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On July 1, President Trump signed into law a sweeping, bipartisan IRS reform bill called the Taxpayer First Act ( P.L. 116-25). This legislation aims to broadly redesign the IRS for the first time in over 20 years.

On July 1, President Trump signed into law a sweeping, bipartisan IRS reform bill called the Taxpayer First Act ( P.L. 116-25). This legislation aims to broadly redesign the IRS for the first time in over 20 years.

Reworked IRS Reform Bill

The Senate approved the Taxpayer First Act by voice vote on June 13. The measure was unanimously approved in the House on June 10.

The reworked IRS reform bill, originally introduced in the last Congress, was revised in early June after the House passed a prior version in April. However, the original House-approved bill (HR 1957) was quickly doomed in the Senate because of controversy surrounding the IRS’s Free File program.

The provision codifying the IRS’s Free File program was removed from the original bill, and the measure was reintroduced as HR 3151. Congress then quickly sent it to the president’s desk.

Taxpayer First Act Provisions

The Taxpayer First Act aims to reform the IRS into a more taxpayer-friendly agency. It requires the IRS to develop a comprehensive customer service strategy, as well as a plan to redesign the IRS’s structure, modernize its technology, and enhance its cyber security.

The measure also:

• codifies and enhances an independent Office of Appeals within the IRS;
• waives the application fee for an offer in compromise (OIC) by a low-income taxpayer;
• sets new electronic filing requirements;
• clarifies information available about low-income taxpayer clinics (LITCs);
• codifies the Volunteer Income Tax Assistance (VITA) Program;
• requires notice regarding the closure of taxpayer assistance centers (TACs);
• improves the IRS whistleblower program;
• modifies the private debt collection program;
• clarifies procedures for equitable relief from joint liability;
• establishes new safeguards on seizing funds believed to be structured to avoid the $10,000 financial reporting requirement; and
• modifies procedures for the issuance of summons and notice of third-party contacts by the IRS.

Hill Reaction

"This signing is the culmination of a lengthy, bipartisan process undertaken by the [House] Ways and Means Committee to implement pro-taxpayer reforms at the IRS for the first time in more than 20 years," Senate Finance Committee (SFC) Ron Wyden, D-Ore., said in a July 1 statement. "New protections for low-income taxpayers, practical enforcement reforms, and upgraded assistance for taxpayers and small businesses will all now go into place."

Additionally, the House’s top Republican tax writer issued a statement after Trump signed the IRS reform legislation. "I’m proud that after three years of thoughtful bipartisan work, our bold package of reforms to the Internal Revenue Service are the law of the land," Ways and Means ranking member Kevin Brady, R-Tex., said on July 1. "Thank you to President Trump for signing this historic legislation, which is the biggest and boldest step in over 20 years to redesign and restructure the IRS into an agency with a singular mission – quality taxpayer service."

The House has approved a bipartisan repeal of the Affordable Care Act’s (ACA) so-called "Cadillac"excise tax on certain high-cost insurance plans.

The House has approved a bipartisan repeal of the Affordable Care Act’s (ACA) so-called "Cadillac"excise tax on certain high-cost insurance plans.

ACA Cadillac Tax Repeal

The Middle Class Health Benefits Tax Repeal Bill (HR 748) cleared the House on the evening of July 17 by a 419-to-6 vote. The bipartisan bill would repeal the 40 percent excise tax under the ACA known as the "Cadillac tax" on certain high-cost employer-sponsored health care plans.

Congress has repeatedly delayed the ACA’s "Cadillac" tax, which is currently set to go into effect in 2022. However, HR 748 would fully repeal the tax.

Although the measure has bipartisan support in the Senate, as for when it will get its legs in the upper chamber remains to be seen. Lately, Senate Majority Leader Mitch McConnell, R-KY., has been viewed on Capitol Hill as focusing more on moving nominations than considering tax bills.

HR 748’s Large Price Tag May Signal Hope for Tax Extenders

Notably, HR 748 dodged House Democrats’ "pay as you go" rules for tax legislation, thus carrying with it a large price tag with no offsets. The nonpartisan Congressional Budget Office (CBO) has estimated that the bill would cost the federal government more than $196 billion over 10 years.

Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, has signaled that Democrats’ support for repealing the ACA’s "Cadillac"tax without pay-fors may signal a newly opened door for tax extenders. Grassley has consistently expressed that he is focused on addressing the previously and soon to be expired tax breaks known as tax extenders but has been waiting for the Democratic controlled House to send such a bill, noting that tax legislation must originate in the House.

However, House Democrats’ tax extenders bill, the Taxpayer Certainty and Disaster Tax Relief Bill of 2019 (HR 3301) would offset its costs by causing the GOP tax law’s increase in estate tax exemption amounts to sunset early at the beginning of 2023. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), the estate tax provisions would expire at the start of 2026.

The bill cleared the House Ways and Means Committee last month but has not yet reached the House floor. Senate Republicans have called any proposal to repeal provisions under the TCJA a "nonstarter."

The IRS has released final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.

The IRS has released final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.

The Treasury Department and the IRS had issued the temporary regulations ( T.D. 9766) to clarify that the rule that a disregarded entity is treated as a corporation for employment tax purposes does not apply to the self-employment tax treatment of any individuals who are partners in a partnership that owns a disregarded entity. The temporary regulations continued to explicitly provide that the owner of a disregarded entity who is treated as a sole proprietor for income tax purposes is subject to self-employment taxes. A notice of proposed rulemaking ( REG-114307-15) cross-referencing T.D. 9766was published on the same day.

