1

Monthly Newsletter for ncpeFellowship Members Vol. 7 No. 1 January 2016

1

Remarks from Beanna

Happy New Year!The beginning of a NEW YEAR is always a time of great HOPE!

• We hope we stayed awake in class to understand whatwe need to know.

• We hope old clients come back and new ones find theirway to us.

• We hope staff is happy, well-trained and stay throughApril 15th (or this year’s filing deadline).

• We hope our health stays good.

• We hope our family stays well and understands what TaxSeason means to a Tax Professional.

• We hope taxpayers will understand we don’t write thelaw, we just obey it!

• We hope we always do the right thing because it is theright thing to do.

Hope noun : Desire accompanied by expectation of fulfillment.

The Fellowship wishes each and every one of you great HOPE for this filing season.

Beanna

Beanna@ncpefellowship.com or 877-403-1470

Happy New Year

Happy New Year

20162016Wishing

A Very Successful YearTo Our

Tax ProfessionalMembers

WishingA Very Successful Year

To OurTax Professional

Members

National Center for Professional Education FellowshipNational Center for Professional Education Fellowship

2

2015 TANGIBLE PROPERTY REGULATIONS2-CE HOURS

Program Number CXZWX-T-00020-15-O

2015 ETHICS AND CONDUCT FORTAX PROFESSIONALS - 2-CE HOURS

Program Number CXZWX-E-00019-15-O

2015 ESTATE AND GIFT TAXES - 1-CE HOURProgram Number CXZWX-T-00018-15-O

2015 THE INCREDIBLE LLCLimited Liability Company - 2-CE HOURSProgram Number CXZWX-T-00017-15-O

2015 IDENTITY THEFT - 1-CE HOURProgram Number CXZWX-T-00016-15-O

Available Now

2015 FALL SERIES SEMINARSSEARCHABLE, REFERENCE BOOK

923 Pages

New 2016 Webinar:

Filing The Decedents Estate Return

The “How to” of the Form 1041

2016 Decedent’s Return Webinar1 CE Hour

at our websitehttp://ncpeFellowship.com

Stay on Top with theNumber One Rated Seminars in the Country!

NCPE!Let NCPE Keep You Up-to-Date with

Our Number One Rated Seminars andthe Best Research Team in America!

Plus, the NCPE Foundation will keep you on topwith the latest information on tax law changes

and the IRS.

To Register:http://ncpeseminars.com

1-800-682-2163

If your membership is due inDecember 2015 or January 2016

Renew Now.

click link tab “Renew Now”http://ncpeFellowship.com

3

Remarks from Beanna (1)

Tax News (5)2016’s 10 Biggest Tax Changes (5)LifeLock to Pay $100 Million to Consumers to Settle FTC Charges it Violated 2010 Order (6)Worst Tax Scams of 2015 (6)The Real Cost Of Global Tax Reform: An Unsustainable Increase In Accounting And Legal Fees (7)3 Biggest Tax Stories of 2015 — and How They Affect You (8)New Liability Concerns for Accountants, Financial Planners and Attorneys Regarding IRA Advice (10)Study Finds Simple Ways To Increase Participation in Earned Income Tax Credit (10)An Illustration of How NOT to Do a Related Party Loan (12)Tax Extenders Bill Puts Tax Court In Constitutional Limbo (12)

Practice Management (13)Your Image in an Internet World (13)New Tax Bill Brings Improvements to Education Benefits (14)New Law Says Money For Wrongful Convictions Is Tax Free (14)Legislative Update from Capitol Hill (15)AICPA Objects to New Bill to Regulate Income Tax Preparers (15)A Permanent Internet Tax Ban (16)Tax Status of Museums Questioned by Senators (17)

Military Taxes (18)The Military and the Affordable Care Act (18)Military tax statements will be available through myPay according to the following schedule: (18)

Estate and Trust News (18)Taxation of Grantor Trusts - During the Lifetime of the Grantor(s) - Optional Methods 2 & 3 (18)

People in the Tax News (19)Collin County Businessman Sentenced for Identity Theft-Related Federal Tax Violations (19)Sumner Redstone Loses Gift Tax Case to IRS (19)Oregon Man Lets Loose Flock of Chickens in Tax Collector’s Office in Anger (20)Plaxico Burress Pleads Guilty to Tax Evasion Charges (20)Brother of Real-life Gordon Gekko: I’ll Never Pay $334M Tax Debt (21)NY Cigar Distributor Convicted of Skirting Millions in Taxes (22)Wesley Snipes Sues IRS Over Abusive $17.5M Tax Bill, False Promise Of ‘Fresh Start’ (22)

IRS News (23)IRS Suggests Using Transcripts in Lieu of Estate Tax Closing Letter (23)Gulag America (23)IRS Makes One of Two Changes for Small Businesses, Farms and Ranches (23)IRS Introduces New Compliance Questions on Form 5500 (24)IRS Power To Revoke Passports Signed Into Law (24)Eight Facts about New ACA Information Statements (25)‘Cash Only’ Small Business Targeted By IRS: The Case Of Nick’s Roast Beef (26)Interest Rates Remain the Same for the First Quarter of 2016 (27)New Early Interaction Initiative Will Help Employers Stay Current with Their Payroll Taxes (27)

Table Of Contents (page)

4

IRS Criminal Investigation Releases Fiscal Year 2015 Annual Report (28)IRS Criminal Investigation Scales Back Use of Cell Phone Tracking (28)Will Scammers Hide Behind New Law for Private Tax Collectors? (29)Internal Revenue Service Reminds Taxpayers to Plan Ahead If You Need a Tax Transcript (30)EITC Letters (31)

