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Federal Tax Update - July 7, 2014
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Ed Zollars from Nichols Patrick CPE delivers the weekly podcast on federal tax issues. For all of your CPE needs, please go to www.ficpa.org/cpe. This week’s podcast covers the following topics:
IRS UNVEILS VOLUNTARY TAX PREPARER REGISTRATION PROGRAM DESPITE COMPLAINTS OF AICPA AND NAEA
Revenue Procedure 2014-42, 6/30/14
The IRS unveiled a new voluntary Annual Filing Season Program in response to the Service’s loss in the case of Loving v. IRS, 742 F.3d 1013,113 AFTR 2d 2014-867, (D.C. Cir. 2014) in its attempt to provide a mandatory preparer licensing program. The details of the new program are found in Revenue Procedure 2014-42, http://www.irs.gov/pub/irs-drop/rp-14-42.pdf.
The program is designed for preparers who not attorneys, CPAs or enrolled agents— what are referred to as “unenrolled preparers” generally. The ruling revokes, effective for returns and claims for refunds signed after December 15, 2015, Revenue Procedure 81-38.
That Revenue Procedure allowed unenrolled preparers to represent taxpayers in examination if they had prepared and signed the return under examination. Such individuals could not represent taxpayers beyond that level, including at appeals.
The new program will restrict this limited representation only to those unenrolled preparers who have an “Annual Filing Season Program Record of Completion” for calendar year in which the return was prepared and signed and for the year in which representation occurs. Thus, unenrolled preparers who wish to appear with their clients for exams will need to enter into this program and remain qualified under it.
The ruling notes that it “does not in any way affect or limit the ability of attorneys, CPAs, or EAs to represent taxpayers before the IRS. The rules governing the practice of such persons before the IRS are set forth in Circular 230.” Or, to put it more directly, such individuals will not need to complete the Annual Filing Season Program in order to represent individuals in examinations.
The program will require individuals who wish to obtain the “Annual Filing Season Program Record of Completion” to complete an approved 6 hour federal tax refresher course each year and pass a written exam on the material in the course, scoring at least 70% on such an exam. Some individuals are exempted from having to take the exam. Those include: CPAs, EAs and attorneys; Individuals that passed the original RRTP examination; Tax return preparers licensed by a state or territory
As well, applicants must complete 18 hours of approved continuing education courses in the year prior to the application. This education must consist of 2 hours of ethics, 10 hours of federal tax law topics and 6 hours of federal tax updates. Those exempt from the 6 hour refresher course requirement must complete 15 hours of approved continuing education, with the main difference being that the tax update component is reduced to 3 hours.
Individuals entering this program must consent to the applicability of the provisions of Circular 230 governing representation before the IRS for the entire period covered by the Record of Completion.
Certain individuals are barred from the program (those not current in their filing obligations, those disbarred, suspended or disqualified from practice under Circular 230, etc.).
Individuals who obtain the Record of Completion are limited in how they advertise their achievement. Specifically the ruling holds: A tax return preparer who receives a Record of Completion may not use the term “certified,” “enrolled,” or “licensed” to describe this designation or in any way imply an employer/employee relationship with the IRS or make representations that the IRS has endorsed the tax return preparer. A tax return preparer who receives a Record of Completion for a calendar year may represent that the tax return preparer holds a valid Annual Filing Season Program Record of Completion for that calendar year and that he or she has complied with the IRS requirements for receiving the Record of Completion.
The program garned an immediate negative response from the AICPA (http://www.aicpa.org/press/pressreleases/2014/pages/irs-proposed-voluntary-programfor- tax-preparers-is-unlawful-and-improper-says-aicpa.aspx). The AICPA called the program “unlawful and improper” in their news release.
The new release, citing a letter the AICPA sent to the IRS, makes the following points: First, no statute authorizes the proposed program; Second, the program will inevitably be viewed as an end-run around Loving v. IRS, (a federal court ruling rejecting an earlier IRS attempt to regulate tax return preparers); Third, the IRS has evidently concluded, in developing the proposed program, that it need not comply with the notice and comment requirements of the Administrative Procedure Act. This is incorrect; and Finally, the current proposal is arbitrary and capricious because it fails to address the problems presented by unethical tax return preparers, runs counter to evidence presented to the IRS, and will create market confusion.
The National Association of Enrolled Agents (NAEA) is also similarly unhappy with the program, also sending negative comments to the IRS about the program (http://www.naea.org/advocacy/comments-letters/Koskinen-voluntary-annual-preparercertificate- program).
Given the use of the term “unlawful” in the AICPA letter it seems very possible (and perhaps likely) that legal action might be taken to attempt to keep the program from starting up.
