partnership-related items only if those items or amounts are shown, or required to be shown, on the partnership return or are required to be maintained in the partnership's books and records. A partner must, on his or her own return, treat a partnership item in a manner that's consistent with the treatment of that item on the partnership's return. The regulations clarify that so long as a partner notifies the IRS of an inconsistent treatment, in the form and manner prescribed by the IRS, by attaching a statement to the partner's return (including an amended return) on which the partnership-related item is treated inconsistently, this consistency requirement is met, and the effect of inconsistent treatment does not apply to that partnership-related item. If IRS adjusts any partnership-related items, the partnership, rather than the partners, is subject to the liability for any imputed underpayment and will take any other adjustments into account in the adjustment year. As an alternative to the general rule that the partnership must pay the imputed underpayment, a partnership may elect to "push out" the adjustments, that is, elect to have its reviewed year partners take into account the adjustments made by the IRS and pay any tax due as a result of these adjustments.

State & local taxes. IRS has provided safe harbors allowing a deduction for certain payments made by a C corporation or a "specified pass-through entity" to or for the use of a charitable organization if, in return for such payment, they receive or expect to receive a state or local tax credit that reduces a state or local tax imposed on the entity. Such payment is treated as meeting the requirements of an ordinary and necessary business expense. For tax years beginning after Dec. 31, 2017, the TCJA limits an individual's deduction to $10,000 ($5,000 in the case of a married individual filing a separate return) for the aggregate amount of the following state and local taxes paid during the calendar year:

1. Real property taxes;

2. Personal property taxes;

3. Income, war profits, and excess profits taxes, and

4. General sales taxes.

This limitation does not apply to certain taxes that are paid and incurred in carrying on a trade or business or a for-profit activity. An entity will be considered a specified pass-through entity only if:

1. The entity is a business entity other than a C corporation that is regarded for all federal income tax purposes as separate from its owners;

2. The entity operates a trade or business;

3. The entity is subject to a state or local tax incurred in carrying on its trade or business that is imposed directly on the entity; and

4. In return for a payment to a charitable organization, the entity receives or expects to receive a state or local tax credit that the entity applies or expects to apply to offset a state or local tax described in (3), above, other than a state or local income tax.

Personal exemption suspension. IRS provided guidance clarifying how the suspension of the personal exemption deduction from 2018 through 2025 under the TCJA applies to certain rules that referenced that provision and were not also suspended. These include rules dealing with the premium tax credit and, for 2018, the individual shared responsibility provision (also known as the individual mandate). Under the TCJA, for purposes of any other provision, the suspension of the personal exemption (by reducing the exemption amount to zero) is not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction.

Obamacare hardship exemptions. IRS guidance identified additional hardship exemptions from the individual shared responsibility payment (also known as the individual mandate) which a taxpayer may claim on a Federal income tax return without obtaining a hardship exemption certification from the Health Insurance Marketplace (Marketplace). Under the Affordable Care Act (ACA, or Obamacare), if a taxpayer or an individual for whom the taxpayer is liable isn't covered under minimum essential coverage for one or more months before 2019, then, unless an exemption applies, the taxpayer is liable for the individual shared responsibility payment. Under the guidance, a person is eligible for a hardship exemption if the Marketplace determines that:

1. He or she experienced financial or domestic circumstances, including an unexpected natural or human-caused event, such that he or she had a significant, unexpected increase in essential expenses that prevented him or her from obtaining coverage under a qualified health plan;

2. The expense of purchasing a qualified health plan would have caused him or her to experience serious deprivation of food, shelter, clothing, or other necessities; or

3. He or she has experienced other circumstances that prevented him or her from obtaining coverage under a qualified health plan.

Certain Obamacare due dates extended. IRS has extended one of the due dates for the 2018 information reporting requirements under the ACA for insurers, self-insuring employers, and certain other providers of minimum essential coverage, and the information reporting requirements for applicable large employers (ALEs). Specifically, the due date for furnishing to individuals the 2018 Form 1095-B (Health Coverage) and the 2018 Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) is extended to Mar. 4, 2019. Good-faith transition relief from certain penalties for 2018 information reporting requirements is also extended.