Tax Pros in Trouble (31)Former Owner and Former Supervisor of “Direct Tax” Preparation Business Sentenced for Tax Fraud (31)Baton Rouge Resident Convicted Of Stealing Federal Dollars In Fraudulent Tax Refund Scheme (32)Alabama Resident Indicted For Stolen Identity Tax Refund Fraud Scheme (32)Fontana: Former Tax-preparation Business Owner Admits Filing False Returns (32)Two Massachusetts Men Indicted In Massive Stolen Identity Tax Refund Fraud Scheme (33)Miramar Tax Preparer Admits to Filing Fraudulent Returns (33)Former Rochester Tax Preparer Sentenced For Preparing False Returns (34)New York Tax Preparer Sentenced to Year in Prison (34)Former New York City Corrections Officer Pleads Guilty To Multimillion Dollar Tax Refund Conspiracy (34)Former Tax Return Preparer Pleads Guilty To Theft Of Public Money And Aggravated Identity Theft (34)Blackstone Man Pleads Guilty to Tax Crime (35)Woman Sentenced to 2 Years in Federal Prison for Preparing Fraudulent Tax Returns (35)Tax Preparers Plead Guilty to Federal Offenses in Separate Cases (35)#1 Tax Lady Found Guilty Of 27 Tax Felonies, Could Face 131 Years (36)

Ragin CaginSocial Security Changes: What Tax Pros Need to Know (37)

Taxpayer Advocacy (39)These 3 Tax Deductions Could Lead to an Audit (39)Claims Court Denies Motion To Dismiss Tax Refund Lawsuit When Cause of Delay Lies With Government (39)

Foreign Taxes (40)Qualified Dividends from Foreign Corporations (40)

State News of Note (41)The Taxation of Legal Cannabis (41)Corporate Net Operating Loss Carryforward and Carryback Provisions by State (42)

Wayne’s World (42)FAQs Clarify Application of ACA Rules to HRAs & Other Employer Health Care Plans (42)

Letters to the Editor (43)

Tax Jokes and Quotes (44)

Sponsor of the Month (44)Ameritek and Brenda Rich (44)

Table Of Contents (page)

5

Tax News

2016’s 10 Biggest Tax Changes

Tax time is nearly upon us again, and 2016 will bring some tax changes you need to know about. By learning about them, you’ll be better able to take steps that will leave you prepared both this year and next. Let’s look at the 10 biggest tax changes you should know about going into 2016.

1. Tax Day is April 18.

The Washington, D.C., holiday of Emancipation Day is on Friday, April 15, 2016. Under federal law, the tax deadline gets extended when it falls on a holiday or weekend, and so the tax deadline for most taxpayers will be the following Monday, April 18. For those states in New England that celebrate PatriotsDay, an even later April 19 deadline will apply.

2. Tax penalties related to Obamacare are going up again.

The Affordable Care Act imposed penalties for those not having qualifying healthcare coverage. Those penalties started at $95 per adult, or 1% of income above the filing threshold in 2014, but they rose to $285 per adult, or 2% of income above the filing limit in 2015. For 2016, penalties will rise again, hitting $695 per adult, or 2.5% of income. A family maximum will apply to the per-person amount, but the $2,085 amount will be substantially higher than the $975 in 2015, and the $285 in 2016.

3. Tax brackets are rising slightly.

Most of the tax brackets that govern different classes of taxpayers are adjusted for inflation. For 2016, these bracket amounts are rising by roughly 0.4%.

4. Standard deductions are going up for head of householdfilers.

The low inflation rate kept standard deductions for most taxpayers steady in 2016 from 2015 levels, including the

single, married filing jointly, and married filing separately statuses. For those who qualify as heads of household, the standard deduction will rise $50 to $9,300 in 2016.

5. Personal exemptions are rising.

The personal exemption that taxpayers are entitled to take on their tax returns will go up in value by $50 in 2016. That will give everyone an exemption amount of $4,050.

6. Contribution limits on health savings accounts are going up.

Health savings accounts let people with high-deductible health plans set money aside on a pre-tax basis to cover the costs of their healthcare. For 2016, the contribution limit for individual policies will remain at $3,350, but the maximum contribution for family policies will rise by $100 to $6,750. A catch-up contribution of $1,000 for those 55 or older will continue to apply.

7. The Earned Income Credit is rising.

The maximum allowable Earned Income Credit will go up modestly in 2016. For those with three or more qualifying children, the maximum credit will rise to $6,269, up $27. Those with two children will get a maximum $5,572, which is up $24 from 2015, while one-child families can get up to $3,373, $14 more than last year. Those without children get just a $3 bump and can claim up to $506 for 2016.

8. The exemption from AMT is higher.

The alternative minimum tax has struck a growing number of taxpayers, making the exemption amount more important than ever. Single taxpayers will see their AMT exemptions go up $300 in 2016 to $53,900, while joint filers will see a $500 boost to $83,800.

9. The estate tax exemption is heading upward.

The lifetime exemption amount for the gift and estate tax is tied to inflation, and it is slated to rise next year as well. The exemption amount will rise to $5.45 million, up $20,000 from 2015. The limit applies to estates of those who pass away in 2016.

10. Other tax provisions could change if not renewed.

Nearly every year, lawmakers wait until the last minute to renew popular tax breaks, such as charitable distribution from IRAs, state sales tax deductions, teachers’ write-offs for classroom supplies, and deductions for private mortgage insurance. As of early December, these provisions hadn’t yet been renewed for 2015, but typically, lawmakers renew them retroactive to the beginning of the year. The same is likely in 2016 unless an extension provides for two years of relief rather than just one.Many things aren’t changing.

Even though the 10 things listed above are changing, many other typical annual changes aren’t happening. Contribution

6

limits to 401(k) plans, IRAs, and flexible spending arrangements are all staying the same in 2016 as they were in 2015, reflecting the minimal amount of inflation in the economy.

