Posts Tagged ‘law’


Beyond the Extenders: The Tax Legacy of 2015

Originally Published in ACCOUNTINGTODAY.COM

With so much attention being paid to the end-of-the-year passage of the tax extenders legislation, it is important to remember that an array of federal tax legislation was passed earlier in 2015 that will affect tax return preparation and advising of clients this busy season. Additionally, there were several key court cases in 2015 that will potentially affect clients’ returns moving forward.

Key federal tax legislation

In May of 2015, the Don’t Tax Our Fallen Public Safety Heroes Act (PL 114-14) was passed into law and provides that a certain level of compensation paid under Sec. 1201 of the Omnibus Crime Control and Safe Streets Act of 1968 will be excluded from gross income for tax purposes. This 1968 act established federal programs that provide death and education benefits to survivors of fallen law enforcement officers, firefighters, and other first responders as well as disability benefits to officers permanently disabled in the line of duty. The amounts are excluded from gross income and are not subject to any information reporting requirements, therefore payers should not file Form 1099 MISC to report the payments.

The Defending Public Safety Employees’ Retirement Act (PL 114-26) was passed in June of 2015 and provides extended exemption from the 10 percent penalty on retirement plan withdrawals for certain public employees in the year or after the year they turn 50. The exemption from the 10 percent penalty for early withdrawals from a retirement plan includes: certain federal law enforcement officers, federal firefighters, customs and border protection officers, and air traffic controllers. The act is effective for distributions after Dec. 31, 2015, so public safety employees contemplating a 2015 withdrawal who would otherwise be impacted by the 10 percent tax may want to defer such withdrawals to 2016.

Also, in June of 2015, the Trade Preferences Extension Act of 2015 (PL 114-27) was passed into law. This act impacts education tax credits and deductions and affects tax years after 2014. If taxpayers do not possess a valid Form 1098-T from the educational institution, they will no longer be allowed to claim the American Opportunity Tax Credit, the Lifetime Learning Credit, or the tuition and fees deduction under Section 222. Form 1098-T should accompany Form 8863, which is used to claim education credits.

In addition, the child tax credit, known as the additional child tax credit, is refundable if the credit exceeds the income tax due by the taxpayer. Beginning in 2015, the additional child tax credit is not refundable if the taxpayer has claimed a foreign earned income exclusion. This is particularly important for any U.S. expat clients.

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (PL 114-41) was passed into law in July 2015 and is of significance because tax return due dates were impacted. The good news is that the individual filing deadline was not changed and remains April 15. There was also no change to S corporations, as their return due date will remain at March 15. For partnerships, the return due date changes to March 15 or the fifteenth day of the third month after year-end (a six-month extension can be requested). The corporate return due date shifts forward one month to April 15. All changes to tax return due dates are for tax years beginning after Dec. 31, 2015. Special note should be given to the fact that due dates for estimated tax payments will not change.

Reviewing the latest status on key tax legislation initiatives can be a key component of ensuring that your clients are able to take advantage of every credit and refund opportunity available.

Critical court decisions in 2015

Other pieces of critically important information to monitor are verdicts of key judicial proceedings that will ultimate affect how tax law is interpreted moving forward. The following insights are summaries of key cases decided in the courts that will inform how certain tax laws are understood in the future.

One Supreme Court case, King v. Burwell, 135 S. Ct. 2480 (6/25/2015), is related to Premium Tax Credits provided under the Patient Protection and Affordable Care Act. The issue in question was if a federal tax credit could be applied whether the insurance was acquired via a state-run or federal-facilitated exchange. The IRS has now issued a regulation confirming that the federal tax credit is available to qualifying individuals regardless of whether they purchase insurance on a state-run or federally facilitated exchange.

In the case of Obergefell v. Hodges, Supreme Court No. 14-556, 2015-1 USTC 50,357, the Supreme Court ruled on June 26, 2015, that same-sex marriage is a constitutional right under the Equal Protection Clause and all states should allow same sex couples to file their taxes as married couples. Also, the IRS issued Proposed Regulations on Oct. 21, 2015, to clarify the treatment of same-sex spouses for federal tax purposes.