IRS ISSUES PROPOSED FINAL REGULATIONS ON POST-2013 SMALL EMPLOYER HEALTH CARE CREDIT
TD 9672, 6/30/14
The IRS has issued final regulations (TD 9672, https://s3.amazonaws.com/publicinspection. federalregister.gov/2014-15262.pdf) for the small business health care credit under §45R which reflect the revisions that take place beginning in 2014.
The regulations generally incorporate the guidance previously given in Notice 2010-44 and 2010-82. One change required by the law is that for tax years beginning during or after 2014, the small employer’s coverage must be offered to employees through a small business health options program (SHOP) exchange.
Special rules are provided to deal with the potential problems that may exist for an employer with a health plan year that does not begin on January 1, and therefore may not be able to offer employees a SHOP based plan as of the first day of the year. If, as of August 26, 2013 the employer offers coverage under a plan with a plan year that begins on a date other than the first date of the plan year, and that coverage qualifies under the 2013 rules for the credit, the employer will be treated as offering coverage under a SHOP plan for the entire year so long as it offers coverage via a SHOP program on the first day of the plan year beginning during the taxable year.
It is important to remember that, beginning in 2014, the credit will be limited to a maximum of two consecutive years beginning with the year in which the employer first offers one or more qualified plans to its employees via a SHOP exchange. The proposed regulations outline the application of this provision, something that was not an issue in the earlier guidance.
The regulations also outline how an employer can meet the uniform percentage contribution requirement to be eligible for the credit. An employer must make pay a uniform percentage, not lower than 50 percent, of the premium for each employee. The regulations provide rules to meet this test for various scenarios. The rules vary depending on whether the premium for the qualifying plan charges a “composite billing” (a uniform premium for each employee or a single aggregate premium for a group of employees) or a “list billing” (where the insurer charges a separate premium for each employee based on factors such as age). As well, the rules consider cases where the plan offers only self-only coverage or includes family coverage with a higher premium. Finally, the rules deal with a case where the employer offers either a single qualifying health plan (QHP) or multiple QHPs.
The simplest case is for an employer with composite billing and only self-only coverage. In that case, the employer simply must pay the same amount toward the premium of each employee and that amount must be at least 50% of such premium.
An employer that also offers coverage under the QHP beyond self-only coverage (such as family coverage), an employer can meet the requirements by paying a uniform amount for the higher cost tier of coverage that is the same for each employee in that tier and is no less than is paid for the self-only coverage. Effectively, this allows the employer, if it wishes, to require employees to pay the full cost of such additional coverage or subsidize it entirely.
Alternatively, the employers may separately test each tier of coverage using the basic “self-only” test described earlier. Thus, the employer would need to pay more than 50% of the cost of the allocable premium for each employee, and the same amount for each employee in that particular tier. However a different amount and percentage (so long as it’s at least 50%) could be used for each particular tier class.
If an employer is faced with “list” billing the employer can meet the test either by paying a uniform percentage of not less than 50% for each employee or can, effectively, covert the list billings into an employer-computed composite premium for self-only coverage and each employee with coverage pays the same amount towards self-only coverage that is no more than 50% of the employer-computed composite premium.
If an employer offers more than one SHOP plan it has two options. First, it can separately test each QHP under the above tests. Alternatively, the employer can use a “reference plan” method to meet the tests. The employer designates one of the QHPs as the reference plan and computes an employer contribution that would, if all employees enrolled in the reference plan, satisfy the uniform percentage rules for that plan. The employee can then apply that employer contribution either to the reference plan or to one of the other plans.
The final regulations mention one change made to get around a State rule that could have caused issues for the “uniform percentage” requirements for employer contributions: The Treasury Department and the IRS understand that at least one State requires employers to contribute a certain percentage (for example, 50 percent) to an employee's premium cost, but also requires that the employee's contribution not exceed a certain percentage of monthly gross earnings; as a result, in some instances, the employer's required contribution for a particular employee might exceed 50 percent of the premium. To satisfy the uniform percentage requirement under section 45R, the employer generally would be required to increase the employer contribution to all of its employees' premiums to match the increase for that one employee, which may be difficult, especially if the percentage increase is substantial. An employer will be treated as meeting the uniform percentage requirement if the failure to satisfy the uniform percentage requirement is attributable to additional employer contributions made to certain employees solely to comply with an applicable State or local law.
The final regulations apply to taxable years beginning after December 31, 2013, however employers will be allowed to rely on provisions in the prior proposed regulations for tax years beginning after 2013 and before 2015.