Most people put off tax planning to the last minute, but by knowing about these coming changes before they take effect, you can do more comprehensive tax planning for your client’s that will serve them better in 2016 and beyond.

LifeLock to Pay $100 Million to Consumers to Settle FTC Charges it Violated 2010 Order

FTC Alleged Company Violated Order’s Information Security Requirements, Misled Consumers With Deceptive Advertising

LifeLock will pay $100 million to settle Federal Trade Commission contempt charges that it violated the terms of a 2010 federal court order that requires the company to secure consumers’ personal information and prohibits the company from deceptive advertising. This is the largest monetary award obtained by the Commission in an order enforcement action.

“This settlement demonstrates the Commission’s commitment to enforcing the orders it has in place against companies, including orders requiring reasonable security for consumer data,” said FTC Chairwoman Edith Ramirez. “The fact that consumers paid Lifelock for help in protecting their sensitive personal information makes the charges in this case particularly troubling.”

The FTC’s filing in the case alleged that LifeLock violated four components of the 2010 order. First, the FTC alleged that from at least October 2012 through March 2014, LifeLock failed to establish and maintain a comprehensive information security program to protect users’ sensitive personal information including their social security, credit card and bank account numbers.

Second, the filing alleged that during this period LifeLock falsely advertised that it protected consumers’ sensitive data with the same high-level safeguards used by financial institutions. Third, the FTC alleged that, from January 2012 through December 2014, LifeLock falsely advertised that it would send alerts “as soon as” it received any indication that a consumer may be a victim of identity theft.

Finally, the FTC alleged that the company failed to abide by the order’s recordkeeping requirements.

Worst Tax Scams of 2015

As we head into tax season, here are some of the worst tax scams you need to be on the lookout for as you prepare to file your 2015 tax return.

Whenever there are large quantities of money flowing -- such as from American taxpayers to the IRS and vice versa -- there will inevitably be scam artists trying to make a quick buck.

The good news is, the IRS does an excellent job of publishing information about current scams, and the vast majority can be avoided by simply knowing what to look out for.

With that in mind, here are some of the worst tax scams to be on the lookout for as 2015 comes to a close and you prepare to file your return.

1. Email phishing scams. Phishing refers to any scam carriedout via an unsolicited email or fake website, and there areseveral examples related to taxes. For example, there havebeen many cases of phishing scams involving an official-looking email claiming to be from the IRS, which redirectsto a fake (but authentic-looking) IRS website, where victimsare prompted to enter personal information. To avoid these,it helps to be aware that any actual IRS website begins withwww.IRS.gov, not a .com website, IRSgov.com, or any othervariation. As an example of what to look for, here’s an actualphishing email claiming to be from the IRS.

2. Phone scams. People claiming to be IRS agents will calland tell victims that they owe money to the IRS, which mustbe paid immediately through a wire transfer or prepaid debitcard. The callers are often extremely convincing, may use fakeIRS ID numbers, and might even know a substantial amountof personal information about their intended victims. However,the IRS will never call you to demand immediate payment,demand that you pay delinquent taxes without a chance toappeal, or require you to use any specific payment method.And the IRS will always mail you a bill first, before calling.

3. Phony tax returns. Thieves file made-up tax returns usingother people’s Social Security numbers and other personalinformation and will use these phony returns to requesta refund, payable with a prepaid debit card that’s easilyconverted to cash and is difficult to trace. Most victims don’trealize it until they try to file their own legitimate refund, onlyto have the IRS rejected it. It can be difficult to prevent thistype of fraud, since all that’s needed is your Social Securitynumber and birthdate, but the best way to avoid it is to file asearly as possible during tax season, before thieves have achance to. It’s also important to safeguard all of your personal

7

information on an ongoing basis, to prevent this from occurring in the future. To help, the IRS offers these tips:

• Don’t carry your Social Security card in your wallet, orany other document with your Social Security numberon it.

• Only give a business your SSN if absolutely necessary.

• Check your credit report regularly. (Note: you can dothis for free once a year at www.annualcreditreport.com.)

• Look over your Social Security statement every year(available at www.ssa.gov).

• Be sure to use updated antivirus software.

4. Charity scams. In my opinion, this is the absolute worst, mostdisgusting tax scam of all. Groups will pretend to be charitableorganizations to attract donations from good-hearted peoplewho hope to receive tax deductions for their philanthropy. Thisis especially common after disasters, such as the flooding inSouth Carolina in October. In fact, the IRS issued a specificwarning after this tragedy, advising that taxpayers take stepsto ensure that their donations go to legitimate charities. Toavoid having this happen to you, make sure to donate tocharities whose names you recognize, or who you can verifyas legitimate, tax-exempt organizations through this IRS tool.

5. Refund scams. Less-than-honest tax preparers will promiseyou a huge tax refund and may accomplish their goal by simplymanufacturing tax credits and deductions on your return outof thin air. Later on, if the IRS audits your return, you’ll have topay the money back, and possibly a penalty as well. To avoidthis problem, be wary of any tax preparer who promises you arefund before seeing your documentation, charges a fee as apercentage of your refund, or asks you to sign a blank return.These are some of the worst tax scams you may have facedin 2015, but this isn’t an exhaustive list. After all, some ofthe scams that may be perpetrated during the upcoming taxseason might not even be invented yet. The best course ofaction is to educate yourself on what the IRS does and doesnot do, and to immediately report any suspicious tax-relatedsituations.

The Real Cost Of Global Tax Reform: An Unsustainable Increase In Accounting And Legal Fees

Leaders from the Group of 20 largest economies (G20) met in Turkey last month to put their final stamp of approval on a major overhaul of the international rules governing corporate taxes. The vote was the icing on a cake that the Organization for Economic Cooperation and Development (OECD) has been baking for many years with the goal of clamping down on tax avoidance among multinational corporations.