Limitation on deducting business interest expense. IRS has provided a safe harbor that allows taxpayers to treat certain infrastructure trades or businesses (such as airports, ports, mass commuting facilities, and sewage and waste disposal facilities) as real property trades or businesses solely for purposes of qualifying as an electing real property trade or business. For tax years beginning after Dec. 31, 2017, the TCJA provides that a deduction allowed for business interest for any tax year can't exceed the sum of:

1. The taxpayer's business interest income for the tax year;

2. 30% of the taxpayer's adjusted taxable income for the tax year; plus

3. The taxpayer's floor plan financing interest (certain interest paid by vehicle dealers) for the tax year.

The term "business interest" generally means any interest properly allocable to a trade or business, but for purposes of the limitation on the deduction for business interest, it doesn't include interest properly allocable to an "electing real property trade or business". Thus, interest expense that is properly allocable to an electing real property trade or business is not properly allocable to a trade or business, and is not business interest expense that is subject to the interest limitation.

Avoiding penalties. IRS has identified the circumstances under which the disclosure on a taxpayer's income tax return with respect to an item or position is adequate for the purpose of reducing the understatement of income tax under the substantial understatement accuracy-related penalty for 2018 income tax returns. The guidance provides specific descriptions of the information that must be provided for itemized deductions on Form 1040 (Schedule A); certain trade or business expenses; differences in book and income tax reporting; and certain foreign tax and other items. The guidance notes that money amounts entered on a form must be verifiable, and the information on the return must be disclosed in the manner set out in the guidance. An amount is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by the IRS) and the taxpayer can show good faith in entering that number on the applicable form. If the amount of an item is shown on a line of a return that does not have a preprinted description identifying that item (such as on an unnamed line under an "Other Expense" category), the taxpayer must clearly identify the item by including the description on that line. If an item is not covered by this guidance, disclosure is adequate with respect to that item only if made on a properly completed Form 8275 (Disclosure Statement) or 8275-R (Regulation Disclosure Statement), as appropriate, attached to the return for the year or to a qualified amended return.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

2018 Year-End Tax Planning

Dear Tax Constituent:

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next.

Year-end planning for 2018 takes place against the backdrop of a new tax law — the Tax Cuts and Jobs Act — that makes major changes in the tax rules for individuals and businesses. For individuals, there are new, lower income tax rates, a substantially increased standard deduction, severely limited itemized deductions and no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT), among many other changes. For businesses, the corporate tax rate is cut to 21%, the corporate AMT is gone, there are new limits on business interest deductions, and significantly liberalized expensing and depreciation rules. And there's a new deduction for non-corporate taxpayers with qualified business income from pass-through entities.

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

• Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of:

  • Net investment income (NII), or

  • The excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

• The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he or she would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.

• Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short term capital loss to the extent that it, when added to regular taxable income, is not more than the "maximum zero rate amount" (e.g., $77,200 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year—for example, you are a joint filer who made a profit of $5,000 on the sale of stock bought in 2009, and other taxable income for 2018 is $70,000—then before year-end, try not to sell assets yielding a capital loss because the first $5,000 of such losses won't yield a benefit this year. And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.

• Postpone income until 2019 and accelerate deductions into 2018 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2018 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2018. For example, that may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or expects to be in a higher tax bracket next year.

• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2018, and possibly reduce tax breaks geared to AGI (or modified AGI).

• It may be advantageous to try to arrange with your employer to defer, until early 2019, a bonus that may be coming your way. This could cut as well as defer your tax.

• Beginning in 2018, many taxpayers who claimed itemized deductions year after year will no longer be able to do so. That's because the basic standard deduction has been increased (to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household, and $12,000 for marrieds filing separately), and many itemized deductions have been cut back or abolished. No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation and investment advisory fees) and unreimbursed employee expenses are no longer deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses to the extent they exceed 7.5% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won't save taxes if they don't cumulatively exceed the new, higher standard deduction.

• Some taxpayers may be able to work around the new reality by applying a "bunching strategy" to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer may be able to make two years' worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019.

• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2018 deductions even if you don't pay your credit card bill until after the end of the year.

• If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2018, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2018. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2018 state and local tax payments to exceed $10,000.

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. (That start date also applies to company plans, but non-5% company owners who continue working and may defer RMDs until April 1 following the year they retire.) Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if you turn age 70-½ in 2018, you can delay the first required distribution to 2019, but if you do, you will have to take a double distribution in 2019: the amount required for 2018 plus the amount required for 2019. Think twice before delaying 2018 distributions to 2019, as bunching income into 2019 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2019 if you will be in a substantially lower bracket that year.