In one recent case, unmarried co-owners of a property were allowed to apply the mortgage interest deduction on a per-taxpayer basis, rather than on a per-property basis. The decision in Voss v. Commissioner, 116 A.F.T.R.2d 2015-5529 (9th Cir. 8/7/15), specified that two unmarried individuals purchasing a residence together can each deduct interest on a mortgage up to $1 million and home equity debt up to $100,000.

In Holden v. Commissioner, T.C. Memo. 2015-83 the outcome affects how a taxpayerís education deduction expenditures are viewed. In this case, the taxpayer is a medical doctor and claimed flight lessons as a business deduction, noting he was taking flight lessons to be able to fly to locations for charitable medical work. The regulations under Section 162 allow a taxpayer to deduct expenditures for education if that education either maintains or improves skills that are required by an individual in his employment, trade or business, or meets express requirements set by the individualís employer or by a law or regulation as a condition of continued employment, status, or compensation. The court found that the taxpayer failed to demonstrate that his flying lessons improved or maintained his skills as a doctor, and the deduction for flight lessons was disallowed.

Another case to review is Muniz v. Commissioner, T.C. Memo. 2015-125 (7/9/2015), in which it was determined that lump-sum alimony payments that were not scheduled to terminate at the death of the payee were determined to not be alimony as defined in Section 71 and were not deductible as alimony. This case serves as a good reminder to help the taxpayer clearly define what payments are considered alimony, child support or another portion of the settlement in relation to divorce proceedings.

And finally, in the case of Pacific Management Group v. Commissioner, T.C. Memo. 2015-97, the ruling clarified that the proper substantiation is required to assert attorney-client privilege. In this case, they noted proper substantiation was an appropriate log that is kept to track why documents can be withheld from IRS request for information. The Tax Court held in this case that the privilege log provided by taxpayer was not adequate to sustain claims of privilege.

With these key takeaways from 2015 legislation and judicial proceedings in mind, tax professionals can leverage these insights to better serve their clients and ensure proper filings on their behalf.


Report: IRS’s English not always plain

Originally Published in The Hill

The IRS needs to do a better job keeping it simple with taxpayers, according to a new federal audit.

Treasury’s inspector general for tax administration found that the IRS generally did a good job complying with the Plain Writing Act, a 2010 law that requires federal agencies to make official communications easy to understand.

But the inspector general also found that the IRS doesn’t have a full list of all the letters and messages it sends to taxpayers, making it difficult to know how clearly the agency is communicating.

The watchdog also said that half the letters and two-thirds of the notices it examined either weren’t written clearly or didn’t give enough information.

“The IRS mails more than 200 million letters and notices each year to individual and business taxpayers to help them understand and meet their tax obligations,” Russell George, the tax administration inspector general, said in a statement.

“Not only does it make good business sense, but the law requires clear government communications that the public can understand and use.”

Agency officials say they have tried to inventory all the messages they send out, but that the sheer number makes that difficult. The IRS office that corresponds with taxpayers also has 44 separate systems it uses to craft letters or notices to taxpayers.

Even so, the IRS said it would be a waste of limited resources for the agency to try to catalog all the different types of correspondences.

The inspector general did say that the IRS had made strides in some areas to comply with the Plain Writing Act, including by increasing training for staffers and corresponding differently with taxpayers and tax professionals.


Berkshire Tax Return Could be One for the Record Books

From –

Berkshire Hathaway chairman Warren Buffett hinted in his annual letter to shareholders that the holding company’s nearly 18,000-page tax return may merit the attention of the Guinness Book of World Records.

Referring to the people who work with the operating managers, he noted, “Equally important, however, are the 23 men and women who work with me at our corporate office (all on one floor, which is the way we intend to keep it!). This group efficiently deals with a multitude of SEC and other regulatory requirements and files a 17,839-page Federal income tax return—hello, Guinness!—as well as state and foreign returns.”

Even at that length, though, Berkshire’s tax return would be dwarfed by General Electric’s, which reportedly runs about 57,000 pages, so it probably won’t end up in the record books, for this year at least.