The formal name for the OECD plan is the Base Erosion and

Profit Shifting project, but it has been conveniently reduced to a four-letter word by most tax professionals who simply refer to it as BEPS. And it’s about to become their biggest headache.

The full BEPS plan calls for a far-reaching list of recommended changes to tax policy and taxpayer reporting requirements. Chief among these is a country-by-country reporting requirement, which requires companies to declare the amount of revenue, profit and tax paid in each country in which they do business, along with details on total employment, capital and assets used in each location. According to the OECD, this detailed reporting process would provide tax authorities with complete transparency into profit generated in each tax regime, and would eliminate any vagaries around where exactly the profits on goods sold can be claimed.

But that’s not how many big companies see it. In fact, according to Mary Van Veen, vice president of tax at DuPont, the country-by-country reporting requirement spelled-out in BEPS provides just enough detail to be dangerous, but not enough to be useful. She explained:

“BEPS will embolden tax authorities to audit multinational companies based on superficial data that is included in the country-by-country reporting mandate without any real understanding of the underlying business.”

She explained the types of common tax scenarios that multinational corporations encounter that will stymie an effort like BEPS:

“For example, let’s say you are a U.S. based corporation with operations in 80 countries. Under the BEPS country-by-country reporting scenario tax authorities will be provided with baseline data about your total revenues generated in each country, number of employees in that country and overall size of your operation in that country.

“It’s extremely likely that tax authorities in higher tax countries will audit your company if they see that you have more employees there than in Switzerland, a lower tax country, yet you report higher revenue in Switzerland. This will happen with very little understanding of the make-up of those employees, what types of jobs they have and the level of responsibility they hold. The employees in Switzerland may have strategic and tactical responsibility for the entire EMEA region, and may hold all of the intellectual property employed in the region, but that level of detail is not reported under BEPS.

“It’s over-simplified to allow tax authorities to pull out what they like and make a case on it, without having a conversation with the company about what’s really happening in each country.”

Van Veen is right. Her thesis has been proven repeatedly throughout the history of corporate taxation and efforts to simplify it. The fact is: corporate tax is hugely complicated. Complete transparency into the tax strategy of a giant corporation with operations around the globe would require a level of detailed scrutiny that no tax authority could ever hope to implement. So, instead, they look for a few basic red flags

8

shareholders. U.S.-based multinationals are already operating at a disadvantage relative to our foreign competitors due to our outdated and archaic tax code. These companies will now spend significant additional resources to defend their non-abusive tax structures.”

3 Biggest Tax Stories of 2015 — and How They Affect You

The U.S. Supreme Court building in Washington, D.C.

This year will go down in history as above-average for tax developments, thanks to two big Supreme Court decisions. Here are the three most significant tax-related stories for 2015.

1. Supreme Court removes last major barrier to Obamacare

In June, the Supreme Court’s King v. Burwell decision ratified the availability of Obamacare health insurance premium tax credits (subsidies) in states that do not run their own health insurance exchanges. The decision pretty much guaranteed that all the Obamacare tax increases will be with us through at least 2016 — and probably forever. If the Court had ruled the other way, Obamacare detractors had hoped to trade the nullification of some or all of these tax increases for an extension of the premium tax credits for folks who would have lost them. That possibility is now off the table. For a quick refresher course on the now-entrenched Obamacare tax increases that could affect you, see Obamacare tax increases are now locked in at least through 2016.

2. Supreme Court legalizes same-sex marriage nationwide

In another June decision, Obergefell v. Hodges, the Supreme Court required states to license and recognize marriages between same-sex couples. Since the Supreme Court’s 2013 Windsor decision, members of legally married same-sex couples can (and must) file federal tax returns as married individuals. However, members of legally married same-sex couples who lived in states that didn’t recognize same-sex marriages had to file state income tax returns as unmarried individuals.

Obergefell v. Hodges essentially makes the Windsor decision applicable for state tax purposes as well as for federal tax purposes. In other words, members of same-sex couples who are legally married under the laws of any state are now considered married for both state and federal tax purposes, regardless of where they live. Therefore, members of married same-sex couples who were previously not allowed to file state returns as married individuals should evaluate whether it

– such as larger number of employees generating a smallerchunk of revenue than a comparable amount of employees inanother country – and then start auditing.

How will that impact corporations? For one, it will get expensive. The multinationals I’ve been talking with are all expecting a flood of governmental scrutiny from tax authorities around the globe that could crush their existing tax departments with increased tax audits and conflict resolution.

Van Veen estimates that her team at DuPont will likely double the amount of time they currently spend on controversy resolution as a result of BEPS. But that’s just part of the cost. There will also be a huge administrative cost involved with integrating systems and getting all of the information required for country-by-country reporting ready for dissemination.

Longer-term, the costs could be even more significant. The grim reality is that all of this is happening at a time when tax compliance budgets at multinational corporations are shrinking. The macroeconomic situation is not terribly good right now, particularly in China and Europe, where companies are pulling out all of the stops to generate quarterly earnings growth despite a global economic slowdown. Pair this tepid economic outlook with a potentially huge drain on personnel and economic resources resulting from increased tax conflict and it becomes clear that something’s got to give.

Could this eventually rear its head in corporate profits? It may. In fact, it’s an area we plan to explore further very soon. The issue will also likely rear its head in mergers and acquisition activity with tax-driven inversion deals likely to become more and more common.

U.S. lawmakers have already begun to raise red flags about the possible negative implications of BEPS. In a Congressional hearing this week, House Ways and Means Tax Policy Subcommittee chairman Charles Boustany, (R-La) said:

“This is a highly subjective standard set by the OECD that seems to unnecessarily target American companies, while also disregarding the detrimental impact these recommendations will have on U.S. companies that currently operate under the worldwide system of taxation observed in the U.S.”