The final regulations adopt the proposed regulations as amended. The corresponding temporary regulations are removed.

Disregarded Entity

These regulations affect partners in a partnership that owns a disregarded entity, and contain amendments to 26 CFR part 301. Generally, under Reg. §301.7701-2(c)(2)(i) and except as otherwise provided, a business entity that has a single owner and is not a corporation under Reg. §301.7701-2(b)is disregarded as an entity separate from its owner (a disregarded entity). However, Reg. §301.7701-2(c)(2)(iv)(B) treats a disregarded entity as a corporation for purposes of employment taxes imposed under Subtitle C of the Internal Revenue Code. This exception to the treatment of disregarded entities does not apply to taxes imposed under Subtitle A of the Code, including self-employment taxes.

Effective Date

These regulations are effective on July 2, 2019.

Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.

Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.

Why Truncate?

The Protecting Americans from Tax Hikes (PATH) Act of 2015 ( P.L. 114-113) amended Code Sec. 6051(a)(2) by replacing the requirement that employers include employees’ SSNs on copies of Forms W-2 furnished to employees with a requirement to use an "identifying number for the employee."Because the SSN was no longer required to appear on Forms W-2 furnished to employees, the IRS published proposed regulations in 2017 to allow employers to truncate employees’ SSNs on those Forms W-2 ( REG-105004-16). The amendments were intended to aid employers’ efforts to protect employees from identity theft.

The final regulations adopt the proposed regulations without substantive changes to the content of the rules.

SSN Truncation on Forms W-2

The final regulations permit employers to truncate employees’ SSNs on copies of:

• Forms W-2 furnished to employees to report wages paid, employment taxes withheld, etc.;
• Forms W-2 furnished to employees to report wages paid in the form of group-term life insurance;
• Forms W-2 furnished to payees to report third-party sick pay; and
• Forms W-2c furnished to correct errors on Forms W-2.

The regulations do not apply to any other forms. Also, truncation is not mandatory; the regulations permit truncation but do not require it.

Under the general truncation rules, a TTIN cannot be used on a statement or document if a statute, regulation, other guidance published in the Internal Revenue Bulletin, form, or instructions:

• specifically requires use of an SSN, IRS individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or IRS employer identification number (EIN); and
• does not specifically permit truncation.

For instance, an employer cannot truncate an employee’s SSN on copies of Forms W-2 filed with the Social Security Administration.

The IRS intends to incorporate the revised regulations into forms and instructions.

Effective Date; Applicability Date

The final regulations are effective on July 3, 2019, but when they apply varies. Reg. §31.6051-1, Reg. §31.6051-3, and Reg. §1.6052-2, as amended, apply for statements required to be filed and furnished under Code Sec. 6051 and Code Sec. 6052 after December 31, 2020. Reg. §31.6051-2, as amended, applies on July 3, 2019. Reg. §301.6109-4, as amended, applies to returns, statements, and other documents required to be filed or furnished after December 31, 2020.

IRS final regulations provide rules that apply when the lessor of investment tax credit property elects to pass the credit through to a lessee. If this election is made, the lessee is generally required to include the credit amount in income (50 percent of the energy investment credit). The income is included in income ratably over the shortest MACRS depreciation period that applies to the investment credit property. No basis reduction is made to the investment credit property.

IRS final regulations provide rules that apply when the lessor of investment tax credit property elects to pass the credit through to a lessee. If this election is made, the lessee is generally required to include the credit amount in income (50 percent of the energy investment credit). The income is included in income ratably over the shortest MACRS depreciation period that applies to the investment credit property. No basis reduction is made to the investment credit property.

Partners and S shareholders who receive the credit (i.e., are the ultimate credit claimants) must make income inclusions in proportion to their share of the credit.

No Basis Increase for Partners and S Shareholders

The regulations resolve a contentious issue against taxpayers. They provide that a partner’s income inclusions are not treated as an item of partnership income under subchapter K. A similar rule applies to S corporations. Therefore, basis adjustment rules that would increase a partner’s outside basis or S shareholder’stock basis if the income inclusion amounts were treated as items of income do not apply. The IRS says its interpretation is appropriate because the investment credit and limitations on the investment credit are determined at the partner and S shareholder level.

Coordination With Recapture Rules

If a recapture event occurs an adjustment is made to the lessee’s (or ultimate claimant’s) gross income to account for any difference between the amounts that were included in income and the credit that is allowed after recapture. Special rules are provided when the amount of the unrecaptured credit exceeds the income inclusions and when the income inclusions exceed the unrecaptured credit.

Election to Accelerate Income Inclusion Upon Lease Termination

The lessee (or ultimate claimant) may make an irrevocable election to include in gross income any remaining income inclusion amounts in the tax year in which a lease terminates or is otherwise disposed of. If a partner or S shareholder disposes of its partnership or S corporation interest, the partner or S shareholder may also make an irrevocable election to include remaining inclusion amounts in income in the year of disposition. These elections may only be made if the recapture period has expired and a recapture event had not occurred during the recapture period.

Effective Date

The final regulations are effective on July 17, 2019 and apply to investment credit property placed in service on or after September 19, 2016.

Effective July 17, 2019, the list of preventive care benefits that can be provided by a high deductible health plan (HDHP) without a deductible or with a deductible below the applicable minimum deductible is expanded. The list now includes certain cost effective medical care services and prescription drugs for certain chronic conditions.

Effective July 17, 2019, the list of preventive care benefits that can be provided by a high deductible health plan (HDHP) without a deductible or with a deductible below the applicable minimum deductible is expanded. The list now includes certain cost effective medical care services and prescription drugs for certain chronic conditions.

