The IRS expects to issue guidance on the Code Sec. 199A passthrough deduction in July, Acting IRS Commissioner David Kautter has said. Kautter outlined the timeline of various guidance proposals at the American Bar Association (ABA) Section of Taxation May Meeting in Washington, D.C.

The IRS expects to issue guidance on the Code Sec. 199A passthrough deduction in July, Acting IRS Commissioner David Kautter has said. Kautter outlined the timeline of various guidance proposals at the American Bar Association (ABA) Section of Taxation May Meeting in Washington, D.C.

Proposed Guidance
More specifically, the proposed guidance on the passthrough deduction is expected to be released by the end of July, an IRS spokesperson told Wolters Kluwer on May 15. "The goal of the guidance is to get things out that are complete," the IRS spokesperson said, reiterating Kautter. "But, it will not cover every question that taxpayers have," the spokesperson added.

Passthrough Deduction
The new passthrough deduction was enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) last December. The new law provides a 20-percent deduction for income from passthrough entities. The deduction is limited by certain controversial factors including business activities, wages paid by the business, and property values.

Questions Expected
Generally, Kautter anticipates initial follow-up questions from taxpayers and practitioners after the proposed guidance is released, the IRS spokesperson told Wolters Kluwer. Kautter has said that it would be better to get the guidance out in "fairly good shape," to allow for public comment and input, rather than taking more time to draft the guidance internally, according to several reports. Kautter has reportedly said that not everyone may agree with that approach, but that a "better product" will likely be created because of it.

Congressional lawmakers on Capitol Hill continue to focus on tax reform. Republicans and Democrats alike have been discussing the effects of tax reform, albeit reaching different conclusions.

Congressional lawmakers on Capitol Hill continue to focus on tax reform. Republicans and Democrats alike have been discussing the effects of tax reform, albeit reaching different conclusions.

Tax Reform Hearings
The Ways and Means Committee held a hearing during the week of May 14, marking the first in a series of upcoming committee hearings on tax reform. The Ways and Means hearings are each expected to examine the effects of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

Small Businesses. Ways and Means Tax Policy Subcommittee Chairman Vern Buchanan, R-Fla., has announced the second tax reform hearing in the series is scheduled for May 23. The subcommittee hearing is expected to focus on the TCJA’s impact on small businesses.

Senate. The Senate Finance Committee (SFC) examined early impressions of the TCJA in a hearing last month. SFC Chairman Hatch, R-Utah has indicated to Wolters Kluwer that he is also currently examining House proposals to reform the IRS.

TCJA Criticism
Meanwhile, Ways and Means Democrats remain united in their opposition against the new tax law. Ranking member Richard Neal, D-Mass., released a Democratic Progress Report which details areas in which Democrats believe the TCJA has fallen short.

The Republican tax law has not put the middle class first or provided relief for small businesses, the progress report notes. Rather, it has provided large " tax cuts to big corporations and wealthy executives," the report added.

Additionally, Democrats have criticized the TCJA for significantly adding to the federal deficit. Neal called the new law "fiscally irresponsible,"during a Ways and Means hearing held during the week of May 14.

However, House Speaker Paul Ryan, R-Wis., called Democratic tax policy ideas and criticisms of the TCJA "bizarre," during a May 17 press briefing. Democrats are in "denial" about the "thriving economy," according to Ryan.

"If you saw yesterday’s Ways and Means hearing, Democrats are still using the same old doom-and-gloom talk that they were using six months ago," Ryan said. "It was bizarre before, and it is even more bizarre now, when Democrats are openly calling for tax increases, which will do nothing but harm our economy," he added.

To that end, several House Democrats have called for raising the corporate tax rate, including certain Ways and Means members during the full committee hearing. Under the TCJA, the corporate tax rate was lowered from 35 to 21 percent.

Senate
Likewise, Senate Democrats across the Capitol have proposed raising the corporate tax rate to 25 percent. Additionally, in a proposal released by Senate Democrats in March, the top individual tax rate would be reinstated to 39.6 percent. Under the TCJA, the top individual tax rate was lowered to 37 percent. These tax rate increases would pay for a $1 trillion infrastructure plan, according to the Democratic proposal.

Ways and Means Open Seat
In related news, Rep. Brad Wenstrup, R-Ohio, may be eyeing a seat in the House’s tax writing committee. The House Steering Committee has recommended Wenstrup to serve as a member of the Ways and Means Committee. Wenstrup is a doctor, war veteran, and small business owner. He would replace Rep. Patrick Meehan, R-Pa., who resigned last month.

The IRS’s "Achilles’ heel" is using outdated software originating from the 1960s, Acting IRS Commissioner David Kautter told Senate lawmakers. Kautter and Treasury Secretary Steven Mnuchin testified in a May 22 Senate Appropriations Financial Services and General Government Subcommittee hearing.

The IRS’s "Achilles’ heel" is using outdated software originating from the 1960s, Acting IRS Commissioner David Kautter told Senate lawmakers. Kautter and Treasury Secretary Steven Mnuchin testified in a May 22 Senate Appropriations Financial Services and General Government Subcommittee hearing.

System Shut Down
2.3 million cyber attacks are launched against the IRS each day, one million of which are sophisticated, Kautter told Senate appropriators. Kautter and Mnuchin testified before the Subcommittee on the Trump Administration’s fiscal year (FY) 2019 Treasury and IRS budget request.

Underscoring the numerous cyber threats against the IRS is its antiquated technology systems currently in use, Kautter said. "59 percent of IRS hardware and 32 percent of IRS software is obsolete," Kautter told Senate appropriators.

Tax Day Glitch. However, the outdated technology at the IRS was not the cause of the partial system shut down that occurred this year on Tax Day, April 17. For eleven hours, certain taxpayers were unable to electronically submit payments through the IRS’s Direct Pay feature. The particular hardware that failed on Tax Day, however, is only a year-and-a-half old, Kautter said.

Five-Year Plan
The IRS and Treasury are currently crafting a new five-year plan to update the IRS’s information technology (IT) systems, both Kautter and Mnuchin testified. A preliminary draft of the plan is expected within 90 days, Mnuchin said.