Van Veen pointed out that with so much scrutiny being placed on companies to show evidence to support their tax structures in low tax regimes such as Switzerland and Ireland, many may end up moving additional substance to those locations beyond what is technically required. This will have the opposite of the effect intended by the OECD in that much-needed jobs may move from higher tax countries to lower tax regimes to counter the impact of BEPS.

“As a public company, we have the obligation to maximize return to shareholders. Multinationals are obligated to structure their companies in ways that maximize their return, which includes legally minimizing taxes. There may be companies that have taken that too far, but not every multinational deserves black-eye for legally fulfilling their fiduciary responsibility to

9

is advantageous to file amended state returns for previous tax years. (That said, filing joint returns isn’t always beneficial.) Going forward, members of married same-sex couples will file state returns in the same fashion as any other married individuals.

In Obergefell v. Hodges, the Supreme Court noted that nontax implications of an individual’s marital status include inheritance and property rights; rules of intestate succession; spousal privilege in the laws of evidence; hospital access; medical decision making authority; adoption rights; the rights and benefits of survivors; birth and death certificates; professional ethics rules; campaign finance restrictions; workers’ compensation benefits; health insurance; and child custody, support, and visitation rights. Social Security benefits are also impacted, because members of same-sex married couples can now receive spousal and survivor benefits in all states. Previously, that wasn’t true if an affected individual was married in one state but lived in another state that didn’t recognize same-sex marriages.

3. Congress passes year-end tax legislation

On Dec. 18, Congress passed the Protecting Americans from Tax Hikes Act of 2015, and the president promptly signed the bill into law. The legislation resurrected a batch of personal and business tax breaks that had expired at the end of 2014. Because Congress habitually allows these breaks to go off the books before inevitably restoring them for a year or two, they have become known as “the extenders.” They are back on the books for 2015 and 2016, and some of them have even been made permanent.

Tax Consequences of Trading Stocks in an IRA Account

IRAs offer some nice tax benefits. Here are a look at them, as well as some potential consequences.

If you’re saving for retirement -- and you should be -- one of the best tools at your disposal is the individual retirement arrangement, or IRA. These kinds of accounts offer a number of tax benefits for money you save toward retirement. However, there are some tax consequences that you should be aware of, as well as the benefits.

Kinds of IRAs and the tax benefits of them

There are two kinds of IRAs: the traditional IRA, and the Roth IRA. Here are the things they have in common:

Contribute up to $5,500 (up to $6,500 if you’re 50 or over) toward your retirement in 2015.

Growth is tax deferred in most cases, if you wait until retirement to take distributions.

Dividends received in the IRA are also tax deferred.

Here’s how they differ:

Traditional IRA distributions in retirement are taxed as regular income, while Roth IRA distributions are completely tax-free.

Traditional IRA contributions may be deductible from your taxable income the year of contribution, while Roth IRA contributions are never deductible.

Roth IRA contributions are capped, based on your adjusted gross income, while traditional IRA contributions are not.

Tax benefits and consequences for most stocks in IRAs

If you buy or sell shares of a “C” corporation inside an IRA, you won’t pay any taxes. Here’s an example.

If you buy a stock for $1,000 and sell it for $2,000, that’s a $1,000 profit. In a taxable account, that would be added to your income for the year. If you held the stock for less than one year, that’s a short-term gain, so you would pay income tax on that $1,000 at the same rate as all of your other regular income, such as your salary at work. This rate is almost always higher than the long-term capital gains tax rate of 15% (or 20% for very high-income earners), if you held the shares for more than one year before selling.

In summary, you would avoid taxes of at least $150 on that $1,000 profit if you held those shares in an IRA.

On the other side of the coin is tax losses. When you sell stocks at a loss in a taxable account, you’re able to deduct the losses against your gains, and even against your regular income up to a limit. If you sell a stock inside an IRA at a loss, you don’t get that benefit.

A category of stocks with tax consequences for IRAs

Most stocks you’ll invest in are so-called “C” corporations. However, there are other stocks out there, such as master limited partnerships -- also called MLPs -- as well as “S” corporations and LLCs, with different rules that IRA investors need to be aware of.

These types of investments typically pay large dividends because of special tax rules that eliminate or greatly reduce the taxes these entities pay. This strategy makes them attractive investments, but it also means that the tax consequences get passed on to the investor. In the case of this select group of stocks, it often results in UBTI, or unrelated business taxable income.

And when you hold shares of this type in a tax-advantaged account like an IRA, it could mean your IRA is subject to paying UBTI. Under current IRS rules, if your IRA earns more than $1,000 in total UBTI in a tax year, you must pay income tax on those earnings. Most people therefore tend to avoid holding these sorts of investments inside an IRA. And while it shouldn’t necessarily rule out every potential investment of

10

this type, the cost in taxes may keep these investments from being the best choice for your IRA.

New Liability Concerns for Accountants, Financial Planners and Attorneys Regarding IRA Advice

Many individuals in the United States have IRA accounts. These retirement accounts may be substantial and are often the target of financial planners who are interested in handling and managing the IRA assets, for a fee, of course. This is big business for financial planners.

In addition, many accountants are licensed to sell insurance products and manage money. Accountants who are financial planners often have an interest in a wealth advisory unit that is connected, directly or indirectly, with their accounting firm.

Here comes the liability headache that involves the retirement plan area.

Let’s say Jack is a financial planner who is aggressive and is looking to manage money. He finds a new prospect who has $50,000 in a CD IRA at a local bank.