Buffett’s tax policies have generated considerable attention in the past year after he wrote a New York Times editorial calling for changes in the Tax Code to tax the “super-rich” at a higher rate to ensure they don’t pay a lower tax rate than their secretaries (see Buffett Says Tax Code is ‘Coddling the Super-Rich’). The editorial led to the “so-called” Buffett Rule, which President Obama cited in his State of the Union address and included in his 2013 budget plan. However, Buffett has also been criticized for the disputes that his company has gotten into with the Internal Revenue Service over the back taxes that the IRS says it owes.

“Investing is often described as the process of laying out money now in the expectation of receiving more money in the future,” Buffett wrote in his shareholder letter Saturday. “At Berkshire we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power—after taxes have been paid on nominal gains—in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.” For more information please see Berkshire Tax Return Could be One for the Record Books on


New IRS tax gap numbers highlight future audit areas

From –

The IRS’ recently released tax gap study, which measures data from 2006 returns, shows that the tax gap has increased from $345 billion dollars a year in 2001 to $450 billion in 2006. The majority of the tax gap (83%) can be attributed to underreporting, which includes understating income and overstating deductions. The IRS has several tools to narrow the underreporting tax gap, including pre-refund notices and return rejections, underreporter inquiries and, most significantly, audits.

The IRS will focus its limited audit resources in the following areas, which have the highest rates of misreporting.

On Jan. 26, the IRS also modified its online payment arrangement (OPA) application at to allow for taxpayers to request installment agreements for balances of up to $50,000. The current application allows for balances of up to $25,000 and payment terms of up to five years.

Information reporting and disclosures

The IRS continues to use tax return disclosures and third-party information to better select taxpayers for audit. Specifically, look for the IRS to use information to address the following issues:

  • Misreporting stock basis: The IRS issued regulations under a new law that will require stock brokers and mutual fund companies to report basis and other information for most stock purchased in 2011 and all stock purchased in 2012 and later. Form 1099-B will report the information to investors and the IRS. The IRS will use the underreporter notice program and audits to correct perceived misreporting in this area.
  • Underreporting business income: Form 1099-K reporting is now required for recipients of payment card transactions or payments through third-party network arrangements, such as PayPal. The IRS expects to receive more than 56 million Forms 1099-K in 2012 that it can match against filed and unfiled tax returns.
  • Uncertain tax position reporting for large corporations: In 2011, certain large corporations were required to start disclosing an uncertain tax position (UTP) on their 2010 tax returns. A UTP is generally defined as a stance on a tax return in which the corporation sets aside a reserve to either pay the higher amount of tax later or litigate the matter in the future. The transparency in reporting a UTP allows the IRS to better select returns for audit.
  • Offshore tax disclosure compliance: The IRS and the Department of Justice are continuing to press foreign financial institutions, especially Swiss banks, to disclose US account holders. The IRS has embarked on its third voluntary disclosure program to allow taxpayers to disclose foreign assets and income.
  • Worker classification: The IRS is conducting a three-year National Research Program study of employment tax noncompliance. The tax gap study concluded that 17% of the tax gap can be attributed to underreporting and underpayment of employment taxes. The main issue is proper worker classification – that is, independent contractor or employee. The IRS knows there is noncompliance in this area. In fact, employment tax audits have a change rate of more than 86%. The IRS has a strategic motivation for reclassifying workers as independent contractors: Form W-2 recipients are 99% compliant, whereas the misreporting percentage of independent contractors and small business owners is 43%.

Small businesses

According to the IRS, small business underreporting makes up 40% of the tax gap, or about $179 billion a year. With a limited budget for 2012, the IRS will continue to focus on this area.