"The IRS has not done a good job in the past with regard to its technology dollars," Kautter said. However, the leadership team at the IRS is new, energetic, and knowledgeable, and will thus render a different result, he added.

Tax Reform
Technology is the most time consuming and expensive aspect of tax reform implementation, according to Kautter. Additionally, Kautter expects that guidance on all major aspects of tax reform under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) will be out by fall. Recently, Kautter said that proposed guidance on the Code Sec. 199A pass-through deduction will be released in July.

Tax Gap
"In 2016, IRS estimated that the average annual gross tax gap—the difference between taxes owed and taxes paid on time—was $458 billion for tax years 2008-2010," Subcommittee Chairman James Lankford, R-Okla. said during his opening statement. However, the tax gap is most attributable to the "cash" economy, Kautter told lawmakers.

"An individual taxpayer making more than $1 million a year is seven times more likely to be audited than a taxpayer making under $200,000 a year," Kautter said. "The problems with the tax gap tend to be in the cash economy."

Budget
The Trump Administration’s FY 2019 budget request proposes a total of $12.3 billion for Treasury’s operations and bureaus. The budget request proposes $11.135 billion in IRS funding. This figure for the IRS includes "savings and reductions" of $24.5 million compared to the FY 2018 enacted levels, according to Kautter.

The FY 2019 budget request allocates IRS funding for the following:

• taxpayer services: $2.24 billion;
• operations support: $4.16 billion;
• enforcement: $4.63 billion; and
• business systems modernization: $110 million.

The Treasury Department and the IRS, along with the Department of Labor and the Department of Health and Human Services, issued a notice of clarification to more thoroughly explain their decision not to adopt recommendations made by the American College of Emergency Physicians (ACEP) and certain other commenters regarding T.D. 9744. The challenged regulations govern the coverage of emergency services by group health plans and health insurance issuers under the ACA’s copayment and coinsurance limitations.

The Treasury Department and the IRS, along with the Department of Labor and the Department of Health and Human Services, issued a notice of clarification to more thoroughly explain their decision not to adopt recommendations made by the American College of Emergency Physicians (ACEP) and certain other commenters regarding T.D. 9744. The challenged regulations govern the coverage of emergency services by group health plans and health insurance issuers under the ACA’s copayment and coinsurance limitations.

The ACEP had sued the federal government over the final regulations, which were issued in 2015 under the Patient Protection and Affordable Care Act (ACA) ( P.L. 111-148). Among other things, ACEP argued that the federal government did not adequately respond to their public comments regarding the regulations. On August 31, 2017, the court sent the matter back to the Departments of Health and Human Services, Labor, and Treasury to respond to the public comments from ACEP.

Greatest of Three Regulations
Under T.D. 9744, a plan or issuer satisfies the copayment and coinsurance limitations in the statute if it provides benefits for out-of-network emergency services in an amount equal to the greatest of three possible amounts:

• the amount negotiated with in-network providers for the emergency service furnished;
• the amount for the emergency service calculated using the same method the plan generally uses to determine payments for out-of-network services (such as the usual, customary, and reasonable charges), but substituting the in-network cost-sharing provisions for the out-of-network cost sharing provisions; or
• the amount that would be paid under Medicare for the emergency service.

Each of these amounts is calculated excluding any in-network copayment or coinsurance imposed with respect to the participant, beneficiary, or enrollee. This is sometimes referred to as the "Greatest of Three" or the "GOT" regulation because it sets a floor on the amount that nongrandfathered group health plans, and health insurance issuers offering nongrandfathered group or individual health insurance coverage, are required to pay for out-of-network emergency services under this provision at the greatest of the three listed amounts.

Clarification of Regulations
In their clarification, the departments state that the regulations provide a reasonable and transparent methodology to determine appropriate payments by nongrandfathered group health plans and health insurance issuers offering nongrandfathered group or individual health insurance coverage for out-of-network emergency services. In addition, the departments maintain that ACEP and other commenters did not provide adequate information to support their assertion that the methods used for determining the minimum payment for out-of-network emergency services under the GOT regulation are not sufficiently transparent or reasonable.

The IRS has issued a new five-year strategic plan to guide its programs and operations and to help meet the changing needs of taxpayers and members of the tax community. "Providing service to taxpayers is a vital part of the IRS mission and the new Strategic Plan lays out a vision of ways to help improve our tax system," remarked IRS Acting Commissioner David Kautter.

The IRS has issued a new five-year strategic plan to guide its programs and operations and to help meet the changing needs of taxpayers and members of the tax community. "Providing service to taxpayers is a vital part of the IRS mission and the new Strategic Plan lays out a vision of ways to help improve our tax system," remarked IRS Acting Commissioner David Kautter.

The Fiscal Year 2018-2022 IRS Strategic Plan focuses on six goals aimed at improving customer service:

• empowering and enabling all taxpayers to meet their tax obligations;
• protecting the integrity of the tax system by encouraging compliance through administering and enforcing the tax code;
• proactively collaborating with external partners to improve tax administration;
• cultivating a well-equipped, diverse, flexible and engaged workforce;
• advancing data access, usability and analytics to inform decision-making and improve operational outcomes; and
• driving increased agility, efficiency, effectiveness and security in IRS operations.

The Service further urged taxpayers to be aware of their fundamental rights under the Taxpayer Bill of Rights when dealing with the IRS.

The IRS Large Business and International (LB&I) Division has identified and selected six additional compliance campaigns. The IRS previously announced 13 campaigns on January 31, 2017, followed by an additional 11 on November 3, 2017, and five more on March 13, 2018. These campaigns help LB&I move in the direction of issue-based examinations. In addition, a compliance campaign process helps the organization decide which compliance issues present risks and the best way to respond to such risks.

The IRS Large Business and International (LB&I) Division has identified and selected six additional compliance campaigns. The IRS previously announced 13 campaigns on January 31, 2017, followed by an additional 11 on November 3, 2017, and five more on March 13, 2018. These campaigns help LB&I move in the direction of issue-based examinations. In addition, a compliance campaign process helps the organization decide which compliance issues present risks and the best way to respond to such risks.