PARTICIPANTS IN DEFINED CONTRIBUTION PLANS TO BE ALLOWED TO USE A PORTION OF BENEFITS TO PURCHASE QUALIFED LONGEVITY ANNUITY CONTRACT
TD 9673, 7/1/14
The IRS revised regulations in TD 9673 (https://s3.amazonaws.com/publicinspection. federalregister.gov/2014-15524.pdf) governing minimum required distributions from defined contribution plans and IRAs to allow, within limits, a plan to allow a participant to direct a portion of his/her benefit to purchase a longevity annuity. If an employee directs a portion of his account to purchase an annuity to purchase an annuity that will begin a lifetime payout no later than age 85, the value of the annuity and premium paid will not be otherwise included in computing the employee’s required minimum distribution each year from the plan.
The maximum balance that can be used to purchase this annuity is limited to no more than 25% of the employees account balance or $125,000 on the date of payment, whichever is less. The maximum dollar limitation will be adjusted in future years in a similar manner as the dollar limit under IRC §415(d) (the annual dollar cap on allocations to a participant’s account). However it would only move in $10,000 increments.
A participant taking advantage of this provision is effectively “banking” a portion of the account to provide for an increased benefit when he/she is older. The annuity will also allow a longer deferral of income, thought with the trade-off of requiring these funds to be held in an annuity contract as opposed to being fully invested as the participant sees fit.
IRS ISSUES SIMPLIFIED FORM 1023 FOR SMALL SECTION 501(C)(3) ORGANIZATIONS
Form 1023-EZ, TD 9674 and Revenue Procedure 2014-40, 7/1/14
The IRS has issued a simplified application for exemption under IRC §501(c)(3), Form 1023-EZ and associated instructions. The form is available at http://www.irs.gov/pub/irs-pdf/f1023ez.pdf, with instructions at http://www.irs.gov/pub/irspdf/ i1023ez.pdf. The form is significantly shorter than the 26 page full Form 1023.
At the same time the IRS issued revised final regulations under Section 501 in TD 9674 (https://s3.amazonaws.com/public-inspection.federalregister.gov/2014-15623.pdf) and an updated Revenue Procedure governing applications for exempt status in Revenue Procedure 2014-40 (http://www.irs.gov/pub/irs-drop/rp-14-40.pdf).
An eligibility checklist with 26 questions is to be used to determine if an organization would be eligible to use this form in lieu of the standard Form 1023 is found in the instructions to the Form 1023 EZ. A yes answer to any of the questions would require the organization to file the longer form.
The new form must be filed electronically, although a three page paper version is provided on the IRS website to allow organization to prepare for the filing. The application is filed electronically at http://www.pay.gov and a $400 user fee applies.
In the April 29, 2014 edition of PPC's Five Minute Update it was reported that the IRS expects 70% of §501(c)(3) organizations applying for exemption will be qualified to use the Form 1023-EZ. The document goes on to state that the IRS is looking to reduce the work they are doing in the application phase, probably good news for those applying for exemption. However the report goes on to state that the IRS plans to make up for this by doing more thorough examinations of such organizations.
These changes took effect on July 1, 2014.
MERGED CORPORATIONS ALLOWED TO USE INTEREST NETTING RULES FOR PRE AND POST MERGER TAX OVERPAYMENTS AND UNDERPAYMENTS
Wells Fargo & Company v. Commissioner, No. 11-808T, 2014 TNT 125-13, 6/27/14
The question of what is the “same taxpayer” for purposes of the interest netting rules of IRC §6621 was address by the United States Court of Federal Claims in the case of Wells Fargo & Company v. Commissioner, No. 11-808T, https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2011cv0808-72-0.
The case in question involved various entities which, through statutory mergers, eventually became part of Wells Fargo & Company. For certain years prior to the mergers there were both tax overpayments by some of the companies and tax underpayments for others. For the years in question the various corporations had filed returns under different employer identification numbers.
The issue is significant because a higher interest rate is imposed on underpayments than is paid on overpayments—so if no netting is allowed, the IRS would effectively receive a “bonus” on the amount of the underpayments. IRC §6621(d), enacted in 1998, allows for netting of such overpayments and underpayments for purposes of computing interest to address that disparity.
The netting is allowed if the overpayments and underpayments relate to the same taxpayer. However, as the Court of Claims note, the issue of who exactly in the same taxpayer in the context of a statutory merger had not previously been addressed.
The IRS position in the case is that the “same taxpayer” requires that the entities whose overpayments and underpayments are netted must have filed returns using the same employer identification number. Wells Fargo takes the position that following a merger, the previous companies become the “same taxpayer” for federal tax purposes even though they may use separate EINs on the various returns filed.
Prior cases had held that members of affiliated groups filing consolidated returns were not the same taxpayer when activities related to years prior to the parties being members of the affiliated group (see Energy E. Corp. v. United States, 645 F.3d 1358 (Fed. Cir. 2011), and Magma Power Co. v. United States, 101 Fed. Cl. 562 (2011)). The IRS position was that the same result should hold following a merger.
