WASHINGTON—The Internal Revenue Service will be resuming issuing collections notices to taxpayers that were previously suspending during the COVID-19 pandemic, although a date on when they will begin to be sent out has not been set.

WASHINGTON—The Internal Revenue Service will be resuming issuing collections notices to taxpayers that were previously suspending during the COVID-19 pandemic, although a date on when they will begin to be sent out has not been set.

"Right now, we are planning for restarting those notices," Darren Guillot, commissioner for collection and operation support in the IRS Small Business/Self Employment Division, said May 5, 2023, during a panel discussion at the ABA May Tax Meeting. "We have a very detailed plan."

Guillot assured attendees that the plan does not involve every notice just starting up on an unannounced day. Rather, the IRS will "communicate vigorously" with taxpayers, tax professionals and Congress on the timing of the plans so no one will be caught off guard by their generation.

He also stated that the plan is to stagger the issuance of different types of notices to make sure the agency is not overwhelmed with responses to them.

"The notice restart is really going to be staggered," Guillot said. "We’re going to time it at an appropriate cadence so that we believe we can handle the incoming phone calls that it can generate."

Guillot continued: "We want to also be mindful of the impact that it will have on the IRS Independent Office of Appeal. Some of those notices come with appeals rights and we want to make sure that we give taxpayers a chance to resolve their issues without the need to have to go to appeal or even get to that stage of that notice. So, it will be a staggered process."

In terms of helping to avoid the appeals process and getting taxpayers back into compliance, Guillot offered a scenario of what taxpayers might expect. In the example, if a taxpayer was set to receive a final Notice of Intent to Levy right before the pause for the pandemic was instituted, "we’re probably going to give most of those taxpayers a gentle reminder notice to try and see if they want to comply before we go straight to that final notice. That’s good for the taxpayer and it’s good for the IRS. And it’s good for the appellate process as well."

Guillot also said the agency is going to look at the totality of the 500-series of notices and taxpayers and their circumstances to see if there is a more efficient way of communicating and collecting past due amounts from taxpayers.

He also stressed that the IRS has been working with National Taxpayer Advocate Erin Collins and she has offered "input that we’re incorporating and taking into consideration every step of the way."

Collins, who also was on the panel, confirmed that and added that the IRS is "trying to take a very reasonable approach of how to turn it back on," adding that the staggered approach will also help practitioners and the Taxpayer Advocate Service from being overwhelmed as well as the IRS.

Guillot also mentioned that in the very near future, the IRS will start generating CP-14 notices, which are the statutory due notices. This is the first notice that a taxpayer will receive at the end of a tax season when there is money that they owe and those will start to be sent out to taxpayers around the end of May.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service will use 2018 as the benchmark year for determining audit rates as it plans to increase enforcement for those individuals and businesses making more than $400,000 per year.

The Internal Revenue Service will use 2018 as the benchmark year for determining audit rates as it plans to increase enforcement for those individuals and businesses making more than $400,000 per year.

The agency is "going to be focused completely on … closing the gap," IRS Commissioner Daniel said April 27, 2023, during a hearing of the House Ways and Means Committee. "What that means is the auditrate, the most recent auditrate, we have that’s complete and final is 2018. That is the rate that I want to share with the American people. The auditrate will not go above that rate for years to come because for the next several years, at least, we’re going to be focused on work that we’re doing with the highest income filers."

Werfel added that even if the IRS were to expand its audit footprint a few years from now, "you’re still not going to get anywhere near that historical average for quite some time. So, I think there can be assurances to the American people that if you earn under $400,000, there’s no new wave of audits coming. The probability of you being audited before the Inflation Reduction Act and after the Inflation Reduction Act are not changed at all."

He also noted that many of the new hires that will be brought in to handle enforcement will focus on the wealthiest individuals and businesses. Werfel said that there currently are only 2,600 employees that cover filings of the wealthiest 390,000 filers and that is where many of the enforcement hires will be used.

"We have to up our game if we’re going to effectively assess whether these organizations are paying what they owe," he testified. "So, it’s about hiring. It’s about training. And it’s not just hiring auditors, it’s about hiring economists, scientists, engineers. And when I [say] scientists, I mean data scientists to truly help us strategically figure out where the gaps are so we can close those gaps."

Werfel did sidestep a question about the potential need for actually increasing the number of audits for those making under $400,000. When asked about a Joint Committee on Taxation report that found that more than 90 percent of unreported income actually came from taxpayers earning less than $400,000, he responded that "there is a lot of mounting evidence that there is significant underreporting or tax gap in the highest income filers. For example, there’s a study that was done by the U.S. Treasury Department that looked at the top one percent of Americans and found that as much as $163 billion of tax dodging, roughly."