The additional campaigns were identified through LB&I data analysis, and suggestions from IRS employees. LB&I’s goal is to improve return selection, identify issues representing a risk of noncompliance, and make the greatest use of limited resources.

The six campaigns selected for the rollout are:

• Interest Capitalization for Self-Constructed Assets;
• F3520/3520-A Non-Compliance and Campus Assessed Penalties;
• Forms 1042/1042-S Compliance;
• Nonresident Alien Tax Treaty Exemptions;
• Nonresident Alien Schedule A and Other Deductions; and
• NRA Tax Credits.

The campaigns themselves fall within the Withholding & International Individual Compliance practice area.

The IRS intends to provide guidance on the new information reporting obligations for certain life insurance contract transactions under Code Sec. 6050Y. The proposed regulations will provide guidance on the modifications to the transfer for valuable consideration rules for life insurance contracts under Code Sec. 101(a). In addition, the IRS has delayed the reporting requirements under Code Sec. 6050Y until the final regulations are issued.

The IRS intends to provide guidance on the new information reporting obligations for certain life insurance contract transactions under Code Sec. 6050Y. The proposed regulations will provide guidance on the modifications to the transfer for valuable consideration rules for life insurance contracts under Code Sec. 101(a). In addition, the IRS has delayed the reporting requirements under Code Sec. 6050Y until the final regulations are issued.

Transfers for Value Rules
For transfers after December 31, 2017, the exceptions to the transfer for value rules do not apply to the transfer of a life insurance contract, or any interest in such a contract, that is a reportable policy sale. Thus, some portion of the death benefit ultimately payable under the contract may be includable in income. A "reportable policy sale" means the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer’s interest in the life insurance contract. A "reportable death benefit" is an amount paid at the death of the insured under a life insurance contract that was transferred in a reportable policy sale.

Reporting Requirements Delayed
The new reporting requirements of Code Sec. 6050Y apply to reportable death benefits paid and reportable policy sales made after December 31, 2017. However, the transition guidance delays any reporting under Code Sec. 6050Y until final regulations are issued.

Under Code Sec. 6050Y, information returns must be filed in the following situations:

• By anyone who acquires a life insurance contract, or any interest in a life insurance contract, in a reportable policy sale;
• By an issuer of a life insurance contract upon notice of a transaction required to be reported above, or upon any notice of a transfer of a life insurance contract, or any interest in a life insurance contract, to a foreign person; and
• By any payor of reportable death benefits.

Proposed Regulations
The proposed regulations will describe the manner by which and time at which the reporting requirements of Code Sec. 6050Y must be satisfied. They will also clarify which parties are subject to the reporting requirements and other definitional issues. For example, Treasury and the IRS intend to define the term "reportable policy sale" in the proposed regulations to include a viatical settlement. In addition, the proposed regulations will clarify the extent to which Code Sec. 6050Y applies to sales or acquisitions effected by transferors and transferees outside the United States, and to sellers and issuers that are foreign persons for purposes of these reporting rules.

The IRS is requesting public comment on the intended proposed regulations implementing these reporting requirements.

U.S. taxpayers with foreign financial accounts must file an FBAR (Report of Foreign Bank and Financial Accounts) if the aggregate value of their accounts exceeds $10,000 at any time during the calendar year. The FBAR must be filed by June 30 of the current year to report the taxpayer's financial accounts for the prior year.

U.S. taxpayers with foreign financial accounts must file an FBAR (Report of Foreign Bank and Financial Accounts) if the aggregate value of their accounts exceeds $10,000 at any time during the calendar year. The FBAR must be filed by June 30 of the current year to report the taxpayer's financial accounts for the prior year.

A U.S. taxpayer must report the account not only if the taxpayer has a financial interest in the account, but also if the taxpayer has signature authority over the account. The account must be reported even if it produces no income, and whether or not the taxpayer receives any distributions from the account.

FinCEN

Reporting is required by the Bank Secrecy Act (BSA), not by the Internal Revenue Code. Taxpayers submit the proper form to Treasury's Financial Crimes Enforcement Network (FinCEN), not the IRS. The form is not submitted with a tax return. However, FinCEN has delegated FBAR enforcement authority to the IRS.

New Form 114

In the past, taxpayers reported their accounts on Form TD F 90-22.1. However, effective for 2014 and subsequent years, taxpayers must report their accounts on new FinCEN Form 114. The June 30 deadline is firm; there is no extension for filing the form late. However, persons who belatedly discover the need to file an FBAR for a previous year can file on Form 114.

In the past, too, taxpayers reported their accounts on a paper form, but Form 114 is only available online, through the BSA E-Filing System website. Paper Form TD F 90-22.1 has been discontinued. This BSA E-Filing System allows the taxpayer to designate the year being reported, so taxpayers may use the same form to file late reports for a prior year. In addition, persons can now authorize a tax professional, such as an attorney, CPA, or enrolled agent, to file on their behalf, by designating an agent on BSA Form 114a.

If two persons jointly maintain an account, each must file an FBAR. However, spouses now qualify for an exception, and can file only one FBAR, provided the nonfiling spouse only owns accounts jointly with the filing spouse. The couple can complete a Form 114a, to authorize one spouse to file for the other, because the electronic system only accepts one signature for an FBAR.

Signature authority

Signature authority is authority to control the disposition of assets held in a foreign financial account. A person with a power of attorney over a foreign account must file an FBAR, even if the person never exercises the power of attorney.

FinCEN has considered amending the rules regarding signature authority. In the meantime, because there is some uncertainty about the meaning of signature authority, FinCEN has deferred FBAR filing by certain individuals that only have signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity. FinCEN Notice 2011-1 first provided an extension for these persons. In Notice 2013-1, FinCEN extended the due date for these persons to file, to June 30, 2015, while FinCEN further considers changes to the rules.

