nionat al society ofx ta professionals federal tax alert · pdf filethe federal tax alert...

The Federal Tax alerT [email protected] JANUARY / February 2016 1

On December 18, 2015, Congress passed into law a bipartisan agreement on

about 50 tax extenders that in the past have normally been extended by Congress on a one and/or two year basis over the past decade. The PATH Legislation makes a good number of the provisions permanent while others are extended only until December 31, 2016 and a few for a five-year extension period.

A. Permanent Provisions Include:

1. §24 Child Tax Credit (CTC): The allowance of the refundable credit for taxpayers with earned income greater than $3,000 and having less than 3 qualifying children was supposed to expire after 2017. The earned income that is greater than $3,000 is multiplied by 15% in order to calculate the refundable credit.

The legislation also precludes retroactive claims of the CTC by preventing taxpayers from amending a return (or filing an original return) for any prior year in which the taxpayer or the qualifying child did not have a taxpayer individual identification number (ITIN) in order to claim the credit.

Effective for years beginning after December 31, 2015, the legislation also adds a provision barring individuals from claiming the credit for:

a. 10 years if they are convicted of fraud; or

b. 2 years if they intentionally disregard the rules.

In addition, for tax years beginning after December 31, 2015, the paid-preparer due diligence penalty under §6695(g) which currently applies to the EITC will also apply to those who fail to exercise due diligence in determining eligibility for the CTC. The penalty is $500 for

each failure indexed to inflation and the amount in 2015 is $505 for each failure.

The legislation updated §6402(m) and now provides that for credits and refunds made after December 31, 2016 no credit or refund for an overpayment for a tax year will be made before the 15th day of the second month following the close of the tax year (February 15) if the taxpayer claimed the additional CTC.

Note: The estimated cost of the provision over the next 10 years is $87.8 Billion.

2. §25A American Opportunity Credit (AOTC) was supposed to expire after 2017 and revert back to the Hope Credit. The AOTC has been made permanent. It was also made subject to heightened verification processes and paid-preparer due diligence requirements in order to reduce the number of improper payments.

Program Integrity Provisions: Effective for returns, and any amendment or supplement to a return, filed after December 18, 2015, the legislation prohibits an individual from retroactively claiming the AOTC by amending a return (or filing an original return if he failed to file) for any prior year in which the individual or a student for whom the credit is claimed did not have an ITIN. However, the change does not apply for timely filed returns for tax year 2015.

In addition, for tax years beginning after December 31, 2015, the paid-preparer due diligence penalty under §6695(g), which currently applies with respect to the earned income tax credit (EITC), will also apply to those who fail to exercise due diligence in determining eligibility for the AOTC.

2015 ExtENdERs LEgisLAtioN: Protecting Americans from Tax Hikes (PATH) Act of 2015

continued on page 6

In This IssueIn THe news

2015 extenders legislation: Protecting americans from Tax hikes (PaTh) act of 2015 .............................1

IrS announces error on Identity Protection PIN letters Sent to Taxpayers..3

update on National Taxpayer advocate reports to Congress ........3

GuesT AuTHOr Nicholas Bozzo: risk Management Tips For Tax Season ...............9

PrAcTIce MAnAGeMenTTalking about Security: The IrS Provides More Tips to Protect your Personal Information While Online .................5

FrOM THe BencHIrS Chief Counsel’s Office Issues advice on “dependent, Support Test of divorced Parents and release of exemption” .................. 11

eTceTerAa Timely Tip from ennis T. Pea ..................10

NaTIONal SOCIeTy of Tax PrOFeSSIONalS

Federal Tax AlertJANUARY / FEBRUARY 2016

the

2 JANUARY / February 2016 [email protected] The Federal Tax alerT

Technical Tax advice provided by NSTP Hotline staff is based upon specific information conveyed by the member. Members should take special care in relying upon recommendations and opinions that reflect the understanding of the Hotline staff member. NSTP and the Hotline staff are not responsible for misapplication of information given. Members are responsible for the ultimate verification and application of any information provided by NSTP.

NOTICe • TAX HOTLIne • dIreCT lINe: 360-695-0556January 1 – January 31, 2016Monday–Friday

9:00 AM – 2:00 PM Pst 10:00 AM – 3:00 PM Mst 11:00 AM – 4:00 PM Cst 12:00 PM – 5:00 PM Est

February 2 – April 16, 2016Monday, Tuesday & Thursday

6:00 AM – 2:00 PM Pst 7:00 AM – 3:00 PM Mst 8:00 AM – 4:00 PM Cst 9:00 AM – 5:00 PM Est

February 2 – April 15, 2016wednesday & Friday


February 2 – April 15, 2016saturday

8:00 AM – 12:00 PM Pst 9:00 AM – 1:00 PM Mst 10:00 AM – 2:00 PM Cst 11:00 AM – 3:00 PM Est

April 16 – December 31, 2016Monday, wednesday & Friday


Happy New Year into 2016 and welcome to the start of yet another tax season. So how many years have you been involved in tax preparation? What are the stories you have

to tell? Send them to [email protected] — Â we want to focus an issue of the FTA on the funny and maybe not-so-funny stories that you have run into during your years of practice.