And while answering the questions on the need for more personnel to handle the audits of the wealthy, he did acknowledge that "a big driver" of needing such a large workforce to handle the filings of wealthy taxpayers is due to the complexity of the tax code, in addition to a growing population, a growing economy, and an increasing number of wealthy taxpayers.

Other Topics Covered

Werfel’s testimony covered a wide range of topics, from the size and role of the personnel to be hired to the offering of service that has the IRS fill out tax forms for filers to technology and security upgrade, similar to a round of questions the agency commissioner faced before the Senate Finance Committee in a hearing a week earlier.

He reiterated that a study is expected to arrive mid-May that will report on the feasibility of the IRS offering a service to fill out tax forms for taxpayers. Werfel stressed that if such a service were to be offered, it would be strictly optional and there would be no plans to make using such a service mandatory.

"Our hope and our vision [is] that we will meet taxpayers where they are," he testified. "If they want to file on paper, we’re not thrilled with it, but we’ll be ready for it. If they want the fully digital experience, if they want to work with a third-party servicer, we want to accommodate that."

Werfel also reiterated a commitment to examine the use of cloud computing as a way to modernize the IRS’s information technology infrastructure.

And he also continued his call for an increase in annual appropriations to compliment the funding provided by the Inflation Reduction Act. He testified that modernization funds were "raided" so that phones could be answered and to prevent service levels from declining while still being able to modernize the agency, more annual funds will need to be appropriated.

By Gregory Twachtman, Washington News Editor

The Supreme Court has held that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) does not apply where a delinquent taxpayer has a legal interest in accounts or records summoned by the IRS under Code Sec. 7602(a). The IRS had entered official assessments against an individual for unpaid taxes and penalties, following which a revenue officer had issued summonses to three banks seeking financial records of several third parties, including the taxpayers. Subsequently, the taxpayers moved to quash the summonses. The District Court concluded that, under Code Sec. 7609(c)(2)(D)(i), no notice was required and that taxpayers, therefore, could not bring a motion to quash. 

The Supreme Court has held that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) does not apply where a delinquent taxpayer has a legal interest in accounts or records summoned by the IRS under Code Sec. 7602(a). The IRS had entered official assessments against an individual for unpaid taxes and penalties, following which a revenue officer had issued summonses to three banks seeking financial records of several third parties, including the taxpayers. Subsequently, the taxpayers moved to quash the summonses. The District Court concluded that, under Code Sec. 7609(c)(2)(D)(i), no notice was required and that taxpayers, therefore, could not bring a motion to quash. The Court of Appeals also affirmed, finding that the summonses fell within the exception in Code Sec. 7609(c)(2)(D)(i) to the general notice requirement.

Exceptions to Notice Requirement

The taxpayers argued that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) applies only if the delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS. However, the statute does not mention legal interest and does not require that a taxpayer maintain such an interest for the exception to apply. Further, the taxpayers’ arguments in support of their proposed legal interest test, failed. The taxpayers first contended that the phrase "in aid of the collection" would not be accomplished by summons unless it was targeted at an account containing assets that the IRS can collect to satisfy the taxpayers’ liability. However, a summons might not itself reveal taxpayer assets that can be collected but it might help the IRS find such assets.

The taxpayers’ second argument that if Code Sec. 7609(c)(2)(D)(i) is read to exempt every summons from notice that would help the IRS collect an "assessment" against a delinquent taxpayer, there would be no work left for the second exception to notice, found in Code Sec. 7609(c)(2)(D)(ii). However, clause (i) applies upon an assessment, while clause (ii) applies upon a finding of liability. In addition, clause (i) concerns delinquent taxpayers, while clause (ii) concerns transferees or fiduciaries. As a result, clause (ii) permits the IRS to issue unnoticed summonses to aid its collection from transferees or fiduciaries before it makes an official assessment of liability. Consequently, Code Sec. 7609(c)(2)(D)(i) does not require that a taxpayer maintain a legal interest in records summoned by the IRS.

An IRS notice provides interim guidance describing rules that the IRS intends to include in proposed regulations regarding the domestic content bonus credit requirements for:

An IRS notice provides interim guidance describing rules that the IRS intends to include in proposed regulations regarding the domestic content bonus credit requirements for:

• --the Code Sec. 45 electricity production tax credit,
• --the new Code Sec. 45Y clean electricity production credit,
• --the Code Sec. 48 energy investment credit, and
• --the new Code Sec. 48E clean energy investment credit.

The notice also provides a safe harbor regarding the classification of certain components in representative types of qualified facilities, energy projects, or energy storage technologies. Finally, it describes recordkeeping and certification requirements for the domestic content bonus credit.

Taxpayer Reliance

Taxpayers may rely on the notice for any qualified facility, energy project, or energy storage technology the construction of which begins before the date that is 90 days after the date of publication of the forthcoming proposed regulations in the Federal Register.

The IRS intends to propose that the proposed regs will apply to tax years ending after May 12, 2023.