• If you are age 70-½ or older by the end of 2018, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2018 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, resulting in tax savings.

• If you were younger than age 70-½ at the end of 2018, you anticipate that in the year that you turn 70-½ and/or in later years you will not itemize your deductions, and you don't have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs in 2018. If the immediately previous sentence applies to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs in 2018. Then, when you reach age 70-½, do the steps in the immediately preceding bullet point. Doing all of this will allow you to, in effect, convert nondeductible charitable contributions that you make in the year you turn 70-½ and later years, into deductible-in-2018 IRA contributions and reductions of gross income from age 70-½ and later year distributions from the IRAs.

• Take an eligible rollover distribution from a qualified retirement plan before the end of 2018 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2018. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2018, but the withheld tax will be applied pro rata over the full 2018 tax year to reduce previous underpayments of estimated tax.

• Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.

• If you become eligible in December of 2018 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2018.

• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

• If you were in an area affected by Hurricane Florence or any other federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them on either the return for the year the loss occurred (in this instance, the 2018 return normally filed next year), or the return for the prior year (2017).

• If you were in an area affected by Hurricane Florence or any other federally declared disaster area, you may want to settle an insurance or damage claim in 2018 in order to maximize your casualty loss deduction this year.

Year-End Tax-Planning Moves for Businesses & Business Owners

• For tax years beginning after 2017, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in for joint filers with taxable income between $315,000 and $415,000 and for all other taxpayers with taxable income between $157,500 and $207,500.

• Taxpayers may be able to achieve significant savings by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2018. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting your tax adviser.

• More "small businesses" are able to use the cash (as opposed to accrual) method of accounting in 2018 and later years than were allowed to do so in earlier years. To qualify as a "small business" a taxpayer must, among other things, satisfy a gross receipts test. Effective for tax years beginning after Dec. 31, 2017, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $25 million (the dollar amount used to be $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.

• Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2018, the expensing limit is $1,000,000, and the investment ceiling limit is $2,500,000. Expensing is generally available for most depreciable property (other than buildings), and off-the-shelf computer software. For property placed in service in tax years beginning after Dec. 31, 2017, expensing also is available for qualified improvement property (generally, any interior improvement to a building's interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2018, rather than at the beginning of 2019, can result in a full expensing deduction for 2018.

• Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment—bought used (with some exceptions) or new—if purchased and placed in service this year. The 100% writeoff is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year writeoff is available even if qualifying assets are in service for only a few days in 2018.

• Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2018.

• A corporation (other than a "large" corporation) that anticipates a small net operating loss (NOL) for 2018 (and substantial net income in 2019) may find it worthwhile to accelerate just enough of its 2019 income (or to defer just enough of its 2018 deductions) to create a small amount of net income for 2018. This will permit the corporation to base its 2019 estimated tax installments on the relatively small amount of income shown on its 2018 return, rather than having to pay estimated taxes based on 100% of its much larger 2019 taxable income.

• To reduce 2018 taxable income, consider deferring a debt-cancellation event until 2019.

• To reduce 2018 taxable income, consider disposing of a passive activity in 2018 if doing so will allow you to deduct suspended passive activity losses.

These are just some of the year-end steps that can be taken to save taxes.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

Q3 2018

Dear Tax Constituent:

The following is a summary of important tax developments that have occurred in the third quarter of 2018 that may affect you, your family, your investments, and your livelihood.

IRS shoots down states' SALT limitation workaround. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) limits an individual taxpayer's annual SALT (state and local tax) deductions to a maximum of $10,000, with no carryover for taxes paid in excess of that amount. (The SALT deduction limit doesn't apply to property taxes paid by a trade or business or in connection with the production of income.) As a result of this change, many taxpayers will not get a full federal income tax deduction for their payments of state and local taxes. Following the TCJA's passage, some high-tax states implemented workarounds to mitigate the effect of the SALT deduction limit for their residents. One method used was the establishment of charitable funds to which taxpayers can contribute and receive a tax credit in exchange. The IRS has issued proposed regulations, which would apply to contributions after Aug. 27, 2018, that effectively kill this workaround. The regulations would provide that a taxpayer who makes payments to or transfers property to an entity eligible to receive tax deductible contributions must reduce his or her charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

IRS also clarified that the proposed regulation crackdown on the SALT limitation workaround doesn't apply to businesses. In other words, a business generally can deduct a payment to a charitable or governmental entity if the payment is made with a business purpose.