When an individual dies, certain family members may be eligible for Social Security benefits. In certain cases, the recipient of Social Security survivor benefits may incur a tax liability.

Family members

Family members who can collect benefits include children if they are unmarried and are younger than 18 years old; or between 18 and 19 years old, but in an elementary or secondary school as full-time students; or age 18 or older and severely disabled (the disability must have started before age 22).  If the individual has enough credits, Social Security pays a one-time death benefit of $255 to the decedent’s spouse or minor children if they meet certain requirements.

Benefit amount

The benefit amount is based on the earnings of the decedent.  The more the decedent paid into Social Security, the larger the benefit amount. Social Security uses the decedent’s basic benefit amount and calculates what percentage survivors may receive. That percentage depends on the age of the survivors and their relationship to the decedent. Children, for example, receive 75 percent of the decedent’s benefit amount. 

Taxation

The person who has the legal right to receive Social Security benefits must determine whether the benefits are taxable. For example, if a taxpayer receives checks that include benefits paid to the taxpayer and the taxpayer's child, the child's benefits are not considered in determining whether the taxpayer's benefits are taxable. Instead, one half of the portion of the benefits that belongs to the child must be added to the child's other income to see whether any of those benefits are taxable to the child.

Social security benefits are included in gross income only if the recipient's "provisional income" exceeds a specified amount, called the "base amount" or "adjusted base amount."  There are two tiers of benefit inclusion. A 50-percent rate is used to figure the taxable part of income that exceeds the base amount but does not exceed the higher adjusted base amount. An 85-percent rate is used to figure the taxable part of income that exceeds the adjusted base amount.

Up to 50 percent of Social Security benefits could be included in taxable income if a recipient's provisional income is more than the following base amounts:

--$25,000 for single individuals, qualifying surviving spouses, heads of household, and married individuals who live apart from their spouse for the entire tax year and file a separate return; and

--$32,000 for married individuals filing a joint return;

--zero for married individuals who do not file a joint return and do not live apart from their spouse during the entire tax year

Up to 85 percent of benefits could be included in taxable income if a recipient's provisional income is more than the following adjusted base amounts:

--$34,000 for single individuals, qualifying surviving spouses, heads of household, and married individuals who live apart from their spouse for the entire tax year and file a separate return; and

--$44,000 for married individuals filing a joint return;

--zero for married individuals who do not file a joint return and do not live apart from their spouse during the entire tax year.

If the taxpayer's provisional income does not exceed the base amount, no part of Social Security benefits will be taxed. For taxpayers whose income exceeds the base amount, but not the higher adjusted base amount, the amount of benefits that must be included in income is the lesser of:

--One-half of the annual benefits received; or

--One-half of the amount that remains after subtracting the appropriate base amount from the taxpayer's provisional income.

Taxpayers whose provisional income exceeds the adjusted base amount must include in income the lesser of:

--85 percent of the annual benefits received; or

--85 percent of the excess of the taxpayer's provisional income over the applicable adjusted base amount plus the smaller of: (a) the amount calculated under the 50-percent rules above, or (b) one-half of the difference between the taxpayer's applicable adjusted base amount and the applicable base amount. One-half of the difference between the base amount and the adjusted base amount is $6,000 for married taxpayers filing jointly and $4,500 for other taxpayers. For taxpayers who are married, not living apart from their spouse, and filing separately, the amount will always be zero.

If you have any questions about the taxation of Social Security benefits, please contact our office.

Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.

Business travel

You are considered “traveling away from home” for tax purposes if your duties require you to be away from the general area of your home for a period substantially longer than an ordinary day's work, and you need sleep or rest to meet the demands of work while away. Taxpayers who travel on business may deduct travel expenses if they are not otherwise lavish or extravagant. Business travel expenses include the costs of getting to and from the business destination and any business-related expenses at that destination.

Deductible travel expenses while away from home include, but are not limited to, the costs of:

• Travel by airplane, train, bus, or car to/from the business destination.
• Fares for taxis or other types of transportation between the airport or train station and lodging, the lodging location and the work location, and from one customer to another, or from one place of business to another.
• Meals and lodging.
• Tips for services related to any of these expenses.
• Dry cleaning and laundry.
• Business calls while on the business trip.
• Other similar ordinary and necessary expenses related to business travel.

Business mixed with personal travel

Travel that is primarily for personal reasons, such as a vacation, is a nondeductible personal expense. However, taxpayers often mix personal travel with business travel. In many cases, business travelers may able to engage in some non-business activities and not lose all of the tax benefits associated with business travel.

The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business.

Let’s look at an example. Amanda, a self-employed architect, resides in Seattle. Amanda travels on business to Denver. Her business trip lasts six days. Before departing for home, Amanda travels to Colorado Springs to visit her son, Jeffrey. Amanda’s total expenses are $1,800 for the nine days that she was away from home. If Amanda had not stopped in Colorado Springs, her trip would have been gone only six days and the total cost would have been $1,200. According to past IRS precedent, Amanda can deduct $1,200 for the trip, including the cost of round-trip transportation to and from Denver.

Weekend stayovers

Business travel often concludes on a Friday but it may be more economical to stay over Saturday night and take advantage of a lower travel fare. Generally, the costs of the weekend stayover are deductible as long as they are reasonable. Staying over a Saturday night is one way to add some personal time to a business trip.

Foreign travel

The rules for foreign travel are particularly complex.  The amount of deductible travel expenses for foreign travel is linked to how much of the trip was business related.  Generally, an individual can deduct all of his or her travel expenses of getting to and from the business destination if the trip is entirely for business.

In certain cases, foreign travel is considered entirely for business even if the taxpayer did not spend his or her entire time on business activities. For example, a foreign business trip is considered entirely for business if the taxpayer was outside the U.S. for more than one week and he or she spent less than 25 percent of the total time outside the U.S. on non-business activities. Other exceptions exist for business travel outside the U.S. for less than one week and in cases where the employee did not have substantial control in planning the trip.

Foreign conventions are especially difficult, but no impossible, to write off depending upon the circumstances. The taxpayer may deduct expenses incurred in attending foreign convention seminar or similar meeting only if it is directly related to active conduct of trade or business and if it is as reasonable to be held outside North American area as within North American area.