  • Cash-based businesses: Taxpayers who do not receive information statements, such as many small cash-based businesses, are the most noncompliant. An IRS study showed that information reporting and fear of an audit were important factors contributing to voluntary compliance, ranking directly after a taxpayer’s personal integrity. The IRS will continue to focus on retail, web and service businesses in audits to find unreported income.
  • Deduction of S corporation and partnership losses: In 2009, the Government Accountability Office (GAO) reported that 68% of all S corporation returns misreported at least one item. However, more alarming to the IRS were inaccurate S corporation losses taken on shareholder tax returns. The losses were most often inaccurate because of insufficient basis to deduct the loss. The average error per return was $21,600. Because more than 90% of all S corporations use a paid preparer, look for the IRS to leverage tax preparers to correct this misreporting and deter noncompliance by proposing preparer penalties in this area.
  • S corporation shareholder compensation: The same 2009 GAO study also concluded that S corporation shareholders are underpaying themselves to avoid employment taxes on wages. About 13% of S corporations are paying inadequate wage compensation and making payments in the form of distributions that are not subject to self-employment tax (unlike partnership distributions). The median misreporting adjustment for underpaid shareholder compensation was $20,127 – a loss of about $1.5 billion a year in unreported employment taxes. The IRS has already shown an interest in examining more 2011 S corporation returns.

For more information please see New IRS tax gap numbers highlight future audit areas at


FHFA report: Mortgage principal reductions would cost $100 billion

From – The Hill

Reducing mortgage principal on government-owned mortgages would cost $100 billion, making it an unlikely option, a federal housing regulator said Monday.

In response to a request from lawmakers, Federal Housing Finance Agency (FHFA) acting director Edward DeMarco released an analysis by his agency saying that the costs would come on top of continued losses of mortgage giants Freddie Mac and Fannie Mae, according to three separate staff analyses prepared over the past year.

“Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action,” DeMarco said in the letter sent to House Democrats.

Reps. Elijah Cummings, ranking member of the House Oversight and Government Reform Committee, and panel member John Tierney (Mass.) spearheaded a letter sent Wednesday to Chairman Darrell Issa (R-Calif.) asking him to issue a subpoena for the FHFA analysis on the viability of principal reductions.

The FHFA analysis showed that Fannie and Freddie, as of June 30, had nearly 3 million mortgages with outstanding balances estimated to be greater than the value of the home, and that principal forgiveness for all the loans would require funding of almost $100 billion.

“FHFA remains committed to assisting homeowners to stay in their homes and will continue to update and improve our analysis,” DeMarco wrote.

“FHFA would reconsider its conclusions if other funds become available and if the availability of other funds is at a level that would change the analysis to indicate potential savings to the taxpayers.”

Another factor to consider is that nearly 80 percent of those underwater borrowers were current on their mortgages as of that time and those with upward of market loan-to-value ratios above 115 percent, 74 percent are current.

As of June 2011, only 9.9 percent have negative equity in their homes while about 35.5 percent of private-label mortgages were underwater, according to the report.

Overall, forebearance offers greater cash flows to the investor than forgiveness, while achieving marginally lower losses for the taxpayer than forgiveness, “although both forgiveness and forbearance reduce the borrower’s payment to the same affordable level,” the report showed.

Fannie and Freddie recently announced they would offer up to 12 months of forbearance to unemployed homeowners.

On the eve of President Obama’s third State of the Union address, lawmakers expect the president to discuss the housing crisis and possibly suggest additional initiatives to help struggling homeowners, although they weren’t aware of specifics.

Rep. Dennis Cardoza (D-Calif.), a harsh critic of the Obama administration’s housing policy, called on the White House on Monday to include in this year’s agenda his mortgage refinancing proposal.

“Simply put, none of the current housing programs that President Obama has instituted have succeeded in stemming the tide of foreclosures still dragging down our country,” Cardoza said.

“People continue to suffer as their communities are devastated by the housing crisis, with no relief in sight,” he said.

“We need bold leadership from the president on this crisis.”

DeMarco said the agency would continue to focus on improving loss mitigation and foreclosure alternatives. Borrowers who remain current on their loan payments can look into the Home Affordable Refinance Program (HARP), which allows all underwater borrowers to refinance into lower interest rate mortgages.

Additionally, there would be associated costs to upgrade technology, provide guidance and training to servicers and change accounting and tracking systems in order to implement a principal forgiveness program, the analysis showed.

“Unless there is an expectation that principal forgiveness will reduce losses, we cannot just the expense of investing in major systems upgrades,” DeMarco said.

For more information please see FHFA report: Mortgage principal reductions would cost $100 billion at The Hill.