HDHPs and Health Savings Accounts

Individuals covered by an HDHP generally may establish and deduct contributions to a Health Savings Account (HSA). To qualify as an HDHP, a plan may not provide benefits for any year until the minimum deductible for that year is satisfied. However, an HDHP is not required to have a deductible for preventive care.

Current Rule for Chronic Conditions

Under the existing rule, preventive care generally does not include any service or benefit intended to treat an existing illness, injury, or condition. As a result, the cost barriers for care have resulted in some individuals diagnosed with certain chronic conditions failing to get effective and necessary care that would prevent making the chronic condition worse. Failure to address chronic conditions can lead to amputation, blindness, heart attacks, and strokes that require considerably more extensive medical intervention.

Treatments for Chronic Care as Preventive Care

The following medical care services are now classified as preventive care for someone with that chronic condition:

• angiotensin converting enzyme (ACE) inhibitors for individuals diagnosed with congestive heart failure, diabetes, or coronary artery disease;
• anti-resorptive therapy for individuals diagnosed with osteoporosis or osteopenia;
• blood pressure monitor for individuals diagnosed with hypertension;
• peak flow meter for individuals diagnosed with asthma;
• inhaled corticosteroids for individuals diagnosed with asthma;
• glucometer for individuals diagnosed with diabetes;
• hemoglobin A1c testing for individuals diagnosed with diabetes;
• insulin and other glucose lowering agents for individuals diagnosed with diabetes;
• retinopathy screening for individuals diagnosed with diabetes; and
• statins for individuals diagnosed with heart disease and/or diabetes.

The continuity safe harbor placed-in-service date deadlines for the investment tax energy credit (Code Sec. 48) and the renewable electricity production credit (Code Sec. 45(a)) may be tolled if a construction delay is caused by national security concerns raised by the Department of Defense (DOD).

The continuity safe harbor placed-in-service date deadlines for the investment tax energy credit (Code Sec. 48) and the renewable electricity production credit (Code Sec. 45(a)) may be tolled if a construction delay is caused by national security concerns raised by the Department of Defense (DOD).

Background

In general, the energy credit may only be claimed if construction on a qualified facility begins before January 1, 2022. In the case of the production credit, construction must begin before January 1, 2017 (January 1, 2020 for a wind facility). Once construction begins, taxpayers are required to make continuous progress toward completion under either a continuous construction test or a continuous efforts test. These tests are deemed satisfied under the continuity safe harbor if the facility is placed in service within four calendar years after the calendar year in which construction begins.

Tolling Requirements

A construction deadline in the continuity safe harbor is tolled if all of the following requirements are satisfied:

• one or more necessary government permits or approvals for construction have been issued;
• construction has begun;
• the DOD provides written notice that the construction plan should be modified in the interest of national security;
• the plan is modified in a way that is acceptable to the DOD to mitigate the national security concerns; and
• as a result of the plan modification, new or additional permits or licenses must be obtained which will delay the placed-in-service date of the facility or energy property.

Tolling Period

The tolling period of the continuity safe harbor begins on the day the DOD provides written notice that the plan of construction requires modification to meet national security concerns.

The tolling period ends when one of the following events occurs:

• all new or additional permits or licenses are obtained;
• written confirmation is received that all of the required new or additional permits or licenses will not be issued; or
• the relevant federal or state authorities are notified in writing that the modification to the plan will no longer be pursued.

The maximum length of the tolling period is four years.

No Rulings

The IRS will not issue private letter rulings or determination letters regarding the application of the tolling provision or the beginning of construction requirement.

Modified Rulings

Notice 2013-29, 2013-1 C.B. 1085, Notice 2013-60, 2013-2 C.B. 431, Notice 2014-46, 2014-2 C.B. 520, Notice 2015-25, 2015-13 I.R.B. 814, Notice 2016-31, 2016-23 I.R.B. 1025, Notice 2017-4, 2017-4 I.R.B. 541, and Notice 2018-59, 2018-28 I.R.B. 196, are modified.

The Treasury and IRS have issued proposed regulations on provisions dealing with passive foreign investment companies (PFICs). Proposed regulations published on April 25, 2015, also have been withdrawn ( NPRM REG-108214-15).

The Treasury and IRS have issued proposed regulations on provisions dealing with passive foreign investment companies (PFICs). Proposed regulations published on April 25, 2015, also have been withdrawn ( NPRM REG-108214-15).

U.S. persons who own interests in PFICs are subject to rules that limit deferral on passive income earned by foreign corporations ( Code Sec. 1291– Code Sec. 1298). In general, a PFIC is a foreign corporation that in any given year:

• has income that is 75 percent or more passive income (income test); or
• owns, on average, assets that are 50 percent or more passive-income-producing (asset test).

The proposed regulations provide general guidance regarding PFICs, and guidance on the PFIC insurance exception. Specifically, the proposed regulations cover:

• the determination of ownership in a PFIC, and the treatment of certain income received or accrued by a foreign corporation and assets held by a foreign corporation under Code Sec. 1297;
• rules for determining whether a U.S. person that directly or indirectly holds stock in a PFIC is treated as a PFIC shareholder, and whether a foreign corporation is a PFIC; and
• whether a foreign insurance company is a qualifying insurance company (QIC) under Code Sec. 1297(f), and the amounts of income and assets that a QIC can exclude under the PFIC insurance exception.

General Guidance

The proposed regulations specify that, in applying the asset test, the period over which the average percentage is calculated is at least quarterly. However, taxpayers are allowed to use a shorter period, such as a monthly of daily measurement of asset values.