The Court of Claims agreed with Wells Fargo that a merger is different. While the parent and subsidiaries in an affiliated group retain their separate legal identities, in a merger the combined entities become one and the same corporation. As the opinion notes: Because the surviving corporation steps into the shoes of the acquired entity and the surviving corporation is liable retroactively for the tax payments of its predecessors, it does not matter when the initial payments were made. Put another way, following a merger, the law treats the acquired corporation as though it had always been part of the surviving entity.
The loss of the TIN is not relevant in a merger, because the combined entity becomes liable for any taxes of the prior, uncombined entities.
The Court goes on to point to various IRS positions issued over the years that have held, for various purposes, that the merged corporations are treated as the same taxpayer going forward.
IRS NOT REQUIRED TO "PIECE TOGETHER" HINTS REGARDING OMITTED INCOME, TAXPAYER HIT WITH SIX YEAR STATUTE OF LIMITATIONS
Heckman v. Commissioner, TC Memo 2014-131, 6/30/14
In the case of Heckman v. Commissioner, TC Memo 2014-131, http://www.ustaxcourt.gov/InOpHistoric/HeckmanMemo.Dawson.TCM.WPD.pdf, the question of adequate disclosure of omitted income was addressed for purposes of avoiding the six year extended statute under IRC §6501(e)(1)(A).
The taxpayer’s only defense in this case was that he had adequately disclosed a potentially taxable IRA distribution in 2003, having conceded that if the taxpayer did qualify for the disclosure exception to the six year statute under IRC §6501(e)(1)(A), the entire amount being assessed by the IRS for tax related to a rather poorly operated ESOP plan and its distribution and rollover to his IRA was due.
IRC §6501(e)(1)(A) provides that the standard three year statute of limitation is expanded to six years if the taxpayer omits more than 25% of the amount of gross income properly included in the return. This is a mechanical test, and the amount of omitted income clearly exceeded that amount.
However a taxpayer can escape this provision if the taxpayer can show, under IRC §6501(e)(1)(A)(ii), that the taxpayer disclosed the item of potential income either in the return or on a statement attached to the return, in a manner sufficient to apprise the IRS of the nature and amount of the item.
The taxpayer did not specifically include any reference on his return to the existence of a potential problem with the ESOP and/or the existence of any sort o distribution (rolled over or not) to the IRA. However the taxpayer argued that the IRS had access to other documents that should have served to apprise the IRS of the potential issue.
He argued that statements on a partnership return, which became an asset held by the purported ESOP plan, indicated that: The Schedule K-1 attached to the partnership’s return that identified the partner as the taxpayer’s IRA; The Form SS-4, was filed to obtain a taxpayer identification number for the partnership, identified the taxpayer as “general managing member” of the LLC; and The Form 5498 filed for the IRA, which lists the taxpayer as the owner of the nominee account held by the custodian
The taxpayer argues that this information, taken as a whole, effectively should have put the IRS on notice for a possible distribution.
The Tax Court disagreed. The opinion notes: To the contrary, no statement on any of those documents offers any “clue” as to the existence, nature, or amount of the omitted income. At best, they reveal only that petitioner and/or his IRA are members of [the partnership.]
The taxpayer argued that his case was comparable to the situation the taxpayer faced in the case of Benderoff v. United States, 398 F.2d 132 (8th Cir. 1968). However, the Tax Court found the case distinguishable. In Benderoff, the taxpayers’ individual return specifically referred to their income derived from a subchapter S corporation, clearly stating the name of the corporation and the amount of their share of the corporation’s undistributed corporate income. Therefore, the Court of Appeals looked beyond the taxpayer’s individual return. Here, in contrast, petitioner stipulated that he did not disclose his participation in the ESOP or its distribution to his IRA on his 2003 return or in any statement attached thereto. Consequently, we reject his assertion that we may look beyond his individual return because we do not believe that the return offered the necessary “clue” required to disclose the omitted income.
The court also rejected two other theories of the taxpayer. First, the taxpayer claims that he gave information on the transaction by communicating it the IRS during the examination of his 2007 return that eventually lead to the assessment against 2003. Second, though the IRS was aware of existence of the issue based on that communication, it nevertheless failed to assess the tax within three years.
The Court held that: Even if petitioner provided such oral notice, the notification given three years after a return is filed is not a disclosure "in the return, or in a statement attached to the return", as required by section 6501(e)(1)(A)(ii). Moreover, any delay by the Commissioner after receiving such late oral notice of an omission of gross income does not invalidate a notice of deficiency sent before the expiration of the six-year period when it otherwise applies.
In short, the Tax Court refused to credit the taxpayer with other documents (he also tried point to late filed Forms 5500 in a final attempt to claim disclosure that the Court rejected).
LAST UPDATED 7/7/2014