IRS clarifies who is a qualifying relative for family credit purposes. Under the TCJA, effective for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, you can't claim a dependency exemption for dependents, including qualifying relatives, but you may be eligible for a $2,000 credit for each qualifying child and a $500 credit (called the "family credit") for each qualifying non-child dependent, including qualifying relatives. One of the conditions for being a qualifying relative is that the person's gross income for the year can't be more than the exemption amount. That condition remains the same in the Tax Code, but the exemption amount has been reduced to zero because the dependency exemption has has been eliminated. The IRS has clarified that the gross income limit for a qualifying relative for tax credit purposes (as well as for other purposes, such as head-of-household status), is determined by reference to what the exemption amount would have been if it hadn't been reduced to zero by the TCJA. Thus, after 2017 and before 2026, the gross income limit is $4,150, adjusted for inflation after 2018.

IRS explains 20% deduction for qualified business income. The IRS has issued regulations on the new 20% deduction for qualified business income (QBI) created by the TCJA, also known as the pass-through deduction. Here's a summary of the basic rules:

For tax years beginning after Dec. 31, 2017, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI) from a domestic business operated as a sole proprietorship, or through a partnership, S corporation, trust or estate. This deduction can be taken in addition to the standard or itemized deductions.

In general, the deduction is equal to the lesser of:

1. 20% of QBI plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, or

2. 20% of taxable income minus net capital gains.

QBI generally is the net amount of qualified items of income, gain, deduction, and loss, from any qualified trade or business. But QBI doesn't include capital gains and losses, certain dividends and interest income, reasonable compensation paid to the taxpayer by any qualified trade or business for services rendered for that trade or business, and any guaranteed payment to a partner for services to the business.

Generally, the deduction for QBI can't be more than the greater of:

1. 50% of the W-2 wages from the qualified trade or business; or

2. 25% of the W-2 wages from the qualified trade or business plus 2.5% of the unadjusted basis of certain tangible, depreciable property held and used by the business during the year for production of QBI.

But this limit on the deduction for QBI doesn't apply to taxpayers with taxable income below a threshold amount ($315,000 for married individuals filing jointly, $157,500 for other individuals, indexed for inflation after 2018), with a phase-in for taxable income over this amount.

A qualified trade or business doesn't include performing services as an employee. Additionally, a qualified trade or business doesn't include a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. This exception only applies if a taxpayer's taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers; the benefit of the deduction is phased out for taxable income over this amount.

The IRS's new regulations explaining the 20% deduction for QBI are highly detailed and complex. A sampling of the important guidance contained in the guidance follows:

• Partnership guaranteed payments are not considered attributable to a trade or business and thus do not constitute QBI.

• To the extent that any previously disallowed losses or deductions are allowed in the tax year, they are treated as items attributable to the trade or business for that tax year. But this rule doesn't apply for losses or deductions that were disallowed for tax years beginning before Jan. 1, 2018; they are not taken into account for purposes of computing QBI in a later tax year.

• Generally, a deduction for a net operating loss (NOL) is not considered attributable to a trade or business and therefore,is not taken into account in computing QBI. However, to the extent the NOL is comprised of amounts attributable to a trade or business that were disallowed under a specialized excess business loss limitation for noncorporate taxpayers, the NOL is considered attributable to that trade or business.

• Interest income received on working capital, reserves, and similar accounts is not properly allocable to a trade or business. In contrast, interest income received on accounts or notes receivable for services or goods provided by the trade or business is not income from assets held for investment, but income received on assets acquired in the ordinary course of trade or business.

• The 20% deduction for QBI does not reduce net earnings from self-employment or net investment income under the rules for the 3.8% surtax on net investment income.

• Where a business (or a major portion of it, or a separate unit of it) is bought or sold during the year, the W-2 wages of the individual or entity for the calendar year of the acquisition or disposition are allocated between each individual or entity based on the period during which the employees of the acquired or disposed-of trade or business were employed by the individual or entity.