IRS Issues Proposed Regulations That Would Require Tax Preparers to File Due Diligence Checklist with All EITC Claims Submitted in 2012


WASHINGTON —The Internal Revenue Service announced today that it is issuing proposed regulations that would require paid tax return preparers, beginning in 2012, to file a due diligence checklist, Form 8867, with any federal return claiming the Earned Income Tax Credit (EITC). It is the same form that is currently required to be completed and retained in a preparer’s records.

The due diligence requirement, enacted by Congress over a decade ago, was designed to reduce errors on returns claiming the EITC, most of which are prepared by tax professionals.

The IRS created Form 8867, Paid Preparer’s Earned Income Credit Checklist, to help preparers meet the requirement by obtaining eligibility information from their clients. Preparers have been required to keep copies of the form, or comparable documentation, which is subject to review by the IRS. To help ensure compliance with the law and that eligible taxpayers receive the right credit amount, the proposed regulations would require preparers, effective Jan. 1, 2012, to file the Form 8867 with each return claiming the EITC.

Further details can be found in REG-140280-09. Comments on the proposed regulations are due by Nov. 10, 2011, and a public hearing on the proposed regulations is scheduled for Nov. 7, 2011.

The EITC benefits low-and moderate-income workers and working families and the tax benefit varies by income, family size and filing status. Unlike most deductions and credits, the EITC is refundable –– taxpayers can get it even if they owe no tax. For 2011 tax returns, the maximum credit will be $5,751.

Although as many as one in five eligible taxpayers fail to claim the EITC, some of those who do claim it either compute it incorrectly or are ineligible. The IRS is proposing this step as part of its efforts to ensure that the credit is afforded to taxpayers who qualify. For 2009, over 26 million people received nearly $59 billion through the EITC. Tax professionals prepare close to 66 percent of these claims. For more details please the IRS website,


Top 11 Regulatory Changes for Small Business in 2011 (From Accounting Today)

The start of the New Year ushers in a series of new regulatory, compliance and legislative changes that could potentially affect every small business.

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Payroll processor Paychex has released a list of the top 11 regulatory issues facing small businesses in 2011.

1. Tax changes – In 2011, businesses will confront the increasing complexity of the tax environment, including the implementation of a partial payroll tax holiday, the ability for businesses to expense 100 percent of their capital investments, and the retroactive extension of many temporary business tax incentives that expired at the end of last year.

2. Health care reform – A key aspect for 2011 is the provision providing business tax credits for small employers that purchase health insurance, which is effective for tax year 2010 and carries into next year. It provides, with some limitations and requirements, incentives for providing health insurance to employees. Grandfathering will remain an important component of health care reform. Health plans that existed on March 23, 2010 are grandfathered, meaning that they do not need to add many of the new protections under the health care reform law. To remain grandfathered, health plans cannot make any significant changes to the plan.

3. FSA plans – Effective 1/1/11, over-the-counter medicines and drugs other than insulin (i.e., aspirin) will no longer be eligible for reimbursement from a health flexible spending account unless the item is prescribed by a medical practitioner.

4. Unemployment Insurance rates/changes – Unemployment insurance funds in many states are at critically low levels due to the large numbers of people out of work for extended periods. Many employers will see a trend that promises to send state employer UI contribution rates higher in 2011 to replenish depleted UI trust funds and repay federal loans taken to allow states to continue to pay benefits.In addition, measures to reduce unemployment insurance fraud are in the works.

5. Employment law – The United States Department of Labor and many states have enacted or are considering measures to provide greater transparency to workers on the wages they are owed, especially in key areas such as minimum wage and overtime requirements, and to increase penalties on those who fail to pay their workers the compensation they are entitled.

6. 401(k) disclosures/target date funds – For employers offering 401(k) plans to their workers, regulations requiring disclosures pertaining to fees of the plan will be required; additionally, plans offering target date funds will likely see further disclosure requirements around those investments.

7. State budgetary challenges – Many states are facing critical budget shortfalls, and as such may contemplate impromptu tax or fee increases or filing changes to raise badly needed revenue. Additionally, many state agencies are reducing staff, which could result in processing delays for businesses requiring licensing or other state services.