The proposed regulations address attribution of ownership under the look-through subsidiary rules of Code Sec. 1297(c) for determining PFIC status. These rules treat a foreign corporation (FC1) that owns 25 percent or more of another foreign corporation (FC2) as owning and earning a proportional amount of the other foreign corporation’s income and assets. The proposed regulations allow attribution from FC2 to FC1, if FC1 has a greater than 50 percent ownership interest in FC2.

The proposed regulation also provide a partnership look-through rule for the treatment of a partnership interest owned by a foreign corporation, for purposes of determining whether the foreign corporation is a PFIC. Under the rule, the same 25 percent ownership threshold applies to partnership interests as is applied to interests in corporations.

PFIC Insurance Exception

The income of a QIC derived in the active conduct of a trade or business is not treated as passive income for purposes of determining whether a corporation is a PFIC. The QIC test is based on the ratio of the foreign insurance company’s "applicable insurance liabilities" to total assets. Applicable insurance liabilities are the smallest of:

• insurance liabilities on the company’s most recent applicable financial statement (AFS);
• liabilities required by local law or regulation; or
• as provided under Treasury regulations.

Current law allows a foreign corporation to use a local AFS if it does not do financial reporting based on the rigorous and widely-accepted U.S. generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS).

The proposed regulations provide a special rule for foreign corporations that change their method of preparing their AFS by ceasing to prepare this statement under either U.S. GAAP or IFRS without a non-federal tax business purpose for the change. The foreign corporation must continue to prepare its AFS under either U.S. GAAP or IFRS. Failing to do so will mean the foreign corporation has no applicable insurance liabilities for the QIC test.

Additionally, if an AFS is prepared under local accounting standards that do not require discounting unpaid losses and other loss reserves on an economically reasonable basis, AFS insurance liabilities must be reduced under U.S. GAAP or IFRS discounting principles.

Applicability Date

The proposed regulations are proposed to apply to tax years of U.S. persons that are shareholders in certain foreign corporations beginning on or after the date of publication of the Treasury Decision adopting these regulations as final regulations in the Federal Register.

Until the regulations are final:

• taxpayers may choose to apply the proposed regulations (other than Proposed Reg. §1.1297-4and Proposed Reg. §1.1297-5) for open tax years;
• U.S persons and shareholders in certain foreign corporations may apply Proposed Reg. §1.1297-4 and Proposed Reg. §1.1297-5, for tax years beginning after December 31, 2017; and
• taxpayers may rely on Notice 88-22, 1988-1 CB 489, providing guidance on the income and asset tests.

Comments

Written or electronic comments and requests for public hearing must be received by September 9, 2019. Send submissions to: CC:PA:LPD:PR (REG-105474-18), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG-105474-18), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-105474-18).

Proposed regulations would provide an exception to the unified plan rule for multiple employer plans (MEPs). The purpose is to reduce the risk of plan disqualification due to noncompliance by other participating employers. The regulations would apply on or after the publication date of final regulations in the Federal Register. They cannot be relied upon until then. Comments and requests for a public hearing must be received by October 1, 2019.

Proposed regulations would provide an exception to the unified plan rule for multiple employer plans (MEPs). The purpose is to reduce the risk of plan disqualification due to noncompliance by other participating employers. The regulations would apply on or after the publication date of final regulations in the Federal Register. They cannot be relied upon until then. Comments and requests for a public hearing must be received by October 1, 2019.

Multiple Employer Plans

A MEP is a single plan with adopted by multiple unrelated employers. Multiple employer plans under Code Sec. 413(c) can be structured either as:

• an open MEP where an organization with employees takes the lead by establishing the plan for its own employees, and has other unrelated employers join the plan as co-sponsors;
• a closed MEP in which a group or association of employers that meets a commonality requirement takes the lead in establishing the plan, and members are free to adopt it.

Open MEPs are often established by organizations that specialize in providing benefits for smaller employers (typically, 401(k) plans). Note that MEPs are distinct from union multiemployer plans governed by Code Sec. 413(b), but share some of the same rules.

Under the unified plan rule in the current regulations for both MEPs and multiemployer plans, a qualification or operational failure by one employer can result in a total plan failure for all participating employers. The administration is trying to change that, to encourage MEP participation.

Proposed Exception

Under the proposed regulations, an eligible defined contribution MEP would qualify for an exception to the unified plan rule. The exception turns on the ability of the MEP plan administrator under the terms of the plan to spin off the assets and account balances attributable to employees of a noncompliant participating employer into a separate plan and then termination of that plan. A spinoff could be either a spinoff initiated by the unresponsive participating employer and implemented by the plan administrator, or a spinoff-termination implemented by the plan administrator.

The exception would be available if the participating employer is responsible for a qualification failure that it is unable or unwilling to correct. It would also be available if the participating employer is nonresponsive to the plan administrator’s reasonable and timely requests for information or for action.

Exception Requirements

Under the proposed exception, a defined contribution MEP would not be disqualified on account of a participating employer failure if the following conditions are satisfied:

• the MEP satisfies certain eligibility requirements, including established practices and procedures to promote compliance and a requirement to adopt relevant plan language;
• the MEP plan administrator provides notice and an opportunity for the unresponsive participating employer to take remedial action;
• the administrator implements a spinoff in the event the unresponsive participating employer fails to take appropriate remedial action; and
• the administrator complies with any information request by the IRS or a representative of the spun-off plan made in connection with an IRS examination of the spun-off plan, including an information request related to the unresponsive participating employer’s participation in the MEP for years prior to the spinoff.