I was recently swapping stories with a colleague of why this industry is so much fun. We have interesting clients who are involved in unique and off-the-wall environments. And then those are those things we have wondered about and then find out how the industry really works when a client walks into our door. One of my most interesting clients owned a business that supplied independent ATM machines to universities and sports complexes. The money that goes through this industry is phenomenal, and then again so are the fees. Of course, the IRS was not amused when he was trying to justify his exorbitant bill at Christie’s (the local topless club) by saying he needed to keep in touch with his customers.

My two most memorable moments have to do with clients finding themselves in legal trouble. One morning I was watching the local news and saw one of my clients being escorted in handcuffs for the murder of his wife. My first thought was that I had lost a client, however, the wife’s parents contacted me to complete the tax returns and protect the remaining funds from the IRS. At the time of his arrest I had been preparing several years of delinquent personal and business tax returns. He is now serving a 50 year prison term. He received 25 years for the murder of his wife and 25 years for mailing cocaine through the U.S. mail. His attorney made the comment that now we know the price of a life — the same as sending an illegal substance through the mail. Oh! And the reason he mailed the drugs was that his in-laws were giving him a hard time after the death of their daughter and he wanted to get them in trouble by saying they possessed an illegal substance. I did not say he was very smart!

The second situation just presented itself recently. I was reading the local paper and saw an article about one of my ex-clients being sentenced to 18 months for failure to comply with the tax code. Even when he was a client he felt he was somewhat above the law and could flaunt his disregard for basic accounting requirements and payment of payroll taxes (which is why he eventually went to jail). This situation went on for over ten years but his cavalier attitude and the patience of the IRS finally came to an end.

This issue of the FTA offers some tips for risk management by Target Insurance, a wrap up of the legislative action of the tax code and IRS updates.

Nina Tross, MBA, EA nina Tross, MBA, eA

Paul La Monaca, CPA, MST Paul La Monaca, cPA, MsT

from the eDITOrs

The Federal Tax Alert is published 6 times a year by the National society of tax Professionals.

MAILInG ADDress: the Federal tax Alert 11700 NE 95th st., suite 100, Vancouver, WA 98682

TeLePHOne: 800-367-8130

eDITOrs:

Paul La Monaca, CPA, [email protected]

Nina tross, MBA, EA [email protected]

suBscrIPTIOn servIces:

delta [email protected]

Opinions expressed in The Federal Tax Alert are those of the editors and contributors.

Refer 3 and Get One Year FREE!Refer 3 new Full Members to NstP and receive your next year’s dues absolutely FREE! When you refer a new member, make sure they mention your name as their referral so that we can give you credit. When you have referred three new Full Members, you will receive your next year’s membership FREE.


IN THE NEWS

update On national Taxpayer Advocate reports To congressIn the two prior Federal Tax Alerts we have been sharing with you the role and the

work of the Office of the National Taxpayer Advocate, Nina Olson. In her reports to Congress she expresses her concerns and recently has stated in her report that the IRS may be on the verge of dramatically scaling back on telephone service and face-to-face service that it has always provided to the American taxpayer. We saw this during the 2015 filing season and as a result NSTP’s Hotline benefit to members was expanded to 44 hours a week during the filing season, which it will also be for the 2016 filing season beginning February 2, 2016 and ending on Saturday, April 16, 2016. In a statement released January 7, 2016 Nina Olson stated the following items and issues of concerns that we as Tax Professionals need to be alerted:

“The IRS intends to reduce telephone and face-to-face interaction with taxpayers. The IRS has already begun to reduce taxpayer services, such as by refusing to answer all but simple tax-law questions during the filing season and refusing to answer tax law questions at all after April 15. Online accounts are likely to reduce taxpayer demand for telephone and face-too-face interaction to some degree but are unlikely to be useful in addressing complex account-specific matters,” Olson said.

Olson also indicated that “the IRS’s ultimate goal is to get out of the business of talking with taxpayers.” Olson characterized the combination of reductions in personal service and the IRS’s plans to direct taxpayers with questions to preparers and other third parties (along with the expansion of user fees) as creating a “pay to play” tax system, where only taxpayers who can afford to pay for tax advice will receive personal service, while others will be left struggling for themselves.

The “most serious problems” discussed in the report were grouped into four sections: (1) IRS Future State Vision: Implications for Today and Tomorrow; (2) Problems that Undermine Taxpayer Rights and Impose Taxpayer Burden; (3) Problems that Waste IRS Resources and Impose Taxpayer Burden; and (4) Problems that Contribute to Earned Income Tax Credit Noncompliance and Recommendations for Improvements.

The IRS replied to the Taxpayer Advocate stating:

“The Taxpayer Advocate seems to want the IRS to continue to do business the way we did 10 years ago.” The IRS also reiterated its commitment to personal service to taxpayers. Increasing the availability of self-service interaction frees up in-person resources for taxpayers who truly need them, including those who are not comfortable online or do not have personal access to a computer, the IRS added.

Congress made certain to express itself when House Ways and Means Committee Chairman Kevin Brady (R-Tex.) and Oversight Subcommittee Chairman Peter Roskam (R-Ill.) also expressed concern after reviewing the NTA report, stating that “the IRS needs to improve its “abysmal” customer service and work on streamlining and reforming operations so taxpayers can receive the help they need to pay their taxes correctly and without undue bureaucratic hassle”.

As Tax Professionals we need to be aware that this is an issue that we are involved in. We need to strengthen our skills, and tax knowledge. This is available to use through NSTP education in the form of live courses, self-study webinars and discussions with our peers.