Jack is interested in investing the $50,000 and merely tells the IRA owner to withdraw the $50,000 amount from her CD, which is about to mature. The IRA owner, Mary, 75 years of age, is not sophisticated and withdraws the $50,000 from her IRA.

Unfortunately, Jack fails to tell the IRA owner that she will owe income taxes on the IRA distribution. Jack does not tell her about any rollover options.

At income tax time, the IRA owner is told by her tax preparer that she now owes $15,000 in additional income taxes, triggered by the IRA distribution.

Question: Is Jack vulnerable to any liability? Answer: You bet.In arbitration proceedings the financial planner can be held liable because of the failure to tell his unsophisticated client about the tax consequences of an IRA distribution.

Example 1A CPA in New York State is engaged by an IRA beneficiary to give advice regarding an inherited IRA. The CPA did not know the stretch payment rules and told the client that the five-year rule was operative, rather than the life expectancy rule. He received $400 for his advice. He was sued for giving incorrect advice and stated in a deposition that, in essence, he had no idea as to the proper IRA rules. The settlement paid by his malpractice carrier was $25,000!

Example 2An attorney in New York State handling an estate matter was asked how to handle an inherited IRA of about $500,000. He advised the beneficiary to just take it out. Ultimately, in an arbitration proceeding, the attorney was held liable to the tune of about $250,000 for failing to know the IRA distribution rules.

Example 3A financial planner in Florida tells an unsophisticated and elderly client to withdraw about $30,000 from a CD IRA.

The client does so and goes to her tax preparer. She finds out she owes $9,000 in additional income taxes on the IRA distribution.

This situation ultimately went to arbitration in the case of Marilyn Green and Melissa Green (Claimants) vs. LPL Financial LLC (Respondents).

One of the allegations against LPL Financial LLC was that the LPL broker never advised the client about the income tax consequences of the IRA distribution. A number of additional allegations were made as well.

The attorney representing the claimants was Jon A. Jacobson of Jacobson Law, P.A. in West Palm Beach, Fla.

The arbitrator’s decision, made on Nov. 10, 2015, granted the claimants an award in the amount of $52,062 and included:

1. Compensatory damages: $10,2602. Treble damages: $21,240 (double the $10,620)3. Attorney fees: $20,202

According to Mr. Jacobson, brokers and firms in a number of FINRA cases can be held liable for failing to advise their clients about the tax consequences of transactions that they recommend.

Imagine the liability for practitioners such as accountants, attorneys and financial planners who give advice regarding IRA matters, but don’t know the intricate IRA rules.

Example 4An attorney drafts what he thinks is an IRA and retirement benefit QTIP (Qualified Terminable Interest Property) trust. It turns out that the trust does not satisfy Rev. Rul. 2006-26. As a result the $2,500,000 payable to the trust is subject to an estate tax liability of over $1,000,000.

The client decides not to sue the attorney.

Example 5An attorney drafts a noncompliant IRA trust that is part of a testamentary trust. As a result the stretch payment of over $7,000,000 is lost.

For technical reasons the trustee decides not to sue the attorney.

Example 6The trustee of an IRA trust fails to timely file the IRA post-death trust documentation paperwork with the IRA institution by the October 31 deadline date. The deadline is October 31 following the year of death of the IRA owner. The result is the stretch payment of the trust beneficiary is lost.

11

Conclusion

The real problem is that many IRA account holders are passing away with substantial retirement accounts. The attorney for the estate may be a great probate lawyer but may not know all the post-death IRA rules and IRA penalty issues. If the beneficiaries of the estate are also beneficiaries of the IRA, they may ask the attorney for post-death IRA advice. If the attorney gives the wrong advice, then the attorney has potential liability. If the attorney tells the IRA beneficiary to go to their accountant for advice and the accountant gives the wrong advice, then the accountant has a problem. If the attorney and accountant are connected through some type of relationship, then they both can have professional liability if the wrong advice is given.

One wonders how an attorney, accountant or financial planner can know all the complex rules regarding IRAs. These IRA rules require the advisor to have knowledge regarding traditional IRAs, Roth IRAs, the multiple non-spouse inherited IRA rules, the rollover rules, the IRA excise tax rules, the year of death RMD rules, the IRA trust rules and many other rules. The bottom line is that very few people are IRA gurus and know the subject area.

The real bottom line is that if you don’t know the area, then don’t mess with it.

Study Finds Simple Ways To Increase Participation in Earned Income Tax Credit

It is estimated that roughly seven million Americans each year – or 25 percent of those eligible – fail to claim the EarnedIncome Tax Credit (EITC), the primary channel through whichthe government supports the working poor. Economists andpolicymakers have long been puzzled over why millions oflow to moderate income individuals voluntarily forego creditsworth, on average, a month of income.

To shed new insight into why so many people fail to sign up for valuable government benefits, and to identify strategies to improve participation, Carnegie Mellon University’s Saurabh Bhargava led a first-of-its kind field experiment with the Internal Revenue Service. Published in the recent issue of the American Economic Review, the study strategically modified the appearance and content of tax claiming notices and

worksheets in such a way that permitted a better understanding of how confusion, informational complexity and program stigma affected the decision not to claim.

The IRS distributed the redesigned mailings to over 35,000 eligible non-claimants in California to determine which mailings led to the highest response. The study found that small changes to the appearance of the tax notices, such as a cleaner layout, a modestly shorter claiming worksheet, or displaying the amount of the potential credit in the headline, led significantly more individuals to claim than mailings with typical government complexity.

“Many government policies are shaped by standard economic theories that assume people are rational and self-informed,” said Bhargava, an assistant professor of economics in CMU’s Department of Social and Decision Sciences. “This study suggests that complexity and small administrative burdens or ‘hassles’ can deter regular people from acting in their own interest, even when the stakes are large.”