Tax home

To determine if an individual is traveling away from home on business, the first step is to determine the location of the taxpayer’s tax home. A taxpayer’s tax home is generally his or her regular place of business, regardless of where he or she maintains his or her family home. An individual may not have a regular or main place of business. In these cases, the individual’s tax home would generally be the place where he or she regularly lives.  The duration of an assignment is also a factor. If an assignment or job away from the individual’s main place of work is temporary, his or her tax home does not change. Generally, a temporary assignment is one that lasts less than one year.

The distinction between tax home and family home is important, among other reasons, to determine if certain deductions are allowed. Here’s an example.

Alec’s family home is in Tucson, where he works for ABC Co. 14 weeks a year.  Alec spends the remaining 38 weeks of the year working for ABC Co. in San Diego. Alec has maintained this work schedule for the past three years. While in San Diego, Alec resides in a hotel and takes most of his meals at restaurants.  San Diego would be treated as Alec’s tax home because he spends most of his time there. Consequently, Alec would not be able to deduct the costs of lodging and meals in San Diego.

Accountable and nonaccountable plans

Many employees are reimbursed by their employer for business travel expenses. Depending on the type of plan the employer has, the reimbursement for business travel may or may not be taxable. There are two types of plans: accountable plans and nonaccountable plans.

An accountable plan is not taxable to the employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and federal employment taxes. Accountable plans have a number of requirements:

• There must be a business connection to the expenditure. The expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his or her individual income tax return.

• There must be adequate accounting by the recipient within a reasonable period of time. Employees must verify the date, time, place, amount and the business purpose of the expenses.

• Excess reimbursements or advances must be returned within a reasonable period of time.

Amounts paid under a nonaccountable plan are taxable to employees and are subject to all employment taxes and withholding.  A plan may be labeled an accountable plan but if it fails to qualify, the IRS treats it as a nonaccountable plan. If you have any questions about accountable plans, please contact our office.

As mentioned, the tax rules for business travel are complex. Please contact our office if you have any questions.

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

What your return says is key

If it's not the time of filing, what really increases your audit potential? The information on your return, your income bracket and profession--not when you file--are the most significant factors that increase your chances of being audited. The higher your income the more attractive your return becomes to the IRS. And if you're self-employed and/or work in a profession that generates mostly cash income, you are also more likely to draw IRS attention.

Further, you may pique the IRS's interest and trigger an audit if:

• You claim a large amount of itemized deductions or an unusually large amount of deductions or losses in relation to your income;
• You have questionable business deductions;
• You are a higher-income taxpayer;
• You claim tax shelter investment losses;
• Information on your return doesn't match up with information on your 1099 or W-2 forms received from your employer or investment house;
• You have a history of being audited;
• You are a partner or shareholder of a corporation that is being audited;
• You are self-employed or you are a business or profession currently on the IRS's "hit list" for being targeted for audit, such as Schedule C (Form 1040) filers);
• You are primarily a cash-income earner (i.e. you work in a profession that is traditionally a cash-income business)
• You claim the earned income tax credit;
• You report rental property losses; or
• An informant has contacted the IRS asserting you haven't complied with the tax laws.

DIF score

Most audits are generated by a computer program that creates a DIF score (Discriminate Information Function) for your return. The DIF score is used by the IRS to select returns with the highest likelihood of generating additional taxes, interest and penalties for collection by the IRS. It is computed by comparing certain tax items such as income, expenses and deductions reported on your return with national DIF averages for taxpayers in similar tax brackets.

E-filed returns.  There is a perception that e-filed returns have a higher audit risk, but there is no proof to support it. All data on hand-written returns end up in a computer file at the IRS anyway; through a combination of a scanning and a hand input procedure that takes place soon after the return is received by the Service Center. Computer cross-matching of tax return data against information returns (W-2s, 1099s, etc.) takes place no matter when or how you file.

Early or late returns. Some individuals believe that since the pool of filed returns is small at the beginning of the filing season, they have a greater chance of being audited. There is no evidence that filing your tax return early increases your risk of being audited. In fact, if you expect a refund from the IRS you should file early so that you receive your refund sooner. Additionally, there is no evidence of an increased risk of audit if you file late on a valid extension. The statute of limitations on audits is generally three years, measured from the due date of the return (April 18 for individuals this year, but typically April 15) whether filed on that date or earlier, or from the date received by the IRS if filed after April 18.

Amended returns. Since all amended returns are visually inspected, there may be a higher risk of being examined. Therefore, weigh the risk carefully before filing an amended return. Amended returns are usually associated with the original return. The Service Center can decide to accept the claim or, if not, send the claim and the original return to the field for examination.

When you experience a change in employment, probably the last thing on your mind is your 401(k) plan distribution. There are a number of options to choose from when determining what to do with your 401(k) when changing employment - from keeping your account with your past employer, taking it with you, cashing out, or rolling the amounts over into a different account. However, mishandling this transaction can have detrimental tax effects, so make sure that you understand all aspects of the distribution options available to you and act accordingly before you walk out the door.

Often, individuals leave their 401(k) plans with their past employer because of confusion about the options. Generally, there are five moves departing employees can make regarding their 401(k) plans:

Take the cash. Cashing out of a 401(k) plan is rarely a wise decision. Although leaving your job with a nice roll of cash in your pocket sounds tempting (especially if you don't have another job lined up and are short on cash), this decision comes at a very high price. If you cash out of your plan, your current employer is required to withhold 20 percent of the amount for federal income taxes, on top of any state income tax withholding that will be required. Moreover, you face federal income taxes on the distribution (as well as any state income taxes) and a 10 percent penalty tax on the distributed amount if you are under the age of 59 and 1/2 at the time of the distribution. In total, these taxes could eat up over half of your distribution. Additionally, when you cash out of your plan you lose out on the opportunity for continued tax-deferral and tax-compounding of the amount in your account.