...only taxpayers who can afford to pay for tax advice will receive personal service, while others will be left struggling for themselves.

3 4168

Irs Announces error on Identity Protection PIn Letters sent to Taxpayerson tuesday January 5, 2016 the internal Revenue service made an announcement that they sent iRs Notice CP 01A dated January 4, 2016 with an incorrect year. taxpayers whose identity has been compromised need to report an identity Protection (iP) PiN number on page 2 of their current year return. this number is issued annually to the taxpayer for 3 years after their identity has been stolen. the identity Protection (iP) PiN is needed in order for the taxpayer’s return to be electronically filed. the iP PiN is changed each year for the 3 years.

the CP 1A Notice “stated” that the iP PiN issued is to be used for the 2014 tax return when in fact the number is to be used for the 2015 tax return. tax professional are advised the iP PiN is valid for returns needed to be filed in 2016. therefore tax Professional should use the iP PiN number for 2015 returns that the iRs announced would be accepted beginning January 19, 2016.

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from the nsTP BOArD PresIDenT

This is hoping and praying everyone had a Merry Christmas and Happy

New Year. The New Year brings a new tax season with some changes as usual. The tax industry is a life of never ending changes from season to season and 2016 is starting out no different.

As always you can expect to see changes during 2016 and right up to election. Prepare yourself, through education and compliance, to provide your clients with full service and representation. If you are not credentialed then you should consider participating in one of the NSTP EA Boot Camps. The NSTP EA prep course is the best live course available and has met our expectations in assisting members preparing for the exam. The primary value of the live class is the interaction between the attendees. The demand has been overwhelming. The passing rate has been an A+ with success. The tax business provides the opportunity for you to totally represent your clients. We have adjusted our training schedule in order to keep up with the demands for the EA Boot Camp. Plan your future and the investment will be returned to you ten times over in fees, confidence and client loyalty.

• Tax Hotline: our members are never charged a fee for use of the Tax Hotline regardless of the number of times you contact us.

• NSTP Dividend Reward Points: Dividend reward points are earned each time you make a purchase with NSTP whether membership, live events, self-study or materials. Dividend points are automatically deposited into your rewards account and accumulated for you. One dividend point is earned for every dollar spent with NSTP. The dividend points never expire as long as your membership in NSTP continues. Your dividend points can then be “spent” on CPE courses and other educational materials. When you don’t have enough points to qualify

to receive your entire course for free, you can purchase the rest of the credits at a specified per credit hour rate. This purchase also earns dividend reward points and your rewards account keeps growing!

• Federal Tax Alert technical newsletter (6 Issues)

• Tax Client Newsletter (3 Issues). Brand with your own logo and send to your customers

• Weekly Update email (52 issues) keeps you current and up-to-date

• Federal Tax Update Seminars across the country at member rate to prepare for the upcoming tax season, including ACA information

• Webinars with CE credits - members get reduced price

• Member rate for Ethics, Special Topics and Executive Session Workshops in Williamsburg, VA and Napa, CA

• Discount prices on DVDs, Self-Studies and Course Books

• Professional Liability Insurance at group rates

• Beautiful Membership Certificate (suitable for framing) acknowledging your membership in the National Society of Tax Professionals

Are You Aware of Your nsTP Member Benefits?

Bill Horn Bill Horn NSTP Board President

NSTP is poised for change in response to your requests for changes in education and representation. The IRS Forums have been announced—look for your NSTP booth to be classier and provide more services to you at the Forums. NSTP has expanded the webinar library with additional courses, more subject matter, and some with longer credit hours. The Fall Update course is even on a downloadable version you can use for research. You must be in a constant adjustment mode to stay in the tax business.

NSTP is the best member organization in the industry, with the best services and products, and a free no restrictions hot line for you. It is your organization and only as good as you make it. We need your assistance for a new member flourish in 2016 and assistance in retaining present members. We are asking that every member encourage your fellow member to renew their membership and to bring in new members from your local area.

Attendance at NSTP-sponsored seminars and special events are a great way to network with other professionals in your area. If you are active in other professionals organizations, share

information with them about membership in the NSTP. We encourage you to talk about your experiences with the education, hotline and information releases through the NSTP. We strive to be your one source of information from the IRS, Congress and other federal agencies. Help us to be the best organization for the tax professional by attending the seminars, sharing information you receive with your colleagues, and utilizing our hotline.

When you read this in your FTA I will more than likely not be the Board President any more. I told this Board in 2010 that at the point I turned 80 years of age I will step down. I turned 80 in November 2015 and my term as President runs out in January 2016. My term on the Board continues until the end of 2017.

It has been an honor to serve this organization and you its members. I now hand over the reins to your qualified and enthusiastic Board of Directors and the officers. I have enjoyed the run and each and every one of you over the years. It has been a true joy and pleasure to be of service to you. I will remain a member of this great organization. Thank all of you.


starting in November 2015 the IRS has been providing Security

Awareness Tips in an effort to reduce the amount of identity theft and refund fraud. The series of tips, available at www.irs.gov/uac/IRS-Security-Tax-Tips, contain information on topics such as phishing and malware protection, protecting passwords, keeping your tax records secure, and new safeguards introduced by the IRS, the states, and the tax industry. On January 4, 2016, the IRS issued “IRS Security Awareness TIP Number 7, “Tips to Protect Your Personal Information While Online.