Participating employer failures would include known compliance failures, as well as failure to provide information to the MEP plan administrator so that the administrator can determine whether there is an actual plan or operational failure.

One of the most complex, if not the most complex, provisions of the Patient Protection and Affordable Care Act is the employer shared responsibility requirement (the so-called "employer mandate") and related reporting of health insurance coverage. Since passage of the Affordable Care Act in 2010, the Obama administration has twice delayed the employer mandate and reporting. The employer mandate and reporting will generally apply to applicable large employers (ALE) starting in 2015 and to mid-size employers starting in 2016. Employers with fewer than 50 employees, have never been required, and continue to be exempt, from the employer mandate and reporting.

Employer mandate

The employer mandate under Code Sec. 4980H and employer reporting under Code Sec. 6056 are very connected. Code Sec. 4980H generally provides that an ALE is required to pay a penalty if it fails to offer minimum essential coverage and any full-time employee receives cost-sharing or the Code Sec. 36B premium assistance tax credit. An ALE would also pay a penalty if it offers coverage and any full-time employee receives cost-sharing or the Code Sec. 36B credit.

To receive the Code Sec. 36B credit, an individual must have obtained coverage through an Affordable Care Act Marketplace. The Marketplaces will report the names of individuals who receive the credit to the IRS. ALEs must report the terms and conditions of health care coverage provided to employees (This is known as Code Sec. 6056 reporting). The IRS will use all of this information to determine if the ALE must pay a penalty.

ALEs

Only ALEs are subject to the employer mandate and must report health insurance coverage under Code Sec. 6056. Employers with fewer than 50 employees are never subject to the employer mandate and do not have to report coverage under Code Sec. 6056.

In February, the Obama administration announced important transition rules for the employer mandate that affects Code Sec. 6056 reporting. The Obama administration limited the employer mandate in 2015 to employers with 100 or more full-time employees. ALEs with fewer than 100 full-time employees will be subject to the employer mandate starting in 2016. At all times, employers with fewer than 50 full-time employees are exempt from the employer mandate and Code Sec. 6056 reporting.

Reporting

The IRS has issued regulations describing how ALEs will report health insurance coverage. The IRS has not yet issued any of the forms that ALEs will use but has advised that ALEs generally will report the requisite information to the agency electronically.

ALEs also must provide statements to employees. The statements will describe, among other things, the coverage provided to the employee.

30-Hour Threshold

A fundamental question for the employer mandate and Code Sec. 6056 reporting is who is a full-time employee. Since passage of the Affordable Care Act, the IRS and other federal agencies have issued much guidance to answer this question. The answer is extremely technical and there are many exceptions but generally a full-time employee means, with respect to any month, an employee who is employed on average at least 30 hours of service per week. The IRS has designed two methods for determining full-time employee status: the monthly measurement method and the look-back measurement method. However, special rules apply to seasonal workers, student employees, volunteers, individuals who work on-call, and many more. If you have any questions about who is a full-time employee, please contact our office.

Form W-2 reporting

The Affordable Care Act also requires employers to disclose the aggregate cost of employer-provided health coverage on an employee's Form W-2. This requirement is separate from the employer mandate and Code Sec. 6056 reporting. The reporting of health insurance costs on Form W-2 is for informational purposes only. It does not affect an employee's tax liability or an employer's liability for the employer mandate.

Shortly after the Affordable Care Act was passed, the IRS provided transition relief to small employers that remains in effect today. An employer is not subject the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. Special rules apply to multiemployer plans, health reimbursement arrangements, and many more.

Please contact our office if you have any questions about ALEs, the employer mandate or Code Sec. 6056 reporting.

People are buzzing about Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, "qualified" distributions from a Roth IRA are tax-free, provided they are held for five years and are made after age 59 1/2, death or disability. You can establish a Roth IRA just as you would a traditional IRA. You can also convert assets in a traditional IRA to a Roth IRA.

Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.

Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.

Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.

Comment: Generally, this income-splitting would be advantageous to any taxpayer who does not expect a sharp increase in income in 2011 or 2012. A wildcard factor is that the lower income tax rates that have been in effect since 2001 will expire after 2010 and could increase in 2011.

There are four ways to convert a traditional IRA to a Roth IRA:

• A rollover - you receive a distribution from a traditional IRA and roll it over to a Roth IRA within 60 days;
• Trustee-to-trustee transfer - you direct the trustee of the traditional IRA to transfer an amount to the trustee of a Roth IRA;
• Same-trustee transfer - the trustee of the traditional IRA transfers assets to a Roth IRA maintained by the same trustee; or
• Redesignation - you designate a traditional IRA as a Roth IRA, instead of opening a new Roth account.

Comment: The account holder does not have to convert all of the assets in the traditional IRA.

Another advantage of converting assets from a traditional IRA to a Roth IRA is that you can change your mind and put the assets back into the traditional IRA. This is known as a recharacterization. You have until the due date, with extensions, for the return filed for the year of conversion. Thus, if you convert assets in 2010, you have until mid-October in 2011 to undo the conversion.

This ability to recharacterize the conversion allows you to use hindsight to check whether your assets declined in value after the conversion. Since you are paying taxes on the amount converted, a decline in asset value means that you paid taxes on phantom income that no longer exists. However, if you convert assets into multiple Roth IRAs, you can choose to recharacterize the assets in a Roth IRA that decreased in value, while maintaining the conversion for a Roth IRA's assets that appreciated in value.

The use of a Roth IRA can be a savvy investment, but whether to convert assets is not an easy decision. If you would like to explore your options, please contact this office.