8. Federal Trade Commission requirements – With the dramatic increase in the use of social media such as blogs, Facebook, and Twitter, the Federal Trade Commission has issued further regulatory guidance around the use of this media in advertising, especially regarding endorsements and misleading or dishonest product reviews. The agency has also recently proposed the creation of a “Do Not Track” tool for the Internet (similar to the telemarketing “Do Not Call” registry).

9. IRS enforcement – To help collect more tax revenue in this era of budget deficits, the IRS is ramping up its enforcement efforts in several areas. In 2010, the IRS kicked off an employment-tax audit program that will carry into 2011. These audits are focusing on employee misclassification, executive compensation, fringe benefits, and adherence to general employment tax filing requirements. Further, the IRS is accelerating efforts to increase tax compliance among employees who collect tips.

10. Privacy – Most states have instituted laws requiring businesses to notify customers (and, in some states, governmental authorities) when sensitive data is breached. Some states have enacted laws requiring that businesses have processes to adequately safeguard sensitive client data. Businesses handling protected health information are subject to additional requirements governing the protection of that data.

11. Employment verification/immigration – U.S. Immigration and Customs Enforcement continues to crack down on companies knowingly hiring undocumented aliens. Several different Congressional immigration reform proposals, which may present further employment verification obligations, are expected to get attention in 2011.


Weirdest Tax Laws of 2010 (From Accounting Today)

From hot air balloons to bagels, 2010 proved to be yet another year in which states and municipalities passed some strange tax laws in a desperate bid to raise revenues and close their budget gaps.
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The Tax & Accounting business of Thomson Reuters has compiled a sampling of some of the year’s quirkiest sales and use tax changes, emphasizing the importance of technology and expertise to help navigate the dynamic sales and use tax landscape.

A few of the “quirky” sales and use tax highlights of 2010 include:

• Candy without flour in Washington:  In June, Washington State enacted legislation that made candy without flour taxable. According to a list published by the Washington Department of Revenue, “Rainbow Whirly Pops” and “Lemon Drops” were taxable, but “Twizzlers” and “Peppermint Bark Shortbread” remained exempt. However, because the law caused so much confusion, and after push-back from voters and large candy makers, Initiative 1107 was passed, repealing the tax on candy effective Dec. 2, 2010.

• Belt buckles in Texas: Every year before it is time to go back to school, several states allow for a tax holiday on school supplies and clothing, with several oddities seemingly infiltrating the exemptions. In Texas, belts are exempt, but belt buckles are not. Cowboy boots and hiking boots are also exempt, but rubber boots and climbing boots are taxable.

• Bagels in New York:  In 2010, New York cracked down on its enforcement of the tax on prepared food, specifically targeting a New York staple: bagels. If you buy a whole bagel and take it home with you, it is exempt from tax. However, if you purchase that same bagel, but eat it at the bagel shop (even without cream cheese), bagel shops must charge sales tax on the purchase price. Apparently, the mere slicing of a bagel kicks your bagel purchase into a taxable transaction. As a result, New Yorkers are paying approximately 8 to 9 cents more per bagel.

• Cup lids in Colorado: Effective March 1, 2010, Colorado eliminated the exemption for non-essential food items and packaging provided with purchased food and beverage items. So, while cups are considered essential, lids are not.

• Hot air balloons in Kansas: On June 30, the Kansas Department of Revenue issued a private letter ruling discussing the taxability of hot air balloon rides. Kansas generally taxes sales of admissions to “any place providing amusement, entertainment or recreation services.” The question was not whether or not balloon rides are entertaining, but whether or not federal law pre-empts the imposition of state sales tax on sales of those rides. Under the Anti-Head Tax Act, 29 U.S.C. Section 40116, states and local jurisdictions are prohibited from imposing fees and charges on airlines and other airport users. The department determined that un-tethered balloon rides where the balloon is actually piloted somewhere “some distance downwind from the launching point” would be considered carrying passengers in air commerce and would be pre-empted by the law. However, state sales tax can be imposed on tethered balloon rides.

• Haunted houses in New York: According to TSB-A-10(11)S, admissions to haunted houses are subject to the New York sales tax.