Roll your funds over into an IRA. An IRA rollover is probably the most popular option for handling a distribution upon a change of employment due to the high level of flexibility and control that the taxpayer has over the funds. With an IRA rollover, you have the ability to take your time to consider the other options such as taking the distribution in cash or investing the funds in your new employer's qualified plan. You also have a great amount of flexibility as to how the funds are invested.

Keep in mind, however, that only pre-tax contributions and earnings accumulated in your current 401(k) plan will be eligible for rollover into an IRA. After-tax contributions, distributions of substantially equal periodic payments, and minimum required distributions are not eligible for rollover into the IRA.

Important note: The transfer of funds between your former employer's plan and your IRA rollover account must qualify as a direct, or "trustee-to-trustee", rollover to avoid the 20 percent withholding requirement. When you receive the distribution check (it will be in the name of the IRA trustee), you have 60 days to deposit it into your IRA account to qualify for rollover treatment.

Invest in your new employer's plan. You may be able to roll your 401(k) account from your past employer into a plan maintained by your new employer. Although your new employer is not required to accept your 401(k) rollover, most do. Thus, your new employer may allow you to invest your 401(k) distribution in the new company's qualified retirement plan. However, only pre-tax contributions and earnings accumulated in your current 401(k) plan will be eligible for this type of rollover. After-tax contributions, distributions of substantially equal periodic payments, and minimum required distributions are not eligible for rollover into the new plan.

Note. The transfer of funds between your former employer and your new employer must qualify as a direct, or "trustee-to-trustee", rollover to avoid the 20% withholding requirement. When you receive the distribution check (it will be in the name of the new employer's plan trustee), your new employer must deposit it into the new company's plan within 60 days to qualify for rollover treatment.

Keep your funds in your current plan. If you have been satisfied with your company's plan performance in the past, have significant after-tax moneys in the fund, and/or you just don't want to make a decision on your distribution at this time, you may have the option of leaving your 401(k) funds where they are with your previous employer. Keep in mind that this option is not a given and is at the discretion of your former employer. For example, employers may not permit departing employees to remain in their 401(k) if the account value is less than $5,000, since maintaining accounts with small values creates administrative burdens. Generally, former employees are also not allowed to add to the account maintained with the past employer and can not borrow against the funds in the 401(k).

One important thing to consider here though is whether keeping your funds with your former employer will limit distribution or access options since you are no longer an employee of the company. Contact your company's benefits department to determine if there are any restrictions that you should know about.

Roll over your 401(k) into a Roth account. Beginning in 2010, all individuals, regardless of income or filing status, can roll over a 401(k) into a Roth IRA. Prior to 2010, eligibility for rolling over a 401(k) into a Roth IRA was limited to individuals with adjusted gross incomes that did not exceed $100,000. This move may be a beneficial if you expect to be in a higher tax rate bracket in retirement than you are now, since qualified distributions from a Roth IRA are tax-free. However, you will pay tax on the amount rolled over into the Roth IRA. If you roll over your 401(k) into a Roth account in 2010, you can elect to recognize the amount subject to tax ratably in 2011 and 2012. However, talk with your financial or tax advisor about this and other options, since as of now, the individual income tax rate brackets are scheduled to rise beginning in 2011 as the lower Bush-era tax rates sunset on December 31, 2010.

Since the distribution of funds from any retirement account can have serious tax consequences, when faced with a change of employment that may result in a distribution of any such funds, please contact the office for additional advice and guidance before you choose a distribution option.

Many small employers want to offer their employees the opportunity to save for retirement but are unsure of how to go about setting up a retirement plan. In this article, we’ll explore three options that are widely used by small businesses: payroll deduction IRAs, SEP plans, and SIMPLE IRAs.

Many small employers want to offer their employees the opportunity to save for retirement but are unsure of how to go about setting up a retirement plan. In this article, we’ll explore three options that are widely used by small businesses: payroll deduction IRAs, SEP plans, and SIMPLE IRAs.

Payroll deduction IRAs

Many small employers find a payroll deduction IRA very attractive because it allows them to offer their employees a retirement savings vehicle at little cost. A business of any size, even self-employed individuals, can establish a payroll deduction IRA.Under a payroll deduction IRA, only your employees make contributions to an IRA.Your responsibility as an employer is simply to transmit the employee’s authorized deduction to the financial institution that maintains the IRA. 

The IRA is set up with a financial institution, such as a bank, mutual fund or insurance company. You can limit the number of IRA providers to as few as one. The employee establishes a traditional IRA or a Roth IRA (based on the employee’s eligibility and personal choice) with the financial institution and authorizes the payroll deductions.As the employer, you withhold the payroll deduction amounts authorized by your employees and send the funds to the financial institution.

An employee’s decision to participate in a payroll deduction IRA is entirely voluntarily. If an employee decides to participate, he or she can only contribute up to a certain amount to the payroll deduction IRA every year. For 2010, the contribution limit is $5,000. An employee age 50 or older may make an additional “catch-up” contribution of $1,000 for a yearly total of $6,000. Every employee who participates is 100 percent vested in the contributions to their payroll deduction IRA.

Let’s look at an example of a payroll deduction IRA:

Aidan’s employer offers its employees the opportunity to have deductions taken from their paychecks to contribute to IRAs that the employees have set up for themselves. Aidan signs up for the program and has $100 from his $1,000 bi-weekly paycheck deposited into his IRA for a yearly total of $2,600. At the end of the year, Aidan’s employer would report the full $26,000 he earned on his Form W-2 and Aidan would add the $2,600 to any other IRA contributions he made during the year for Form 1040 deduction purposes.

The costs of a payroll deduction IRA are low. Moreover, payroll deduction IRAs are not subject to the often complex filing, documentation and administration requirements that are imposed on other employer-sponsored retirement arrangements, such as 401(k) plans.

SEP plans

“SEP” stands for “Simplified Employee Pension” plan. While there are filing, administration and documentation requirements for SEP plans, the goal of an SEP plan is to keep these as simple as possible. The IRS has created, for example, model SEP language for plan documents.