The authors examined the low participation rates for the EITC because the costs of claiming — merely filling out and returning a form — appeared to be low, while the benefits — some were eligible for credits over $5,000 — can be substantial. The field study, along with additional surveys of thousands of low-income individuals, suggested that the absence of claiming is not the result of stigma or the amount of time required to apply for a credit — explanations favored by traditional economic theory — but instead the result of “psychological frictions,” such as low levels of program awareness, confusion regarding eligibility and inattention to program information.

Intriguingly, across recipients of all of the new mailings, 22 percent claimed a credit, despite these individuals having already received an earlier, but complicated, notice from the IRS. This indicates that a mere reminder can lead a substantial number of individuals to claim benefits.

Overall, the study led to additional claiming of about $4 million in credits among a group owed about $26 million in benefits. The study estimated that redesigning and expanding the distribution of notices could lead to several hundred thousand additional claimants in a population not highly sensitive to traditional incentives.

Since the completion of the study, the IRS has begun to circulate redesigned notification forms. And, because other government assistance programs have even more severe challenges getting eligible individuals, often in dire economic need, to sign up for benefits, Bhargava sees this type of work as having widespread relevance.

“This study demonstrates the value and need for rigorous evidence-based approaches to public policy. It also suggests that, in an increasingly complicated world, simplicity and a commonsense recognition of how individuals make decisions can play a critical role in the ultimate success of policies like the EITC,” Bhargava said.

12

Not Thinking About Your 2016 Tax Return Yet? Identity Thieves Are.

Here’s a thought to warm the Grinch’s heart: while you’re focused on the holiday season, identity thieves are thinking about how to steal your information. One of the ways they try to do that is by filing a fake tax return using your information — like your Social Security number — to get a tax refund. You may only find out about it when you get a letter from the IRS. Or when you file your return, only to hear from the IRS that someone else already did. That’s tax identity theft, a problem we hear more about each year. Tax identity theft also happens when someone uses your Social Security number to get a job or claims your child as a dependent on a tax return.

How can you protect yourself from tax identity theft? File your tax return as early in tax season as you can. Use a secure internet connection if you file electronically. If you mail your return, send it directly from the post office.

Tax Extenders Bill Puts Tax Court In Constitutional Limbo

The House of Representatives voted 318-109 to approve a package of tax breaks that will cost an estimated $680 billion over the next decade. ... [O]ne provision in the package that has drawn little attention so far could have significant implications for the United States Tax Court. The provision, buried on page 231 of the 233-page bill, puts the 19-member court in a state of constitutional limbo. The provision is entitled “Clarification Relating to United States Tax Court,” and it amends the Internal Revenue Code to add the following language:

The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.

The provision appears to have been added in response to the D.C. Circuit’s 2014 decision in Kuretski v. Commissioner.

That case involved a couple, Peter and Kathleen Kuretski, who went to Tax Court to challenge an IRS levy on their Staten Island home. After the Tax Court ruled against them, the Kuretskis launched an attack on the court’s constitutional structure. The D.C. Circuit summarized the Kuretskis’ core argument as follows:

The Kuretskis now contend that the Tax Court judge may have been biased in favor of the IRS in a manner that infringes

An Illustration of How NOT to Do a Related Party Loan

While the Internal Revenue Code does have provisions that may impact the tax consequences of related party loans, conceptually there is nothing wrong with a related party loan. Loans can have favorable tax aspects, including deductibility of interest payments, principal repayments by entities being treated as such instead of taxable distributions, and bad debt deductions if the obligations cannot be repaid. Since the IRS will often seek to recast related party loans as gifts, capital contributions, or something other than a loan, taxpayers must observe all proper formalities and meet the criteria for both a “loan,” and when a bad debt deduction is sought that the loan became “worthless.”

On the “loan” side, the lender generally must show at the time of the funds advance, there was a real expectation of repayment and an intent to enforce collection. On the “worthless” side, the lender must be able to show that the debt was truly worthless in the year a deduction for worthlessness is sought.

A recent appellate decision shows the IRS will use bad facts to void loan treatment when a shareholder loans funds to a related corporation. The shareholder sought to write off $800,000 that she loaned to the corporation and that was not repaid.

Here is a list of the bad facts in the case. They are an education on what to AVOID in these situations:

• Generally speaking, the loan was not made on termsthat an outsider would have undertaken.• The loan was unsecured.• The loan was funded over a period of time as a lineof credit. During that period of time, the finances of theborrowing corporation declined – nonetheless, the lendercontinued to fund the loan.• No payments of interest or principal ever were made.• The borrowing corporation did not enter bankruptcy, and continued to operate two years after the year a worthlessdebt deduction was sought.• The borrowing corporation did not recognize anycancellation of indebtedness income.• The lender’s only effort to enforce the debt was to makea demand for repayment of $5,000 in the year of the write off. No legal action was ever commenced.• There were no opinions of accountants or financialconsultants that the note was worthless.• There was no evidence of borrower creditworthiness atthe time of the loan was advanced (a loan to an insolvententity will often not be characterized as a loan).• The loan was a line of credit loan, but it had no covenants that advances could be suspended if certain income orother benchmarks were not attained or maintained.• No event of default occurred in the year thatworthlessness was claimed.SHAW v. COMM., 116 AFTR 2d 2015-XXXX, (CA9),11/18/2015

13

the constitutional separation of powers. They point to 26 U.S.C. § 7443(f), which enables the President to remove Tax Court judges on grounds of “inefficiency, neglect of duty, or malfeasance in office.” According to the Kuretskis, Tax Court judges exercise the judicial power of the United States under Article III of the Constitution, and it violates the constitutional separation of powers to subject any person clothed with Article III authority to “interbranch” removal at the hands of the President. The Kuretskis thus ask us to strike down 26 U.S.C. § 7443(f), vacate the Tax Court’s decision, and remand theircase for re-decision by a Tax Court judge free from the threatof presidential removal and hence free from alleged bias infavor of the Executive Branch.