When you receive cash other than the like-kind property in a like-kind exchange, the cash is treated as "boot." Boot does not render the transaction ineligible for non-recognition treatment but it does require you to recognize gain to the extent of the cash received. The same is true for other non-like-kind property. In other words, anything you receive in addition to the like-kind property, such as relief from debt from a mortgage or additional property that is not like-kind will force you to recognize the gain realized.

An illustration

An example helps to show the gain computation and basis adjustments in a like-kind exchange where boot is received:

You want to transfer land with an adjusted basis of $70,000 and a fair market value of $100,000 in a like-kind exchange. As replacement property you will receive land from Charlie that is like-kind to the one you will transfer. However, Charlie's land has a fair market value of only $80,000. To equalize the value of the like-kind properties being exchanged, Charlie will give you $20,000 in cash. Because the $20,000 is not like-kind property, the like-kind exchange rules treat it as boot and you will have to recognize gain to that extent. Your computation will be as follows:

  $80,000  FMV of like-kind land received
+ $20,000  cash received 
________
$100,000   Your amount realized
- 70,000  Your adjusted basis of the land transferred
________
  $30,000  Realized gain  

However, because you will receive only $20,000 of cash (boot), you will recognize only $20,000 of the gain realized. The rest of the gain or $10,000 will be preserved for a future date when the acquired property is recognized in a taxable transaction.

Basis adjustment. Gain that is not recognized when cash is present in a like-kind exchange will be "preserved" by adjusting your basis in the new property to reflect the remaining gain. The basis rules achieve the gain preservation by first allocating the gain realized to boot to the extent of its fair market value, then to the like-kind property in proportion to its relative fair market value.

The basis of the acquired property will be the adjusted basis of the property transferred, increased by recognized gain and decreased by loss recognized or money received in the exchange. In the above example, your adjusted basis in the replacement property will be $70,000. Because the fair market value of the replacement property is $80,000, the $10,000 of realized but unrecognized gain will be preserved in your adjusted basis.

Cash in excess of gain. In addition, if the fair market value of boot received exceeds the gain realized, only this amount of realized gain is recognized.

If, in our example, your adjusted basis were $90,000, your realized gain would only be $10,000 ($100,000 amount realized minus $90,000 adjusted basis).  In that case, your recognized gain would be limited to $10,000 even though you received $20,000 in cash.

Starting in 2010, the $100,000 adjusted gross income cap for converting a traditional IRA into a Roth IRA is eliminated. All other rules continue to apply, which means that the amount converted to a Roth IRA still will be taxed as income at the individual's marginal tax rate. One exception for 2010 only: you will have a choice of recognizing the conversion income in 2010 or averaging it over 2011 and 2012.

The Tax Increase Prevention and Reconciliation Act of 2005 eliminated the $100,000 adjusted gross income (AGI) ceiling for converting a traditional IRA into a Roth IRA. While this provision does not apply until 2010, now may be a good time to make plans to maximize this opportunity.

The Roth IRA has benefits that are especially useful to high-income taxpayers, yet as a group they have been denied those advantages up until now. Currently, you are allowed to convert a traditional IRA to a Roth IRA only if your AGI does not exceed $100,000. A married taxpayer filing a separate return is prohibited from making a conversion. The amount converted is treated as distributed from the traditional IRA and, as a consequence, is included in the taxpayer's income, but the 10-percent additional tax for early withdrawals does not apply.

Significant benefits

While recognizing income sooner rather than later is usually not smart tax planning, in the case of this new opportunity to convert a traditional IRA to a Roth IRA, the math encourages it. The difference is twofold:

1. All future earnings on the account are tax free; and
2. The account can continue to grow tax free longer than a traditional IRA without being forced to be distributed gradually after reaching age 70 ½.

These can work out to be huge advantages, especially valuable to individuals with a degree of accumulated wealth who probably won't need the money in the Roth IRA account to live on during retirement.

Example. Mary's AGI in 2010 is $200,000 and she has traditional IRA balances that will have grown to $300,000. Assuming a marginal federal and local income tax of about 40 percent on the $300,000 balance, the $180,000 remaining in the account can grow tax free thereafter, with distributions tax free. Further assume that Mary is 45 years of age with a 90 year life expectancy and money conservatively doubles every 15 years. She will die with an account of $1.44 million, income tax free to her heirs. If the Roth IRA is bequeathed to someone in a younger generation with a long life expectancy, even factoring in eventual required minimum distributions, the amount that can continue to accumulate tax free in the Roth IRA can be staggering, eventually likely to reach over $10 million.

Planning strategies

Now is not too early to start planning to take advantage of the Roth IRA conversion opportunity starting in 2010. While planning to maximize the conversion will become more detailed as 2010 approaches and your assets and income for that year are more measurable, there are certain steps you can start taking now to maximize your savings.

Start a nondeductible IRA

The income limits on both kinds of IRAs have prevented higher income taxpayers from making deductible contributions to traditional IRAs or any contributions to Roth IRAs. They could always make nondeductible contributions to a traditional IRA, but such contributions have a limited pay-off (no current deduction, tax on account income is deferred rather than eliminated, required minimum distributions).

While a taxpayer could avoid these problems by making nondeductible contributions to a traditional IRA and then converting it to a Roth IRA, this option was not available for upper income taxpayers who would have the most to benefit from such a conversion. With the elimination of the income limit for tax years after December 31, 2009, higher income taxpayers can begin now to make nondeductible contributions to a traditional IRA and then convert them to a Roth IRA in 2010. In all likelihood, there will be little to tax on the converted amount.