An SEP plan is similar to a payroll deduction IRA. Under an SEP plan, employers make contributions to traditional IRAs set up for employees (including self–employed individuals). An SEP-IRA is funded solely by employer contributions whereas a payroll deduction IRA is funded solely by employee contributions.

As the employer, you must select the financial institution for your SEP. This decision must be made carefully because you and the financial institution will very work closely to administer the plan. After you send the SEP contributions to the financial institution, the financial institution will manage the funds.  Depending on the financial institution, SEP contributions can be invested in individual stocks, mutual funds, and other similar types of investments.

Federal law requires you and the trustee to keep employees informed about the administration and health of the SEP. Employees must be provided with plan documents, an annual statement that reports the fair market value of each employee’s account and a copy of an annual statement that is filed by the financial institution with the IRS. Like a payroll deduction IRA, each employee is 100 percent vested in his or her SEP-IRA.

Generally, the annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of:

-- 25 percent of compensation, or

-- $49,000 for 2010.

Generally, contributions are not required to be made every year to an SEP. In years that contributions are made to an SEP, they must be made to the SEP-IRAs of all eligible employees.

Contributions to an SEP-IRA must be made in cash; property cannot be contributed to an SEP-IRA. Special rules apply if you, as the employer, also contribute to a 401(k) or similar plan on the employee’s behalf.

All eligible employees must be allowed to participate. An eligible employee is any employee who is at least age 21 and has worked for you in at least three of the immediate past five years.

To encourage employers to establish SEPs, the government offers a tax credit. You may be eligible for a tax credit of up to $500 for each of the first three years for the cost of starting the SEP.

SIMPLE IRAs

A “SIMPLE IRA” is a Savings Incentive Match Plan for Employees IRA. Like an SEP plan, a SIMPLE IRA is intended to be easily created and administrated.

A SIMPLE IRA is funded both by employer and employee contributions. As the employer, you can choose either to (1) match the contributions of employees who decide to participate or (2) contribute a fixed percentage of all eligible employees’ pay. Under option (2), which is known as the nonelective contribution formula, even if an eligible employee does not contribute to his or her SIMPLE IRA, you must make a contribution to the employee’s SIMPLE IRA equal to a fixed percent of the employee’s salary. Each employee is 100 percent vested in his or her SIMPLE IRA.

While similar to a payroll deduction IRA, a SIMPLE IRA has additional requirements. One important requirement is the number of employees. Generally, your business must have 100 or fewer employees to be eligible for a SIMPLE IRA.

Let’s look at an example of a SIMPLE IRA. In this example, the employer matches the employee contributions of employees who decide to participate.

Allison’s employer has established a SIMPLE IRA plan for its employees. The employer will match its employees’ contributions dollar-for-dollar up to three percent of each employee’s salary. If an employee does not contribute to his or her SIMPLE IRA, then that employee does not receive a matching employer contribution. Allison decides to contribute five percent ($2,500) of her annual salary of $50,000 to a SIMPLE IRA. The employer’s matching is $1,500 (three percent of $50,000). Therefore, the total contribution to Allison’s SIMPLE IRA that year is $4,000.

There are contribution limits for SIMPLE IRAs. For employees, the annual contribution limit is $11,500 in 2010. Employees age 50 and older may make additional catch-up contributions of $2,500 in 2010.

The SIMPLE IRA contribution for the employer is dependent upon which contribution formula you select. If you decide to make matching contributions, only eligible employees who have elected to make contributions will receive an employer contribution.If you decide to make a nonelective contribution, each eligible employee must receive a contribution regardless of whether the employee makes contributions.

As with an SEP plan, a SIMPLE IRA creates a relationship between you and the financial institution that manages the funds. SIMPLE IRA plan contributions can be invested in individual stocks, mutual funds and similar types of investments. Each participating employee must receive an annual statement indicating the amount contributed to his or her SIMPLE IRA for the year.

As with SEP plans, you may be eligible for a tax credit to help you offset start-up costs. The tax credit can reach up to $500 per year for each of the first three years for the cost of starting a SIMPLE IRA plan.

We’ve covered a lot of material about retirement plans for small businesses. There are more detailed requirements, especially for SEP plans and SIMPLE IRAs, which we can discuss in depth. Please contact our office to set up an appointment to explore these and other retirement arrangements for small businesses.

Individual retirement accounts (IRAs) -- both traditional and Roth IRAs -- are among the most popular retirement savings vehicles today. Protecting the value of your IRA (and other retirement accounts) is incredibly important. While some factors affecting the value of your retirement savings may be out of your control, there are many things within your control that can help you safeguard the wealth of those accounts and further their growth. This article addresses common mistakes regarding IRA distributions and contributions, and how to avoid them.

 A recent report by the Treasury Inspector General for Tax Administration, which oversees IRS activities through investigative programs, reports that an increasing number of taxpayers are not complying with IRA contribution and distribution requirements. Mistakes include, among other things, making excess contributions that are left uncorrected or failing to take required minimum distributions from their IRAs.

 Making excess contributions

 Knowing the maximum amount that you can contribute to your IRA is imperative to avoid negative tax consequences. A 6-percent excise tax applies to any excess contribution made to a traditional or Roth IRA. In 2010, individuals can contribute up to $5,000 to both traditional and Roth IRAs. Individuals age 50 or older can also make “catch-up” contributions of up to $1,000 to their IRA in 2010 as well.

 If you withdraw the excess contribution amount on or before the due date (including extensions) for filing your federal tax return for the year, you will not be treated as having made an excess contribution and the 6-percent excise tax will not be imposed. You must also withdraw any earnings on the contributions as well.

 Not contributing enough

 On the opposite end of the spectrum, you may be contributing too little to your IRA. Although your financial and personal situation will dictate how much you contribute to your IRA each year, and whether you are able to contribute the maximum amount, there are benefits to making the maximum contribution. Contributing the maximum amount means larger tax-free or tax-deferred growth opportunity for your dollars, and a higher – expectedly – account value upon retirement. Moreover, contributing more to your traditional IRA means a larger tax deduction come April 15. Thus, failing to contribute the maximum allowable amount means you may be missing out on tax deductions in addition to tax-deferred, or tax-free earnings.