The IRS, the states and the tax industry urge taxpayers to be safe online and remind them to take important steps to help protect their tax and financial information and guard against identity theft. Treat personal information like cash and don’t hand it out to just anyone.

Social Security numbers, credit card numbers and bank and utility account numbers can be used to steal money or open new accounts in the taxpayer’s name. Every time you are asked for personal information think about whether you can really trust the request. In an effort to steal information, scammers will do everything they can to appear trustworthy.

The IRS has teamed up with State Revenue Departments and the Tax Industry to make sure you understand the dangers to personal and financial data.

The IRS suggests some best practices to follow in order to protect tax and financial information:

• Give personal information over encrypted websites only: If shopping or banking online, then stick to sites that use encryption to protect information as it travels from your computer to their server. In order to determine if a website is encrypted, look for “https” at the beginning of the web address (the

“s” is for secure). Some websites use encryption only on the sign-in page, but if any part of your session isn’t encrypted, then the entire account and your financial information could be vulnerable. Look for https on every page of the site you’re on, not just where you sign in.

• Protect your passwords The longer the password, the tougher it is to crack. Use at least 10 characters; 12 is ideal for most home users. Mix letters, numbers and special characters. Try to be unpredictable so don’t use your name, birth date or common words. Don’t use the same password for many accounts. If it’s stolen from you or from one of the companies with which you do business then it can be used to take over all your accounts. Don’t share passwords on the phone, in texts or by email. Legitimate companies will not send you messages asking for your password. If you get such a message then it’s probably a scam. Keep your passwords in a secure place, out of plain sight.

The IRS states that taxpayers should not assume ads or emails are from reputable companies. Check out companies to find out if they are legitimate. When online, a little research can save a lot of money and produce security risk.

Don’t overshare on social media: Do a web search of your name and review the results. Most likely, the results will turn up your past addresses, the names of people living in the household as well as social media accounts and your photographs. All of these items are valuable to identity thieves. Even a social media post boasting of a new car can help thieves bypass security verification questions that depend on financial data that only you should know. Think before you post!

The Service stresses that we back up our files: No system is completely secure. Copy important files and federal and state tax returns onto a removable disc

or a back-up drive, and store it in a safe place. If your computer is compromised, then you’ll still have access to your files

The IRS stresses that taxpayers save tax returns and records: Federal and state tax forms are important financial documents needed for many reasons. Print out a copy and keep in a safe place. Make an electronic copy in a safe spot as well. Remind your clients that these steps also can help them more easily prepare next year’s tax return. If one stores sensitive tax and financial records on a computer, then use a file encryption program to add an additional layer of security should your computer be compromised.

The IRS recommends that in order to learn additional steps that you can take to protect your personal and financial data, visit Taxes. Security. Together. You also can read Publication 4525, Security Awareness for Taxpayers.

PracTIcE MaNagEMENT

Talking About security: The Irs Provides More Tips to Protect Your Personal Information while Online

Additional Irs resources Available from the Irs which include:

• IRS Commissioner Koskinen’s Statement on the Security Summit Group Public Awareness Campaign

• www.irs.gov/identitytheft

• IR-2015-129, IRS, States and Tax Industry Announce New Steps to Help Public to Protect Personal Tax Data

• Fact Sheet 2015-23, IRS, States and Industry Partners Provide Update on Collaborative Fight Against Tax-Related Identity Theft

• IRS and Partner Statements on the October 2015 Security Summit Meeting


Also, for tax years beginning after December 31, 2015, the current law rules in §32(k) that bar individuals from claiming the EITC for 10 years if they are convicted of fraud; or two years, if they intentionally disregarded the rules, also apply to the AOTC, as does the rule in §6213(g)(2)(K) that allows the IRS to disallow credits without a formal audit if they are claimed in a period during which the taxpayer is barred from doing so due to fraud or reckless or intentional disregard.

For tax years beginning after December 31, 2015, §25A(i)(6) is updated and provides that expenses paid after that date for education furnished in academic periods beginning after that date, a taxpayer claiming the AOTC must report the employer identification number (EIN) of the educational institution to which the taxpayer makes qualified payments under the credit.

Finally, for expenses paid after December 31, 2015, §60505(b)(2)(B)(i) is updated and provides that for education furnished in academic periods beginning after that date, higher education institutions are required to report (on Form 1098-T) only qualified tuition and related expenses actually paid rather than choosing between amounts paid and amounts billed, as under current law.

For tax years beginning after June 29, 2015, taxpayers must receive a Form 1098-T from the educational institution containing all required information in order to claim the AOTC, the above-the-line deduction for higher education expenses, or the Lifetime Learning Credit.

3. §32 Earned Income Tax Credit (EITC): the provision which allows an increased amount for families with 3 or more qualifying children was supposed to expire after 2017. The law provides an increased credit of 45% versus only 40% for taxpayers with 2 qualifying children.

In addition, married couples filing jointly have an increased income phase-out range of $5,000 which is indexed to inflation.

Program Integrity Provisions: Effective for returns, and any amendment or supplement to a return, filed after December 18, 2015, §32(m) is updated and prohibits an individual from retroactively claiming the EITC by amending a return (or filing an original return if he failed to file) for any prior year in which the individual or a student for whom the credit is claimed did not have a valid social security number.

Note: The change does not apply for timely filed returns for tax year 2015.