Domestic Content Bonus Requirements

The notice defines several terms that are relevant to the domestic content bonus credit, including manufactured, manufactured product, manufacturing process, mined and produced. In addition, the notice extends domestic content test to retrofitted projects that satisfy the 80/20 rule for new and used property.

The notice also provides detailed rules for satisfying the requirement that at least 40 percent (or 20 percent for an offshore wind facility) of steel, iron or manufactured product components are produced in the United States. In particular, the notice provides an Adjusted Percentage Rule for determining whether manufactured product components are produced in the U.S.

Safe Harbor for Classifying Product Components

The safe harbor applies to a variety of project components. A table list the components, the project that might use each component, and assigns each component to either the steel/iron category or the manufactured product category.

The table is not exhaustive. In addition, components listed in the table must still meet the relevant statutory requirements for the particular credit to be eligible for the domestic content bonus credit.

Certification and Substantiation

Finally, the notice explains that a taxpayer that claims the domestic content bonus credit must certify that a project meets the domestic content requirement as of the date the project is placed in service. The taxpayer must also satisfy the general income tax recordkeeping requirements to substantiate the credit.

A taxpayer certifies a project by submitting a Domestic Content Certification Statement to the IRS certifying that any steel, iron or manufactured product that is subject to the domestic content test was produced in the U.S. The taxpayer must attach the statement to the form that reports the credit. The taxpayer must continue to attach the form to the relevant credit form for subsequent tax years.

A married couple’s petition for redetermination of an income tax deficiency was untimely where they electronically filed their petition from the central time zone but after the due date in the eastern time zone, where the Tax Court is located. Accordingly, the taxpayers’ case was dismissed for lack of jurisdiction.

A married couple’s petition for redetermination of an income tax deficiency was untimely where they electronically filed their petition from the central time zone but after the due date in the eastern time zone, where the Tax Court is located. Accordingly, the taxpayers’ case was dismissed for lack of jurisdiction.

The deadline for the taxpayers to file a petition in the Tax Court was July 18, 2022. The taxpayers were living in Alabama when they electronically filed their petition. At the time of filing, the Tax Court's electronic case management system (DAWSON) automatically applied a cover sheet to their petition. The cover sheet showed that the court electronically received the petition at 12:05 a.m. eastern time on July 19, 2022, and filed it the same day. However, when the Tax Court received the petition, it was 11:05 p.m. central time on July 18, 2022, in Alabama.

Electronically Filed Petition

The taxpayers’ petition was untimely because it was filed after the due date under Code Sec. 6213(a). Tax Court Rule 22(d) dictates that the last day of a period for electronic filing ends at 11:59 p.m. eastern time, the Tax Court’s local time zone. Further, the timely mailing rule under Code Sec. 7502(a) applies only to documents that are delivered by U.S. mail or a designated delivery service, not to an electronically filed petition.

Internal Revenue Service Commissioner Daniel Werfel said changes are coming to address racial disparities among those who get audited annually.

Internal Revenue Service Commissioner Daniel Werfel said changes are coming to address racial disparities among those who get audited annually.

"I will stay laser-focused on this to ensure that we identify and implement changes prior to the next tax filing season," Werfel stated in a May 15, 2023, letter to Senate Finance Committee Chairman Ron Wyden (D-Ore.).

The issue of racial disparities was raised during Werfel’s confirmation hearing an in subsequent hearings before Congress after taking over as commissioner in the wake of a study issued by Stanford University that found that African American taxpayers are audited at three to five times the rate of other taxpayers.

The IRS "is committed to enforcing tax laws in a manner that is fair and impartial," Werfel wrote in the letter. "When evidence of unfair treatment is presented, we must take immediate actions to address it."

He emphasized that the agency does not and "will not consider race as part of our case selection and audit processes."

He noted that the Stanford study suggested that the audits were triggered by taxpayers claiming the Earned Income Tax Credit.

"We are deeply concerned by these findings and committed to doing the work to understand and address any disparate impact of the actions we take," he wrote, adding that the agency has been studying the issue since he has taken over as commissioner and that the work is ongoing. Werfel suggested that initial findings of IRS research into the issue "support the conclusion that Black taxpayers may be audited at higher rates than would be expected given their share of the population."

Werfel added that elements in the Inflation Reduction Act Strategic Operating Plan include commitments to "conducting research to understand any systemic bias in compliance strategies and treatment. … The ongoing evaluation of our EITC audit selection algorithms is the topmost priority within this larger body of work, and we are committed to transparency regarding our research findings as the work matures."

By Gregory Twachtman, Washington News Editor

The American Institute of CPAs expressed support for legislation pending in the Senate that would redefine when electronic payments to the Internal Revenue Service are considered timely.

The American Institute of CPAs expressed support for legislation pending in the Senate that would redefine when electronic payments to the Internal Revenue Service are considered timely.