 Not taking your RMDs

 Required minimum distributions (RMDs) are minimum amounts that a traditional IRA account owner must withdraw annually beginning with the year that he or she reaches age 70 ½. The RMD rules also apply to 401(k) plans, Roth 401(k)s, 403(b) plans, 457(b) plans, SIMPLE IRAs, and SEP IRAs. However, Roth IRAs are not subject to RMD rules (beneficiaries of Roth IRAs must take RMDs, however).

If you fail to take a RMD, or fail to take the correct amount for the year, the IRS imposes a 50 percent penalty tax on the difference between the actual amount you withdrew and the amount that was required. This is a stiff penalty to pay. A specific formula is used to compute annual RMDs, based on your current age, the amount in your IRA as of a certain date, and your life expectancy. Generally, RMDs are calculated for each account (if more than one) by dividing the prior December 31st balance of the IRA (or other retirement account) by a life expectancy factor that the IRS publishes in Tables in IRS Publication 590, which can be found on the agency’s website.

Note. RMDs were suspended for the 2009 tax year, in order to help retirement plans hit by the economic downturn. However, individuals must begin taking RMDs again in 2010 and thereafter.

Failing to rollover IRA funds within 60-days

If you receive funds from an IRA and want to roll over the money to another, you have only 60 days to complete the rollover in order to escape paying taxes on transaction. In general, failing to complete a rollover from one IRA to another within the 60-day window has significant tax ramifications. If the funds are not rolled over within this timeframe, the amount is considered taxable income, subject to ordinary income tax rates. And, if you are younger than age 59 ½, you will pay an additional 10 percent tax. The distribution may also have state income tax consequences as well. (Note: Rollovers from traditional IRAs to Roth IRAs are taxable, regardless of whether they are completed within 60 days). If you have the option, make a direct rollover or transfer. A direct, trustee-to-trustee transfer involves your funds being directly rolled over from one financial institution to the other, avoiding the 60-day requirement since you never directly receive the money.

Also, you can generally only make a tax-free rollover of amounts distributed to you from IRAs only once in 12-month period. As such, you can not make another rollover from the same IRA to another IRA (or from a different IRA to the same IRA) for one year without the amount being subject to tax.

And, individuals age 70 ½ or older cannot rollover any RMD amounts. Make sure that if you must take an RMD for the year, you withdraw the amount prior to rolling over the IRA.

Make Roth IRA contributions after age 70 ½

 If you continue earning income after reaching age 70 ½, you can continue contributing to your Roth IRA, on top of not having any RMD requirement. Therefore, you continue to accumulate tax-free savings. If you have earned income, and your financial and personal situation allow, consider continuing contributions to your Roth, building up tax-free money when you withdraw the funds.

 Failing to name an IRA beneficiary

 Don’t make the mistake of neglecting to name a beneficiary for your IRA. IRAs do not pass by will, but rather pass under the terms of an IRA Beneficiary Designation Form. If you have not named a beneficiary of your IRA, such as your spouse or child(ren), the “default” beneficiary usually is the account holder’s estate. Where there is no named beneficiary, distributions from the IRA must then generally be made as a lump sum or within five years after the owner’s death.

 When you designate your child(ren) as the IRA beneficiary, the rules regarding distributions differ from those that govern IRAs held by a surviving spouse beneficiary. Non-spouse IRA beneficiaries must generally begin taking required distributions over their life expectancy or within five years after the IRA owner's death. Although taking required distributions, the undistributed IRA assets continue to grow in a tax-deferred manner. On the other hand, a surviving spouse beneficiary may elect to treat the IRA as his or her own, or take minimum distributions as a non-spouse beneficiary would.

 Distributions from inherited IRAs are taxable to the recipient as ordinary income. Generally, the income tax rate tends to be higher when an IRA is paid to the estate instead of an individual beneficiary.

 Roth IRA conversions

 This year may be the first time you are eligible to convert your traditional IRA to a Roth. Beginning in 2010, any individual regardless of adjusted gross income (AGI) or filing status can take advantage of a Roth IRA conversion. Prior to 2010, the ability to convert a traditional IRA to a Roth was limited to individuals with AGIs of less than $100,000. Also, married individuals filing a separate return could not convert to a Roth IRA either. If you convert in 2010, you can elect to split (and defer) the tax you will owe on the conversion and pay half in 2011 and half in 2012.

 The decision to convert to a Roth IRA depends on many factors, including the financial and tax consequences of the transaction. Sometimes, it may be wiser depending on your situation to stick with your traditional IRA, especially if you will pay more tax on the conversion than in the account, or you don’t have outside funds to pay for the conversion tax. Do the math carefully and talk with your tax advisor beforehand.

Q. I spend 20 hours every week cooking meals and delivering them to an organization that feeds the hungry and homeless. Am I entitled to a deduction for my time and the food I pay for out of my own money?

A. Generally, if you do volunteer work for a charity, you are not entitled to deduct the cost of services you perform for the charity. However, if in connection with the volunteer work you incur out-of-pocket expenses, you may be entitled to deduct some of those expenses.

Qualifying expenses

If the amounts that you pay for food and other supplies used in the preparation and packaging of the meals are not reimbursed by the charity, generally you may deduct these expenses as contributions to the charity.

In addition, if the amounts that you pay to travel by car or other means to deliver the meals are not reimbursed by the charity, and you derive no personal benefit from the travel, the expenses are deductible. Qualifying expenses include gasoline for your car and fares for taxis or public transportation.

Special mileage rate

If you drive your own vehicle to deliver the meals, you can use a special IRS mileage rate to calculate charitable contribution deductions involving use of your car. This special rate is 14 cents per mile, which is statutorily set.

Other expenses

Other out-of-pocket expenses incurred in connection with services you provide to a charity that are deductible include costs related to uniforms, travel, meals, and lodging. Sometimes, expenses incurred while serving as a charity’s delegate to a convention may be deducted.

Keep receipts