IRS to Clamp Down on Tax-Dodging Businesses (From WebCPA)

The IRS plans to take a closer look at businesses that don’t file their tax returns, and identify more of them.

The IRS cannot develop a comprehensive estimate of the number of businesses that do not file tax returns and the tax gap associated with them because it lacks data about the population of all businesses, but the IRS could use the inventory of business nonfilers it already has on hand to determine noncompliance, according to a new government report.

The report, by the Government Accountability Office, noted that the IRS identifies several million potential business nonfilers each year, more than it can thoroughly investigate. The “IRS could take a random sample of its inventory, thoroughly investigate those cases, and use the results to estimate the proportion of actual nonfilers in its inventory of potential nonfilers,” said the report.

Until recently the IRS has not had a way to prioritize the cases in its large inventory. But the IRS modernized its business nonfiler program last year by incorporating income and other data in its records indicating business activity. Active businesses generally have an obligation to file a return. The IRS’s Business Master File Case Creation Nonfiler Identification Process, or BMF CCNIP, now assigns each case a code based on this data. The IRS uses the code to select the cases to work with the goal of securing tax returns from nonfilers and collecting additional revenue.

This is a significant modernization, but the IRS lacks a formal plan to evaluate how well the codes are working. The IRS has performance information on its individual nonfiler program, but less on its business nonfiler program. Key management reports needed to provide program data are under development, but no deadline has been set. The IRS could also use more information on why many nonfiler cases are unproductive. This could potentially lead the IRS to identify actions that could reduce IRS resources used on these cases and the associated taxpayer burden.

The GAO identified several opportunities to enhance the IRS’s identification and pursuit of business nonfilers. For example, the new BMF CCNIP selection codes provide a quick way to verify taxpayer statements that a business has ceased operations and does not need to file a tax return. IRS collections staff have been instructed to use the codes when making case closure decisions. They were previously instructed to use other income data, but the GAO’s analysis indicated this may not have been done in all cases.

Non-IRS data on various businesses, including federal contractors, could be used to verify taxpayer statements about whether a tax return should have been filed. The GAO’s analysis of cases in two states that were closed as not liable to file a return found 7,688 businesses where non-IRS data showed business activity as measured by sales totaling $4.1 billion.

The GAO also found cases closed as not liable to file a return involving 13,852 businesses on the federal contractor registry. The GAO’s analyses illustrated the potential value of non-IRS data, but the GAO did not assess which non-IRS data would be most useful nor examine the capacity of IRS’s systems to use such data on a large scale

The GAO recommended in the report that the IRS should develop a partial business nonfiler rate estimate and set a deadline for developing performance data. The IRS should also develop a plan for evaluating the selection codes, and reinforce the need to use income data and selection codes in verifying taxpayer statements. In addition, the report recommended that the IRS study the feasibility and cost-effectiveness of using non-IRS data to verify taxpayer statements.

In response, the IRS agreed that identifying and pursuing active business nonfilers is key to its enforcement efforts and acknowledged that the GAO’s recommendations could assist these efforts. The IRS agreed with four of the GAO’s recommendations and indicated some steps it would take to address the other four. “We agree that identifying and pursuing business nonfilers who remain in business is a key component of our enforcement efforts and that your recommendations may assist us in those efforts,” wrote IRS deputy commissioner of services and enforcement Steven T. Miller.

He noted that the IRS has looked into the possibility of purchasing private data from information resellers, but the IRS concluded that it was difficult to quantify the benefits because the IRS could not be assured that it was not buying duplicative records or that the data purchased would produce revenue-generating casework.

However, with regard to using federal contractor data to make a determination for filing tax returns, the IRS will evaluate the effectiveness of data mining using the Central Contractor Registration database maintained by the General Services Administration.


House OKs small biz jobs bill (From CNN)

NEW YORK ( — One week after the Senate passed a $42 billion bill aimed at helping small businesses, the House voted Thursday to send the bill to President Obama’s desk.

The measure, which passed the House in a 237 to 187 vote, is aimed at creating 500,000 jobs, according to a Senate summary of the bill. The Small Business Jobs Act also is intended to make credit more available for Main Street and enacts about $12 billion in tax breaks.