What's more, taxpayers with $100,000-plus AGIs should consider continue making nondeductible IRA contributions in the future and roll them over into a Roth IRA periodically. As a result, the elimination of the income limit for converting to a Roth IRA also effectively eliminates the income limit for contributing to a Roth IRA.

Example. John and Mary are a married couple with $300,000 in income. They are not eligible to contribute to a Roth IRA because their AGI exceeds the $160,000 Roth IRA eligibility limit. Beginning in 2006, the couple makes the maximum allowed nondeductible IRA contribution ($8,000 in 2006 and 2007, and $10,000 in 2008, 2009, and 2010). In 2010, their account is worth $60,000, with $46,000 of that amount representing nondeductible contributions that are not taxed upon conversion. The couple rolls over the $60,000 in their traditional IRA into a Roth IRA. They must include $14,000 in income (the amount representing their deductible contributions), which they can recognize either in 2010, or ratably in 2011 and 2012.

Assuming they have sufficient earned income each year thereafter (until reaching age 70 1/2), John and Mary can continue to make the maximum nondeductible contributions to a traditional IRA and quickly roll over these funds into their Roth IRA, thereby avoiding significant taxable growth in the assets that would have to be recognized upon distribution from a traditional IRA.

Rollover 401(k) accounts

Contributions to a Section 401(k) plans cannot be rolled over directly into a Roth IRA. The lifting of the $100,000 AGI limit does not change this rule. However, they often can be rolled over into a traditional IRA and then, after 2009, converted into a Roth IRA.

Not everyone can just pull his or her balance out of a 401(k) plan. A plan amendment must permit it or, more likely, those who are changing jobs or are otherwise leaving employment can choose to roll over the balance into an IRA rather than elect to continue to have it managed in the 401(k) plan.

For money now being contributed to 401(k) plans by employees, an even better option would be for those contributions to be made to a Roth 401(k) plan. Starting in 2006, as long as the employer plan allows for it, Roth 401(k) accounts may receive employee contributions.

Gather those old IRA accounts

Many taxpayers opened IRA accounts when they were first starting out in the work world and their incomes were low enough to contribute. Over the years, many have seen those account balances grow. These accounts now may be converted into Roth IRAs starting in 2010, regardless of income.

Paying the tax

In spite of all the advantages of a Roth IRA, a conversion is advisable only if the taxpayer can readily pay the tax generated in the year of the conversion. If the tax is paid out of a distribution from the converted IRA, that amount is also taxed; and if the distribution counts as an early withdrawal, it is also subject to an additional 10-percent penalty. For those planning to convert who may not already have the funds available, saving now in a regular bank or brokerage account to cover the amount of the tax in 2010 can return an unusually high yield if it enables a Roth IRA conversion in 2010 that might not otherwise take place.

Careful planning is key

Transferring funds between retirement accounts can carry a high price tag if it is done incorrectly. For those who plan carefully, however, converting from a traditional IRA to a Roth IRA can yield very substantial after-tax rates of return. Please feel free to call our offices if you have any questions about how the 2010 conversion opportunity should fit into your overall tax and wealth-building strategy.

The actual date a business asset is placed in service is important because it affects when depreciation may be claimed for tax purposes. Depreciation begins in the tax year that an asset is placed in service. The placed-in-service date is especially important in the case of end-of-tax year acquisitions.

If an asset is placed in service on December 31 by a calendar-year taxpayer, depreciation is claimed on that asset for that tax year. If the same asset is placed in service one day later on January 1, depreciation deductions cannot be taken before that new year. The placed-in-service date also determines whether certain mid-quarter and half-year "conventions" will apply, which can mean greater depreciation deductions if purchase and use are timed just before the quarter or mid-year cut off date.

An asset is placed in service on the date that it is in a condition or state of readiness for a specifically assigned function in a trade or business or the production of income, which is not necessarily the date of acquisition. An asset that is being used in a trade or business is clearly placed in service. However, an asset not put to use is most likely not placed in service, unless everything in the taxpayer's power has been done to put the asset to use. An example of this is a canal barge that was deemed placed in service in the year it was acquired despite not being used until the following tax year because the canals were frozen.

Another related rule is that an asset will not be considered placed in service until the business actually begins operations. For example air conditioners installed in a grocery store before the store's opening were not considered placed in service until the store was actually open for business. In many instances this is not a bad thing, since a startup business usually has a limited amount of income during its first year to offset with depreciation deductions. Depreciation deductions in that case generally are more valuable later in the business's development.

More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.

Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:

• Who are your taxable workers?
• What payroll taxes apply?
• What compensation is taxable?
• When are your payroll taxes due?
• What payroll and other returns should you file?

 Taxable workers

The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.

It's more likely that you hire employees.  In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.

There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.

If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.

What taxes apply

Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.

You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.

Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.

Compensation

Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.

There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.

Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.

Deposit schedule

Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.

Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.

Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.

Forms

If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.

The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.

Penalties are costly

Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.

The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.

You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.

Reporting obligations

Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.

Staying out of trouble with the IRS

Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.

Q: After what period is my federal tax return safe from audit? A: Generally, the time-frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals) or, if later, the date you actually filed the return on a requested filing extension or otherwise. This means that if you file your 2014 return on July 10, 2015, the IRS will have until July 10, 2018 to look at it and "assess a deficiency;" not April 15, 2018.

Q: After what period is my federal tax return safe from audit?

A: Generally, the time-frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals) or, if later, the date you actually filed the return on a requested filing extension or otherwise. This means that if you file your 2014 return on July 10, 2015, the IRS will have until July 10, 2018 to look at it and "assess a deficiency;" not April 15, 2018.