In a May 3, 2023, letter to Sen. Marsha Blackburn (R-Tenn.) and Sen. Catherine Cortez Masto (D-Nev.), the AICPA applauded the legislators for The Electronic Communication Uniformity Act (S. 1338), which would treat electronic payments made to the IRS as timely at the point they are submitted, not at the point they are processed, which is how they are currently treated. The move would make the treatment similar to physically mailed payments, which are considered timely based on the post mark indicating when they are mailed, not when the payment physically arrives at the IRS or when the agency processes it.

S. 1338 was introduced by Sen. Blackburn on April 27, 2023. At press time, Sen. Cortez Masto is the only co-sponsor to the bill.

The bill adopts a recommendation included by the National Taxpayer Advocate in the annual so-called "Purple Book" of legislative recommendations made to Congress by the NTA. The Purple Book notes that IRS does not have the authority to apply the mailbox rule to electronic payments and it would need an act of Congress to make the change.

"Your bill would provide welcome relief and solve a problem that taxpayers have been faced with, i.e., incurring penalties through no fault of their own because they believed their filings or payments were timely submitted through an electronic platform," the AICPA letter states. This legislation would provide equity by treating similarly situated taxpayers similarly. It would also improve tax administration by eliminating IRS notices assessing unnecessary penalties when the taxpayer or practitioner electronically submits a tax return by the deadline regardless of when the IRS processes it.

Tax policy and comment letters submitted to the government can be found here.

By Gregory Twachtman, Washington News Editor

WASHINGTON—The Inflation Reduction Act Strategic Operating Plan was designed to be a living document, an Internal Revenue Service official said.

The plan, which outlines how the IRS plans to spend the additional nearly $80 billion in supplemental funds allocated to it in the Inflation Reduction Act, was written to be a "living document. It’s not meant to be something static that stays on the shelf and never gets updated, and just becomes an historic relic," Bridget Roberts, head of the IRS Transformation and Strategy Office, said May 5, 2023, at the ABA May Tax Meeting.

WASHINGTON—The Inflation Reduction Act Strategic Operating Plan was designed to be a living document, an Internal Revenue Service official said.

The plan, which outlines how the IRS plans to spend the additional nearly $80 billion in supplemental funds allocated to it in the Inflation Reduction Act, was written to be a "living document. It’s not meant to be something static that stays on the shelf and never gets updated, and just becomes an historic relic," Bridget Roberts, head of the IRS Transformation and Strategy Office, said May 5, 2023, at the ABA May Tax Meeting.

Roberts also described the plan as a tool to help bring the agency together and more unified in its mission.

"We intentionally wrote the plan to sort of break down some of those institutional silos," she said. "So, we didn’t write it based on business unit or function."

She framed the development of the plan a "cross-functional, cross-agency effort," adding that it "wasn’t like, ‘here’s how we’re going to change wage and investment or large business.’ It was, ‘here’s how we’re going to change service and enforcement and technology. And those pieces touch everything."

Roberts also highlighted the need for better data analytics across the agency, something that the SOP emphasizes particularly as it beings to ramp up enforcement activities to help close the tax gap.

"We are never going to be able to hire at a level that you can audit everybody," she said. "So, the ability to use data and analytics to really focus our resources on where we think there is true noncompliance," rather than conducting audits that result in no changes. "That’s not helpful for taxpayers. That’s not helpful for the IRS."

By Gregory Twachtman, Washington News Editor

The IRS Independent Office of Appeals, in coordination with the National Taxpayer Advocate, has invited public feedback on how it can improve conference options for taxpayers and representatives who are not located near an Appeals office, encourage participation of taxpayers with limited English proficiency and ensure accessibility by persons with disabilities. Taxpayers can send their comments to ap.taxpayer.experience@irs.gov by July 10, 2023.

The IRS Independent Office of Appeals, in coordination with the National Taxpayer Advocate, has invited public feedback on how it can improve conference options for taxpayers and representatives who are not located near an Appeals office, encourage participation of taxpayers with limited English proficiency and ensure accessibility by persons with disabilities. Taxpayers can send their comments to ap.taxpayer.experience@irs.gov by July 10, 2023.

Appeals resolve federal tax disputes through conferences, wherein an appeals officer will engage with taxpayers in a way that is fair and impartial to taxpayers as well as the government to discuss potential settlements. Additionally, taxpayers can resolve their disputes by mail or secure messaging. Although, conferences are offered by telephone, video, the mode of meeting with Appeals is completely decided by the taxpayer. Recently, appeals expanded access to video conferencing to meet taxpayer needs during the COVID-19 pandemic. Further, taxpayers and representatives who prefer to meet with Appeals in person have the option to do so as, appeals has a presence in over 60 offices across 40 states where they can host in-person conferences.

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.