• The rule generally barring a health services business from being a qualified trade or business doesn't include the provision of services not directly related to a medical field, even though the services may purportedly relate to the health of the service recipient. For example, the performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers, payment processing, or research, testing, and manufacture and/or sales of pharmaceuticals or medical devices.

• The rule generally barring the performance of services in the field of actuarial science from being a qualified trade or business does not include the provision of services by analysts, economists, mathematicians, and statisticians not engaged in analyzing or assessing the financial costs of risk or uncertainty of events.

• The rule barring consulting from being a qualified trade or business doesn't apply to consulting that is embedded in, or ancillary to, the sale of goods if there is no separate payment for the consulting services. For example, a company that sells computers may provide customers with consulting services relating to the setup, operation, and repair of the computers, or a contractor who remodels homes may provide consulting prior to remodeling a kitchen.

Bonus depreciation may be claimed for used property. The TCJA boosted the first-year bonus depreciation allowance from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. That means a business can write off the cost of most machinery and equipment in the year it's placed in service. And, for the first time ever, for property acquired and placed in service after Sept. 27, 2017, bonus depreciation may be claimed for used as well as new equipment. The IRS has explained that used equipment and machinery qualifies for the 100% bonus first-year depreciation allowance if: the taxpayer (or a predecessor) didn't use the property at any time before the acquisition; the property wasn't acquired from a related party or from a component member of a controlled corporate group; and the taxpayer's basis in the used property isn't figured by reference to the basis of the property in the hands of the seller or transferor.

Form W-4 for 2019 will be similar to the 2018 version. The IRS has announced that the 2019 version of the Form W-4 (Employee's Withholding Allowance Certificate) will be similar to the current 2018 version. IRS had earlier issued a draft W-4 for 2019 that was longer than the 2018 version and more complex due to changes made by the TCJA. Bowing to complaints that the proposed changes to the form were too confusing and too complicated, the IRS relented and announced that the Form W-4 for 2019 will be similar to the current 2018 version.

Simplified per-diem increase for post-Sept. 30, 2018 travel. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&E). If the rate paid doesn't exceed the IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn't subject to income- or payroll-tax withholding and isn't reported on the employee's Form W-2. Instead of using actual per-diems, employers may use a simplified "high-low" per-diem, under which there is one uniform per-diem rate for all "high-cost" areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS. The IRS released the "high-low" simplified per-diem rates for post-Sept. 30, 2018, travel. Under the optional high-low method for post-Sept. 30, 2018 travel, the high-cost-area per diem is $287 (up from $284), consisting of $216 for lodging and $71 for M&IE. The per-diem for all other localities is $195 (up from $191), consisting of $135 for lodging and $60 for M&IE.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

--McAvoy + Co, CPA

Q2 2018

Dear Tax Constituent:

The following is a summary of important tax developments that have occurred in the second three months of 2018 that may affect you, your family, your investments, and your livelihood.

Postcard tax form. The IRS released a new draft version of the 2018 Form 1040, U.S. Individual Income Tax Return. The new Form is markedly different from the 2017 version of the form and would replace the current Form 1040, as well as the Form 1040A and the Form 1040EZ. In addition to reflecting a number of changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017), the "postcard" draft form is about half the size of the current version and contains far fewer lines than its predecessor. However, this reduction in length is countered by the fact that the draft form has six new accompanying schedules.

States win in bid to tax online/internet sales. The U.S. Supreme Court ruled that the correct standard in determining the constitutionality of a state tax law is whether the tax applies to an activity that has "substantial nexus" with the taxing state. The case (South Dakota v. Wayfair) involved South Dakota's imposition of tax collection and remittance duties on out-of-state sellers meeting certain gross sales and transaction volume thresholds. With the rise of the digital economy, states have lost significant sales tax revenues because they have been unable to tax online/internet sales under the old physical presence nexus standards. Overturning its prior precedents, the Court held that the prior physical presence rule was an "unsound and incorrect" interpretation of the Commerce Clause that has created unfair and unjust marketplace distortions favoring remote sellers and causing states to lose out on enormous amounts of tax revenue. The Court held that the State had established that the vendor had substantial nexus in this case through "extensive virtual presence".