Note: The legislation also updates §6402(m) and provides that effective for credits or refunds made after December 31, 2016 no credit or refund for an overpayment for a tax year will be made to a taxpayer before the 15th day of the second month following the close of the tax year (February 15) if the taxpayer claimed the EITC on the tax return.

4. §62(a)(2)(D) Deductions for expenses of elementary and secondary school teachers limited to $250 on page 1, line 23 of Form 1040 has been made permanent. Beginning in 2016 the $250 is indexed to inflation and includes professional development expenses.

5. §132(f) exclusion for employer-provided mass transit and parking benefits now have the same limitation of $250 indexed to inflation. Therefore the amount for 2015 is $255 per month.

6. §164(b)(5) provides a permanent election to deduct State and Local Sales Tax on Schedule A in lieu of a deduction for State and Local Income Taxes.

Note: The estimated revenue cost over the next 10 years is $42.44 Billion.

7. §408(d)(8) allows an exclusion for taxpayers who have reached 70 ½ and required to take a Required Minimum Distribution (RMD) to make up to $100,000 in Qualified Charitable Distributions “QCD” from IRA accounts. Married taxpayers filing jointly can each have a “QCD” if they each have an IRA account.

This will apply to their RMD amount and will avoid increasing their adjusted gross income possibly helping them with other tax provisions.

8. §179 Expense Election Deduction allowed for up to $500,000 with phase-out beginning at $2 million. It also makes permanent the special rule allowing off-the-shelf computer software eligible property for §179. In addition, it makes permanent the taxpayer’s ability to revoke the §179 election without IRS consent. Beginning in 2016 both the $500,000 and $2 million amounts are indexed to inflation.

RemiNdeR: §179 Expense deductions cannot generate an operating loss.

9. §179 Property will include “qualified real property” and will include air conditioning and heating units placed in service after 2015 as eligible for expensing. It also eliminates the $250,000 cap with respect to “qualified real property” beginning in 2016. Therefore the full $500,000 is allowed.


10. §1202 exclusion of 100% gain on sale of certain small business stock is now a permanent provision instead of reverting back to 50% exclusion. Eligible gain on qualified small business stock held for more than 5 years is excluded from gross income. Up to $10,000,000 of eligible gain can be excluded. ($5,000,000 if married filing a separate return).

11. §1374(d)(7) Subchapter S corporation recognition period for the elimination of the Built-in-Gains (BIG) tax is kept at 5 years instead of reverting back to 10 years.

12. §168(e)(3) allows a 15-year straight-line cost recovery method instead of reverting back to 39 years for “qualified leasehold improvements,” “qualified restaurant buildings and improvements” and “qualified retail improvements.” The deduction has a mid-year convention.

PATH Act of 2015 continued from page 1

continued on page 7


B. Five Year Extensions Include:

1. §168(k) provides for a Bonus Depreciation deduction on the adjusted basis of qualifying property in the first year the property is placed in service. However, the Act only extends the 50% bonus depreciation for years 2015-2017. After 2017 the amount decreases to a 40% bonus depreciation for year 2018 and 30% bonus depreciation for year 2019.

RemiNdeR: Bonus Depreciation is only allowable for new property and can generate an operating loss.

• BonusDepreciationof$8,000isallowed in the first year a luxury auto is placed in service for years 2015-2017. The amount is reduced to $6,400 in 2018 and $4,800 in 2019.

• BonusDepreciationwillalsobe allowed for “qualified improvement property.”

• Thelawalsospecifiesthatcertaintrees, vines and fruit bearing plants will be eligible for bonus depreciation when planted or grafted, rather than when placed in service. The provision is effective for planting and grafting after 2015.


C. Two Year Extensions Include:

1. §108(a)(1)(E) exclusion from gross income on Cancellation of Debt of “qualified principal residence indebt-edness.” The general rule is that the provision will expire for tax years after December 31, 2016. However, the provision is available to home mortgage debt that is discharged subject to a written arrangement that is entered into before January 1, 2017. Therefore, according to an official summary of the legislation, the exclusion applies to qualified principal resident debt that is discharged in 2017, if the discharge is pursuant to a binding written agreement entered into in 2016.


2. §163(k)(3) allows a deduction for mortgage insurance premiums as qualified residence interest for taxpayers whose Adjusted Gross Income (AGI) is below a threshold amount of $100,000 ($50,000 married filing a separate return). The deduction is only allowed for the taxpayer’s principal residence.

3. §222 qualified tuition and fees are allowed as a deduction above-the-line for determining Adjusted Gross Income (AGI).

Note: The estimated revenue cost over the next 10 years is $608 million.

4. §168(e)(3)(A) allows certain race horses to be depreciated as 3-year property instead of 7-year property.

5. §25C provides for a 10% credit for qualified nonbusiness energy property. There are also updates on Energy Star requirements.

6. §30D provides for a 10% credit for plug-in electric motorcycles and two-wheeled vehicles.

7. §179D provides a deduction for energy-efficient commercial buildings.

D. Delayed Provisions Include:

1. §4980I implementation of the 40% Excise Tax on “Cadillac Plans” is de-layed until January 1, 2020 instead of beginning January 1, 2018.

2. §4191 implementation of the 2.3% medical device excise tax on medical device sales is delayed until January 1, 2018 instead of beginning January 1, 2016.

E. Other Provision Issues:

1. Exclusion for Work College Program Payments

Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization. However, the exclusion generally does not apply to that part of the amount received that represents payment for teaching, research or other services (sometimes referred to as the “payment-for-services rule”).