There are exceptions and caveats to this general principle, however. If you file prior to April 15, the IRS still has until April 15 of the third year that follows to audit your return. This means that if you filed an income tax return on February 10, 2017, you still won't be out-of-the-woods until April 15, 2020. For taxpayers who file fraudulent returns, incorrect returns with the intent to evade tax, and those who do not file at all, the IRS may open an audit at any time.

(Don't confuse the deadline for IRS tax assessments with your right to file a refund claim for an amount that you overpaid, either on a filed return or through withholding or estimated tax payments. That deadline is the later of three years from the filing deadline or two years from your last tax payment.)

You may also find some comfort in the practical IRS audit-cycle rhythm. While you are never truly beyond an audit until the statute of limitations has properly run, there are some general standards to keep in mind. Office audits are usually done within 1 1/2 years of the time the return was filed, and field office audits are complete by 2 1/2 years. The rule of thumb is that if you haven't been contacted within this time frame, you're probably not going to be. Especially for small businesses, the IRS has promised to shorten its normal audit cycle so that those taxpayers are not "left hanging" on potential tax liabilities (with interest and penalties) until the three-year limitations period has expired. Whether this shortened period happens, however, is still open to speculation. Most businesses should continue to make it a practice to keep "tax reserves" to cover such audit liabilities.

Whether a parent who employs his or her child in a family business must withhold FICA and pay FUTA taxes will depend on the age of the teenager, the amount of income the teenager earns and the type of business.

FICA and FUTA taxes

A child under age 18 working for a parent is not subject to FICA so long as the parent's business is a sole proprietorship or a partnership in which each partner is a parent of the child (if there are additional partners, the taxes must be withheld). FUTA does not have to be paid until the child reaches age 21. These rules apply to a child's services in a trade or business.

If the child's services are for other than a trade or business, such as domestic work in the parent's private home, FICA and FUTA taxes do not apply until the child reaches 21.

The rules are also different if the child is employed by a corporation controlled by his or her parent. In this case, FICA and FUTA taxes must be paid.

Federal income taxes

Federal income taxes should be withheld, regardless of the age of the child, unless the child is subject to an exemption. Students are not automatically exempt, though. The teenager has to show that he or she expects no federal income tax liability for the current tax year and that the teenager had no income tax liability the prior tax year either. Additionally, the teenager cannot claim an exemption from withholding if he or she can be claimed as a dependent on another person's return, has more than $250 unearned income, and has income from both earned and unearned sources totaling more than $800.

Bona fide employee

Remember also, that whenever a parent employs his or her child, the child must be a bona fide employee, and the employer-employee relationship must be established or the IRS will not allow the business expense deduction for the child's wages or salary. To establish a standard employer-employee relationship, the parent should assign regular duties and hours to the child, and the pay must be reasonable with the industry norm for the work. Too generous pay will be disallowed by the IRS.

For U.S. taxpayers, owning assets held in foreign countries may have a variety of benefits, from ease of use for frequent travelers or those employed abroad to diversification of an investment portfolio. There are, however, additional rules and requirements to follow in connection with the payment of taxes. Some of these rules are very different from those for similar types of domestic income, and more than a few are quite complex.

Two documents do not apply directly to federal income taxation, but are nevertheless highly important. The first of these is a Treasury form, Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. Any individual or organization that owns or has control over a bank or brokerage account must complete this form if the aggregate value of all such accounts under that taxpayer's ownership or control exceeds $10,000. The second such form is not a requirement per se, but taxpayers who have income in a foreign country with which the United States has a treaty would be seriously remiss in failing to complete it. IRS Form 8802, Application for United States Residency Certification, helps to speed and simplify the application process for eligible taxpayers claiming the benefits of tax treaties in connection with foreign taxes paid. Requirements for organizations that may have dual or layered status offer complications that depend on the type of entity, so these instructions must be parsed carefully.

Taxes on real and personal property held overseas are treated quite differently for purposes of federal income taxation, as opposed to the treatment of domestic property. Individuals may claim foreign real property taxes as itemized deductions on Schedule A of Form 1040, just as they would with U.S. real estate. However, taxes on personal property may only be deductible if used in connection with a trade or business or in the production of income.

U.S. taxpayers who own homes in foreign countries are eligible for the capital gains exclusion on the sale of a principal residence subject to the same requirements as domestic homeowners. Likewise, if a taxpayer derives rental income from a home, the rules for reporting income and deductions are the same. However, claiming depreciation expenses in connection with rental income subjects taxpayers to a different set of rules. Code Sec. 168(g) indicates that tangible property used predominantly outside the United States must be depreciated using the alternative depreciation system (ADS), rather than the modified accelerated cost recovery system (MACRS), and involves longer recovery periods. This is true whether the tangible property in question is the residence itself or household appliances contained therein, as well as any other tangible property.

Intangible property such as patents, licenses, trademarks, copyrights and securities produce a variety of types of income, and the taxation of such income may be subject to different rules than similar domestic income. The provisions for taxation of foreign income are often subject to modification by treaty, and the United States has negotiated treaties with over sixty nations.

Income from all sources must be reported in U.S. dollars, regardless of how it is paid. One exception to this rule is that if income is received in a currency that is not convertible to U.S. dollars because of prohibitions placed on conversion by the issuing country, then the taxpayer may choose when to report the income. The income may be reported either in the year earned, according to the most accurate valuation means available, with the taxes paid from other income, or the taxpayer may choose to wait until the currency becomes convertible again.