The IRS advises a "payroll checkup". The IRS has encouraged taxpayers who have typically itemized their deductions to use the withholding calculator on the IRS's website to perform a "payroll checkup", noting that changes made by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017) may warrant an adjustment. TCJA made a number of law changes, effective for tax years beginning after 2017 and before 2026, that affect the amount of itemized deductions that can be claimed and whether taxpayers choose to itemize or claim the standard deduction. They include: nearly doubling standard deductions; limiting the deductions for state and local taxes; limiting the deduction for home mortgage interest in certain cases; and eliminating deductions for employee business expenses, tax preparation fees and investment expenses (including investment management fees, safe deposit box fees and investment expenses from pass-through entities). In light of these changes, some individuals who formerly itemized may now find it more beneficial to take the standard deduction, which could affect how much a taxpayer needs to have their employer withhold from their pay. Also, even those who continue to itemize deductions should check their withholding because of TCJA changes. The IRS warned that having too little tax withheld could result in an unexpected tax bill or penalty at tax time in 2019, and also noted that taxpayers who have too much tax withheld may prefer to receive more in their paychecks instead of in the form of a tax refund.

Tax reform's effect on vehicle and unreimbursed employee expenses. The IRS has provided updated information to taxpayers and employers about changes from the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017) affecting vehicle and unreimbursed employee expenses. Shortly before the enactment of the TCJA, the IRS released optional standard mileage rates for 2018, as well as the maximum standard automobile cost that may be used in computing the allowance under a fixed and variable rate (FAVR) plan. However, TCJA made many tax law changes, including those affecting move-related vehicle expenses, unreimbursed employee expenses, and vehicle expensing. The IRS advised taxpayers that TCJA generally suspended the deduction for moving expenses for tax years beginning after 2017 and before 2026, with an exception for certain members of the Armed Forces. Accordingly, no deduction is allowed for use of an automobile as part of a move using the pre-TCJA 18¢ mileage rate. For the same period, TCJA also suspended all miscellaneous itemized deductions that are subject to the 2%-of-adjusted gross income (AGI) floor, including unreimbursed employee travel expenses. Thus, the 54.5¢ business standard mileage rate generally can't be used to claim an itemized deduction for unreimbursed employee travel expenses (but the 54.5¢ rate still applies for expenses that are deductible in determining AGI, such as for unreimbursed employee travel expenses claimed by reservists and certain state or local government officials). And, for purposes of computing the allowance under a FAVR plan, the maximum standard automobile cost may not exceed $50,000 for passenger automobiles, trucks and vans placed in service after 2017 (up from the pre-TCJA $27,300 for passenger automobiles and $31,000 for trucks and vans).

Family and medical leave credit. The IRS has provided guidance on the new family and medical leave credit, which was added by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017). Under new Code Sec. 45S, for wages paid in tax years beginning in 2018 and 2019, eligible employers can claim a general business credit equal to the applicable percentage (between 12.5% and 25%) of the amount of wages paid to qualifying employees for up to 12 weeks per tax year while the employees are on family and medical leave, if certain requirements are met. For purpose of the credit, family and medical leave includes leave for: the birth of an employee's child and to care for the child; placement of a child with the employee for adoption or foster care; care for the employee's spouse, child, or parent who has a serious health condition; a serious health condition that makes the employee unable to perform the functions of his or her position; any qualifying exigency due to an employee's spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces; and care for a service member who is the employee's spouse, child, parent, or next of kin.

Million dollar FBAR penalty. The Supreme Court declined to review a Ninth Circuit decision (U.S. v. Bussell), which, on finding that a taxpayer willfully failed to file a Report of Foreign Bank and Foreign Accounts (FBAR) with regard to her foreign account, let stand a million dollar FBAR penalty. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship tor that calendar year by filing an FBAR with the Department of the Treasury. Those who willfully fail to file their FBARs on a timely basis can be assessed a penalty of up to the greater of $100,000 (as adjusted for inflation) or 50% of the balance in the unreported bank account for each year they fail to file a required FBAR. The Ninth Circuit rejected a variety of the taxpayer's arguments, including that the imposition of the penalty violated the U.S. Constitution because the fine was excessive under the Eighth Amendment. The taxpayer argued that the penalty was a punitive forfeiture, grossly disproportional to the gravity of the offense, but the Court held that the assessment was proper because the taxpayer defrauded the government and reduced public revenues.