Under pre-Act law, statutory exceptions to the “payment-for-services rule” apply for amounts received by an individual under either:

a. the National Health Service Corps Scholarship program, or

b. the Armed Forces Health Professions Scholarship and Financial Assistance program.

No statutory exception applies for amounts received under a work college program.

NEW lAW: For amounts received in tax years beginning after December 18, 2015, §117(c)(2) is updated and exempts any payments from certain work-learning-service programs that are operated by a work college (as defined in §448(e) of the Higher Education Act of 1965.

2. Increase in Preparer Willful or Reckless Conduct Penalty

Under pre-Act law, any tax return preparer who prepared any return or claim for refund for which any part of an understatement of the taxpayer’s liability was due to the preparer’s willful or reckless conduct was subject to a penalty in an amount equal to the greater of $5,000 or 50% of the income derived (or to be derived) by the tax return preparer as to the return or claim.

New Law: Effective for tax returns prepared for tax years ending after December 18, 2015, §6694(b)(1)(B) is updated and provides that the 50% is increased to 75%.

3. Accelerated Due Dates for W-2, 1099, Etc. Forms

For wages paid to employees, and taxes withheld from employee wages, payers must file a Form W-2 return with the Social Security Administration by February 28 of the year following the calendar year for which the return must be filed, using Form W-3, Transmittal of Wage and Tax Statements. The due date for these information returns that are filed electronically is March 31.


continued on page 8


Present law also requires persons to file an information return with IRS concerning certain transactions involving the payment of “non-employee compensation.” Generally, these returns are on Forms in the 1099 series. Payers generally must file the information return with IRS on or before the last day of February of the year following the calendar year for which the return must be filed. However, the due date for most information returns that are filed electronically is March 31.

NEW lAW: The Act requires Forms W-2, W-3 and returns to report “non-employee compensation” (e.g., Form 1099-MISC), to be filed on or before January 31 of the year following the calendar year to which such returns relate. §6701(c) provides that those returns are no longer eligible for the extended filing date for electronically filed returns. Therefore these Forms must be filed by the last day in February. This provision is effective for returns and statements relating to calendar years after December 18, 2015 (e.g. filed in 2017).

4. Safe Harbor for De Minimis Errors on Information Returns and Payee Statements

Except where there is reasonable cause and no willful neglect and subject to certain other exceptions,

any failure to include all of the information required to be shown on an information return or a payee statement with respect to an information return, or any inclusion of incorrect information on an information return or payee statement, is subject to a penalty. The amount of the penalty depends on various factors, including whether the payer is a small business.

NEW lAW: The Act establishes a safe harbor from penalties for the failure to file correct information returns and for failure to furnish correct payee statements by providing that, generally, if the error is $100 or less ($25 or less in the case of errors involving tax withholding), the issuer of the information return is not required to file a corrected return and no penalty is imposed. (§6721(c)(3)(A) and §6722(c)(3)(A).

Under the exception to this rule, if any person receiving payee statements requests a corrected statement, then the penalty for a failure to file a correct information return and the penalty for failure to furnish a correct payee statement would continue to apply in the case of de minimis errors on those statements. (§6721(c)(3)(B) and §6722(c)(3)(B).

These provisions are effective for returns and statements required to be filed after December 31, 2016.

5. “Achieving a Better Life Experience” (ABLE) Accounts:

• For tax years beginning after Dec. 31, 2014, states can allow tax-exempt “Achieving a Better Life Experience” (ABLE) accounts to assist persons with disabilities in building an account to pay for qualified disability expenses.

• Starting in 2015, ABLE accounts can be established in any State.

• Proposed reliance regs on ABLE accounts say IRS will provide transition relief to enable state programs and ABLE accounts to be brought into compliance with any requirements set forth in final regulations once they are issued.

• IRS relaxed certain requirements for ABLE programs that were set out in the proposed regulations. Those requirements involve establishment of safeguards to categorize distributions, collection of taxpayer identification numbers from contributors, and processing of disability certifications with signed physicians’ diagnoses.

n

1. Standard Auto Mileage Rates for 2016:

Business .......................... 54 cents

Medical ............................ 19 cents

Moving ............................. 19 cents

Charitable ......................... 14 cents (Statutory)

2. The basis reduction for the depreciation portion for automobiles used for business purposes when using the Standard Mileage Rates are as follows:

Year Cents per Mile

2012 ........................................23

2013 ........................................23

2014 ........................................22

2015 ........................................24

2016 ........................................24

3. Forms 1094-B, 1094-C and Forms 1095-B, 1095-C Due Dates extended as follows:

a. The due dates for furnishing Form 1095-B and Form 1095-C

to the insured and employees is extended from January 31, 2016 to March 31, 2016.

b. The due date for health coverage providers and employers furnishing the 2015 Form 1094-B and the 2015 Form 1094-C to the IRS is extended from February 28, 2016 to May 31, 2016 if not filing electronically.

Note: If filing electronically then the 2015 Form 1094-B and 2015 Form 1094-C is extended from March 31, 2016 to June 30, 2016.


updates from Irs

continued on page 9


As you head into this year’s tax season, I thought you might

appreciate some timely tips on how to avoid potential client conflicts and even lawsuits. Keep in mind that you don’t have to make an error to be sued. In our litigious society, frivolous lawsuits are all too frequent. The following tips are based on my company’s experience, as well as general risk management guidelines for all professionals.