The president will sign the bill into law on Monday.

“The small business jobs bill passed today will help provide loans and cut taxes for millions of small business owners without adding a dime to our nation’s deficit,” said Obama in a statement.

Not only is Obama under pressure to create jobs, but he started talking about getting cheap capital to small businesses nearly a year ago.

The House first passed a version of the legislation about 3 months ago, but the bill met stiff Republican opposition in the Senate. After months of debate and significant pressure from the White House, the Senate finally passed the bill in a 61 to 38 vote last week.

The president chided Congress for the politicking even as he celebrated the passage. “After months of partisan obstruction and needless delay, I’m grateful that Democrats and a few Republicans came together to support this common-sense plan to put Americans back to work,” he said.

The Financial Services Roundtable, a group of the nation’s largest financial institutions, supports the bill. “Small businesses are the linchpin of our nation’s economic growth and well-being,” said Steve Bartlett, president of the Roundtable.

Republicans have largely opposed the bill: The votes in both the House and the Senate have fallen nearly on party lines.

“Unfortunately, this bill does nothing to help end the uncertainty that is crippling job creation and hurting small businesses,” said House Republican Leader John Boehner, R-Ohio. “Instead it puts taxpayers on the hook for even more bailouts.”

What is in the bill: The Small Business Jobs Act authorizes the creation of a $30 billion fund run by the Treasury Department that would deliver ultra-cheap capital to banks with less than $10 billion in assets.

The idea is that community banks do the lion’s share of lending to small businesses, and pumping capital into them will get money in the hands of Main Street businesses.

Another provision aims to increase the flow of capital by providing $1.5 billion in grants to state lending programs that in turn support loans to small businesses. The state programs have proven themselves to be efficient, targeted and effective, but with many states struggling to balance their budgets, the programs are going broke.

The bill would also provide a slew of tax breaks that will cost $12 billion over a decade, according to a preliminary estimate from the Joint Committee on Taxation. The breaks aim to encourage small businesses to purchase new equipment, to incentivize venture capital firms to invest in small businesses, and to motivate entrepreneurs to start their own business.

Another provision of the legislation increases the loan limits on government-backed loans. It also extends the popular loan sweeteners for Small Business Administration loans through the end of the year. The sweeteners, initiated with the 2009 Recovery Act, have been a ,stimulus success story, and small businesses have been in line waiting for more funding.

There are quite a few tax breaks, but here is a rundown of five that have the potential to be game changers for the small businesses that are affected:

100% exclusion of capital gains: The bill would eliminate capital gains taxes on investments in qualifying small businesses.

To qualify for the tax break, a small business needs to be a C corporation – sorry, LLCs and S-corps – with assets of less than $50 million. The investor must buy the stock at “original issue,” meaning it’s purchased directly from the company, and has to hold it for at least five years.

Carry back provision extended to 5 years: When a business books a profit, it pays income tax on its earnings. But if the business then turns a loss in later years, tax rules allow the business to “carry back” its loss and deduct the money from earlier profits.

By filing an amended tax return for the earlier, profitable year, the business can claim an immediate refund on the taxes it paid. The bill allows certain small businesses to extend the carryback for 5 years.

Increase of Section 179: To motivate companies to go spend money on equipment, “Section 179” of the tax code allows businesses to write off capital expenditures immediately, putting cash in a company’s pocket quickly.

Thanks to the Recovery Act, businesses can write off up to $250,000 worth of equipment through 2009. This bill extends the benefit through 2011 and the maximum increases to $500,000.

Bonus depreciation extension: Businesses can also opt to recover the cost of capital expenditures by writing off a bit of the cost of the purchase over a number of years, following a depreciation schedule.

Temporarily, businesses can front-load that deduction by writing off 50% of capital expenditures made in 2008 and 2009. This bill extends that first-year depreciation for qualifying property that is put in service in 2010.

Help for start-ups: Currently, entrepreneurs can deduct up to $5,000 in start-up expenses. That amount is reduced by the amount that the start-up’s expenses exceed $50,000. The bill would increase the deduction to $10,000 for 2010, and the deduction would be reduced by the amount that an entrepreneur exceeds $60,000.

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