Inflation-adjusted HSA amounts for 2019. The IRS has released the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2019 for health savings accounts (HSAs). Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers, as well as other persons (e.g., family members), also may contribute on behalf of an eligible individual. A person is an "eligible individual" if he is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a HDHP, unless the other coverage is permitted insurance (e.g., for worker's compensation, a specified disease or illness, or providing a fixed payment for hospitalization). For calendar year 2019, the limitation on deductions for an individual with self-only coverage under an HDHP is $3,500 (up from $3,450 for 2018). For calendar year 2019, the limitation on deductions for an individual with family coverage under an HDHP is $7,000 (up from $6,900 for 2018). For calendar year 2019, an HDHP is defined as a health plan with an annual deductible that is not less than $1,350 (same as for 2018) for self-only coverage or $2,700 (same as for 2018) for family coverage, and with respect to which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,750 (up from $6,650 for 2018) for self-only coverage or $13,500 (up from $13,300 for 2018) for family coverage.

More returns to be filed electronically. The IRS has issued proposed regulations that would require all information returns, regardless of type, to be taken into account in determining whether a person met the 250-return threshold and thus was required to file the returns electronically. The proposed regs would also require any person required to file information returns electronically to file corrected information returns electronically, regardless of the number of corrected information returns being filed. Existing regs provide that the 250-return threshold applies separately to each type of information return and each type of corrected information return filed. Accordingly, under the existing rules, different types of forms are not aggregated for purposes of determining whether the 250-return threshold is satisfied, with the result that fewer taxpayers are required to file electronically. The proposed regs are proposed to go into effect for returns filed after Dec. 31, 2018.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

--McAvoy + Co, CPA

Q1 2018

Dear Tax Constituent:

The following is a summary of important tax developments that have occurred in the first three months of 2018 that may affect you, your family, your investments, and your livelihood. 

Appropriations Act tax changes. On March 23, President Trump signed into law the Consolidated Appropriations Act 2018 (P.L. 115-141), a $1.3 trillion spending bill that funds the federal government through September. 30. In addition to funding the government, the bill also contains a number of tax provisions, including a fix to the deduction for qualified business income (QBI) related to the so-called "grain glitch" which provided a disproportionate tax benefit to farmer who sold goods to co-operatives, a provision enhancing the low-income housing credit with a four year increase in the State housing credit ceiling, and a large number of technical corrections, including ones revamping the new partnership audit rules.

Bipartisan Budget Act includes 2017 impact. On February 9, President Trump signed into law the Bipartisan Budget Act of 2018 (P.L. 114-74). In addition to providing a continuing resolution to fund the federal government through March 23, the 2-year budget contained a number of tax law changes. In particular, the Budget Act retroactively extends through 2017 over 30 so-called "extender" provisions, including welcome tax relief to victims of the California wildfires and Hurricanes Harvey, Irma, and Maria, and provided a number of miscellaneous tax-related provisions.

Short-term funding bill delays some Obamacare taxes. On January 22, President Trump signed into law the Federal Register Printing Savings Act of 2017 (P.L. 115-120), which ended the government shutdown and funded the government through February 8th. It also suspended several Affordable Care Act (ACA, or Obamacare) taxes. The 40% excise tax on high cost employer-sponsored health coverage (the so-called "Cadillac tax") was delayed to apply for tax years beginning after Dec. 31, 2021; the 2.3 % medical device tax was delayed retroactively to the beginning of 2018 to apply to sales after Dec. 31, 2019; and the annual fee on health insurance providers was suspended for 2019 (however, it remains in effect for 2018).

The IRS will not accept "silent" 2017 returns. The IRS said it will not accept electronically filed 2017 tax year returns that don't report whether the taxpayer has complied with the individual mandate provisions of the ACA. Under the ACA shared responsibility or individual mandate provision, individuals are required to obtain qualifying minimum essential coverage (MEC), receive an exemption from the coverage requirement (e.g., on account of having household income below the return filing threshold), or pay a penalty. Tax returns that didn't report full-year MEC or an exemption, or pay an penalty, are referred to as "silent returns." While the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017) provides that for months beginning after Dec. 31, 2018, the amount of the individual shared responsibility payment is reduced to zero, the IRS will not treat as complete and accurate 2017 returns that are silent on compliance with ACA individual mandate.