1. Screen prospective clients carefully. Consider criteria such as:

• Does your firm have the expertise to meet the client’s needs?

• Is the client financially stable?

• Does the client have reasonable expectations about your service?

• Are the client’s own finances managed effectively?

2. Always use an engagement letter. When agreements are in writing, chances of a lawsuit are significantly lower. At a minimum, engagement letters should include:

• What is and is not included within the scope of the agreement.

• Provide completion dates contingent upon the client meeting deadlines for delivering documentation.

• Detail your firm’s payment terms.

• Include a disclaimer for cyber liability.

3. Document. Document. Document. You’ve undoubtedly heard this before but it bears repeating. Specifically:

• Write everything down, right away. Include information such as who said what to whom and what if any agreements were made.

• Include factual information only.

• Use an established documentation procedure.

• Carefully consider what information should be documented in emails.

4. Use checklists to ensure consistency and improve accuracy. You can find sample checklists for preparing individual and business tax returns at www.targetproins.com (choose Tax Preparers under the Programs tab).

5. Keep the lines of communication open.

• Utilize timelines and progress reports.

• Always alert clients to any potential problems.

6. When in doubt, consult an expert. Consider contacting a colleague who specializes in a particular area of practice, or your attorney. As an NSTP member, you can also take advantage of the association’s hotline.

7. Ensure that your firm’s data is protected.

• Review your firm’s policies for storing and protecting data and ensure that your staff understands and complies with these policies.

• Consider using outside resources to supplement internal security procedures.

• Create written guidelines for what to do if hardware or data files are lost or stolen.

8. Think twice about suing a client for non-payment. More often than not, clients countersue for malpractice.

9. Think three times before entering into a business deal with a client. For innumerable reasons, it’s rarely a good idea in any business.

10. Carry at least a minimum amount of Professional Liability (Errors & Omission) insurance. This coverage is relatively inexpensive, especially in comparison to the possible cost of a lawsuit. Equally important, should a client threaten to sue, or even if you anticipate possible legal action, it’s critical that you tell your insurance company immediately. Because most Professional Liability policies are what’s called “Claims made and Reported Forms,” you will only be covered for those claims made and reported during the same policy year.

Nicholas Bozzo is the President of Target Professional Programs, NSTP’s endorsed provider for Professional Liability Insurance.

gUEST aUTHOr

risk Management Tips for Tax season

TAx PROFESSIONAl REMINDER: These forms are all information returns subject to the §6721 Failure to File Penalty of $250 per failure indexed to inflation which in 2016 will be $260 per failure. The §6722 Failure to Timely Furnish penalty of $250 per failure is also indexed to inflation and will be $260 per failure in 2016.

4. IRS Sending Letters to Some Taxpayers: On December 29, 2015 the IRS issued a Quick Alert for Tax

Professionals with the subject being: EITC Letters 5621 and 5621-A. The issue deals with EITC claimed on 2014 tax returns and it states:

If your client(s) receive a letter then they should review their 2014 tax return for accuracy and, if needed, file an amended tax return to make the necessary corrections. Taxpayers who filed questionable EITC claims may receive one or both of the following letters:

• Letter5621:asksthetaxpayerto review his/her tax return to determine if the children claimed each met all the qualifying child rules for the credit.

• Letter5621-A:asksthetaxpayerto review his/her tax return to determine if all the income and expenses reported from self-employment on Schedule C or Schedule C-EZ are complete and correct.

updates from the Irs continued from page 8


ETcETEra

A Timely Tip from ennis T. peA

iRs identity theft Victim Assistance: How it works

The IRS knows identity theft can be

frustrating and confusing for victims. When it comes to tax-related identity theft, the Internal Revenue Service wants to resolve cases as quickly as possible. The IRS has worked hard to help victims of identity theft by making improvements and shortening the time it takes to resolve these complex situations.

Each taxpayer’s experience will vary, depending on whether they tell the IRS they may be a tax-related identity theft victim or the agency informs them there may be have been a suspicious tax return filed with their name on it. Further, the IRS may not realize the taxpayer is an identity theft victim until their return has been processed or an audit has been initiated.

Here is a general outline of what you can expect.

A. You tell the IRS you may be a tax-related identity theft victim.

For example, your e-filed return is rejected because of a duplicate tax filing with your Social Security number, and you report the incident to the IRS:

• Youshouldfilebypaperifyouareunable to e-file.

• YoushouldcompleteandfileForm 14039, Identity Theft Affidavit, with your paper tax return.

• YourtaxreturnandForm14039are received for processing by the IRS.

• YourcasegoestoourIdentityTheft Victim Assistance (IDTVA) organization where it will be handled by employees with specialized training.

• TheIRSwillsendyouanacknowledgment letter.

• TheIRSIdentityTheftVictimAssistance organization will work your case by:

• Assessing the scope of the issues, trying to determine if your case affects one or more tax years.

• Addressing all the issues related to the fraudulent return. This includes determining if there are additional victims, who may be unknown to you, listed on the fraudulent return.

• Researching the case to double check all the names, addresses and SSNs are accurate or fraudulent.

• Conducting a case analysis to determine if all outstanding issues were addressed.

• Ensuring your tax return is properly processed and if you are due a refund, releasing your refund.

• Removing the fraudulent return from your tax records.

• Marking your tax account with an identity theft indicator, which completes our work on your case and helps protect you in the future.

• Youwillreceivenotificationthatyour case has been resolved. This is generally within 120 days but complex cases may take 180 days or longer.

• Priortothestartofthenextfiling season, you will receive a letter (CP01A) with an Identity Protection Personal Identification Number (IP PIN) to help protect your tax return going forward.

B. The IRS tells you a suspicious return has been received with your name on it.

Often, the IRS Taxpayer Protection Program identifies a suspicious tax return bearing your name and SSN and will send you a notice or letter. There are many reasons why a return may appear to be suspicious to IRS systems, and the agency takes this precautionary step to help protect you. Here’s what happens in this situation:

• Youmayreceivealetterfromthe IRS asking you to verify your identity within 30 days.

• Youfollowtheletter’sinstructionsto verify your identity at IDVerify.irs.gov:

• If you are unable to verify using the website, you should call the Taxpayer Protection Program toll-free number provided by the letter.

• If you are unable to verify your identity with the customer service representative, you may be asked to visit an IRS Taxpayer Assistance Center in person. You should plan on providing picture identification plus the letter and a copy of the tax return if you did file it.

• If you are unsure about the letter’s authenticity and whether it came from the IRS, go to IDVerify.IRS.gov and follow the prompts to verify your identity.

• If you receive this or similar notices about suspicious returns, you do not need to complete the Form 14039 unless instructed to do so.

• Onceyouverifyyouridentitywiththe IRS, you will be asked if you have or have not filed the return.

continued on next page


On Tuesday December 15, 2015, the Internal Revenue Service’s Office

of Chief Counsel issued Advance Release Document 2016 02009 addressing issues pertaining to §152(e) dealing with dependent exemptions, support test for children of divorced parents and the release of dependency exemptions. The question posed to the Chief Counsel’s Office was as follows:

“You asked whether the noncustodial parent or the custodial parent should be allowed the dependency exemption in the following situation:”

Mother has been the custodial parent of her two children since her divorce from Father, the noncustodial parent. In XXXX, both parents claimed the dependency exemption for the children. Father attached to his XXXX return a Form 8332, Release Revocation of Release of Claim to Exemption for Child by Custodial Parent. Part II of the form was completed and on the line of Part II dealing with the years for which the release is effective the words “all future years” were written. Part I of the form was not completed.

The custodial parent does not recall having executed the form and says she is confident that she would not have released the dependency exemption for all future years. Under §152(e) of the Internal Revenue Code, a child is treated as a qualifying child or a qualifying relative of the noncustodial parent if all of the following apply:

(1) The child received over half of his or her support for the year from one or both of the parents;

(2) The child was in the custody of one or both of the parents for more than half of the year; and

(3) The custodial parent agrees not to claim the child as a dependent by completing and signing Form 8332 or a similar statement.

Form 8332 may be executed for all future years. Under §1.152-4(e)(1)(ii) of the income Tax Regulations, a Form 8332 that specifies all future years is treated as specifying the first taxable year after the taxable year of execution and all taxable years after that.

The Chief Counsel responded that:

In the present case, the noncustodial parent attached Form 8332 to his XXXX return. Although Part I was not completed, Part II was and the “all future years” language used in Part II of the form covers the XXXX taxable year. Accordingly, under §152(e), the two children are treated as qualifying children or qualifying relatives of the Father, the noncustodial parent.

Regarding the custodial parent’s claim that she did not execute for Form 8332 attached to the non-custodial parent’s tax return, if the form is completed, signed and attached to the noncustodial parent’s return, the IRS should allow the dependency exemption for the children named on the form to the noncustodial parent and deny the custodial parents’ claim to the dependency exemption. If the custodial parent did not execute the Form 8332, then her remedy is against the noncustodial parent. In addition, if the custodial parent did release the dependency exemption for all future years, then the regulations under §152 allow her to revoke the release for the first calendar year after the year in which she revokes the release. Part III of Form 8332 is used for future year revocations.

The interesting result here is that the IRS is not getting involved in whether or not the Form 8332 was actually given to the noncustodial parent by the custodial parent but in fact this is the custodial parent’s issue and she will have to prove otherwise that she didn’t release the exemption to the noncustodial parent for all years.

FrOM THE BENcH

Irs chief counsel’s Office Issues Advice on “Dependent, support Test of Divorced Parents And release of exemption”

• Ifyoudidnotfilethereturn,it will be removed from your IRS records. You may be told you will need to file a paper return for the current filing season.

• Ifyoudidfilethereturn,it will be released for processing and, barring other issues, your refund will be sent.

How quickly the IRS works identity theft cases depends upon the volume of work and the complexity of the cases. Once the agency completely resolves your tax account issues, the IRS will mark your account with an identity theft indicator to help protect you in the future.

Certain tax-related identity theft victims will be placed into the Identity Protection PIN program and annually receive a new, six-digit IP PIN that must be entered on the tax return. The IP PIN adds an extra layer of identity protection. Some taxpayers will be given the option of getting an IP PIN, using the IRS.gov/getanippin tool.

Are there other steps I should take as a tax-related IDT victim?

You should also follow the recommendations from the Federal Trade Commission, such as contacting one of the three credit bureaus to place a free “fraud alert” on your credit records. See Taxpayer Guide to Identity Theft and FTC’s site, www.identitytheft.gov, for details.

You should also check with your state tax agency to see if there are additional steps to take at the state level.

n

continued from previous page

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