Battery qualified for residential energy credit. In a private letter ruling (IRS Letter Ruling 201809003), the IRS held that a battery that was integrated into an existing solar energy system was a qualified solar electric property expenditure eligible for the Code Sec. 25D tax credit under which an individual may claim a 30% credit for qualified solar electric property expenditures made by him during the year. Thus, it appears that taxpayers can not only save on their electrical bills and tax bills by installing a solar energy system but will also obtain an additional tax credit and shield themselves from grid outages from storms, etc., by installing a battery and storing the energy generated by their solar equipment. But, note that the battery cost will qualify for the credit only if the battery only stores solar-generated energy.

Roth IRA conversion recharacterization. In Frequently Asked Questions posted to its website, the IRS clarified the effective date of a provision in the TCJA prohibiting a taxpayer from recharacterizing a Roth conversion. The TCJA amended Code Sec. 408A(d)(6)(B(iii) such that the provision allowing taxpayers to recharacterize Roth IRA contributions and traditional IRA contributions does not apply to a conversion contribution to a Roth IRA. The TJCA also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as Code Sec. 401(k) or Code Sec. 403(b) plans. The change in law is effective for tax years beginning after Dec. 31, 2017. There was some confusion among tax professionals regarding the effective date of the change. Specifically, there was some debate as to whether the pre-2018 effective date referred to the tax year when the recharacterization was made, or the tax year when the unwinding of that recharacterization occurs. The FAQs provide that if a traditional IRA was converted to a Roth IRA in 2017, it may be recharacterized as a contribution to a traditional IRA until Oct. 15, 2018.

Offshore voluntary disclosure program ending. In IR 2018-52, 3/13/2018, the IRS announced that it will be closing the offshore voluntary disclosure program (OVDP) on September 28, 2018. The OVDP is a tax amnesty program that permits U.S. taxpayers with unreported foreign accounts to avoid criminal charges and pay reduced civil penalties by making a voluntary disclosure to the IRS. The IRS noted that, by alerting taxpayers to the closure now, it intends to provide U.S. taxpayers with undisclosed foreign financial assets time to avail themselves of the OVDP before the program closes.

Withholding tables reflect recently enacted tax reform. The IRS released Notice 1036, Early Release Copies of the 2018 Percentage Method Tables for Income Tax Withholding, which updated the income tax withholding tables for 2018 to reflect changes made by the TCJA, including major changes to the income tax rates, an increased standard deduction, and the elimination of personal exemptions, effective for tax years beginning after Dec. 31, 2017. The IRS also provided information that explained the use of the new tables and related subjects. The 2018 federal withholding tables, which were issued later than usual due to TCJA's enactment, must be used beginning on Feb. 15, 2018. That is also the deadline for changing the optional flat rate for withholding on supplemental wage payments of $1 million or less (bonuses, commissions, etc.) from 25% to 22%.

Withholding calculator. The IRS also released an updated withholding calculator on its website, as well as a new version of Form W-4, to help taxpayers check their 2018 withholding in light of changes made by the TCJA. IRS also issued a series of frequently asked questions on the withholding calculator. While the updated withholding tables are designed to work with existing Forms W-4 that employers have on file, many taxpayers (such as those with children or multiple jobs, and those who itemized deductions under prior law) are affected by the new law in ways that can't be accounted for in the new withholding tables. The IRS encourages employees to use the withholding calculator and new form to perform a quick "paycheck checkup" to help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time in 2019. It can also prevent employees from having too much tax withheld.

Withholding on gain on sales or exchanges of certain partnership interests suspended. The TCJA provided that, effective Jan. 1, 2018, if a partnership engages in a U.S. trade or business, a portion of the gain or loss of a nonresident alien individual or foreign corporation on the sale or exchange of an interest in the partnership is treated as effectively connected with the conduct of a U.S. trade or business under Code Sec. 864(c)(8). Withholding is imposed under Code Sec. 1446(f) at a 10% rate on the amount realized on the disposition. However, the IRS has announced that, pending further guidance, it was suspending withholding obligations under Code Sec. 1446(f) with respect to certain publicly traded partnership (PTP) interests. The suspension is limited to the withholding obligation and doesn't apply to the treatment of the gain or loss as effectively connected income.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

--McAvoy + Co, CPA