The D.C. Circuit rejected the Kuretskis’ claim. It assumed, arguendo, that “‘interbranch’ removal of a Tax Court judge would raise a constitutional concern.” But it found “no cause for concern in fact.” According to the D.C. Circuit, the Tax Court “exercises Executive authority as part of the Executive Branch,” and “[p]residential removal of a Tax Court judge thus would constitute an intra—not inter—branch removal.” (No Tax Court judge has ever actually been removed by the President.)

This holding evidently unnerved Senator Orrin Hatch, who chairs the tax writing committee in the upper chamber. Senator Hatch introduced a bill this past April with language identical to the “clarification” found in the extenders package. The accompanying report explained:

The Committee is concerned that statements in Kuretski v. Commissioner may lead the public to question theindependence of the Tax Court, especially in relation to theDepartment of Treasury or the Internal Revenue Service.The Committee wishes to remove any uncertainty causedby Kuretski v. Commissioner, and to ensure that there is noappearance of institutional bias.

This “clarification” may be motivated by noble sentiments. But it has the potential to cause much more confusion than it resolves. If the Tax Court isn’t inside the Executive Branch, then where exactly is it? And if the Hatch provision becomes law, how would a federal court of appeals handle a future challenge to the Tax Court’s constitutional structure?

A few possibilities (with thanks to my colleague Will Baude for helping me think through the permutations):

First, the court of appeals might say that the Tax Court is part of the Legislative Branch. ...

Second, the court of appeals might say that the Tax Court is part of the Judicial Branch. ...

A third possibility is that the court of appeals might say the Tax Court lies off in constitutional no-man’s land, apart from all three branches. ...A fourth possibility is that the court of appeals might say that the “clarification” in the extenders package is itself a nullity. . .

The hasty addition of the “clarifying” provision to the end-of-year extenders package means that there is little time for lawmakers to debate the measure. Yet it may take courts quite a bit of time to sort through the provision’s potential implications.

And for what? Say the Kuretskis are correct that the Tax Court judge in their case may have been biased in favor of the IRS because he was subject to presidential removal. A congressional declaration that the Tax Court is “independent” of the Executive Branch doesn’t change that: it’s the removal provision that the Kuretskis say is the source of the bias, and the extenders package leaves the removal provision in place. Congress cannot wave a magic wand and make the “appearance of institutional bias” go away. What it can do is create a constitutional quandary for the Tax Court—and an entirely unnecessary one at that.

Practice Management

Your Image in an Internet World

Are you “old school”, “new school” or from the “school of hard knocks”? It just doesn’t matter. What counts is the image that you present to your clients.

Taxpayers are internet savvy!

Use of the internet can:

• Remind taxpayers of appointments• Send vital information such as a tax organizer orrequest for information• Communicate with written email record• Send follow-up communication, and my favorite• Send your Client Newsletters

One of the best methods to project your up to date business

14

image is to have a professional presence on the internet - Web Page.

But I don’t have the time to set it up and maintain it.....no worry here. GetNetSet, one of the Fellowship sponsors (go to the landing page of the Fellowship and click on Sponsors) does it all for you. After discussing what you want for your image and consulting with you, they set up and continually update your Web Site. The cost? As Mr. Wayne says, “it depends”. But they will work with you to accomplish your desires at a reasonable price. And speaking of price, if you have 5t00 clients that you send the Fellowship client newsletter to, the cost of printing, envelopes and mailing will more than offset the cost of GetNetSet. AND, the private “client portal” to receive client information is compliant with IRS procedure.

This is something you do for you. Do it today.

New Tax Bill Brings Improvements to Education Benefits

Families saving for college with a 529 plan may want to review their 2015 qualified expenses. Thanks to the Protecting Americans from Tax Hikes (PATH) Act, computers, Internet access and computer software are now considered qualified expenses, retroactive to January 1, 2015. That means if you bought a laptop for college this year you have until January 1, 2016 to take a tax-free and penalty-free withdrawal from your 529 plan to cover the costs.

The PATH Act also includes other important updates to education-related tax benefits. Here’s a quick summary:

ABLE Act updates:

529 ABLE accounts allow beneficiaries with special needs to save tax-free for future expenses without having to forgo government assistance. The new law removes the residency requirement for these accounts, giving individuals more choices when it comes to investment options and expenses since they are now able to use any state’s ABLE plan.

However, another expected update to ABLE accounts was not included in the Act. The Joint Committee on Taxation’s description of the PATH Act refers to a provision that would permit limited rollovers from a 529 plan to a 529 A account without penalty, but this change was not included in the final PATH Act.

Extensions to tax benefits:

The American Opportunity Tax Credit (AOTC) allows eligible parents to claim a tax credit for 100% of the first $2,000 and 25% of the next $2,000 of a child’s mandatory tuition and fees, for total maximum credit of $4,000 per student. The AOTC was scheduled to revert back to the old Hope Scholarship credit at the end of 2017 but was instead made permanent by the PATH Act.

PATH also extended the above-the-line education deduction through 2016, which allows eligible parents to deduct up to $4,000 in tuition and fees per student. Enhancements to 529 plans (all retroactive to the beginning of 2015):

1. Computers and other related equipment are a permanentqualified expense. Prior to the Act, computer purchases wereonly considered qualified if the school required them for courseattendance or enrollment.

2. School refunds can be redeposited. Students who withdrawfrom school will avoid paying taxes and penalty when therefund is deposited back into the account within 60 days. Aspecial transition rule provides that refunds received afterDecember 31, 2014, and before December 18, 2015, maybe recontributed not later than 60 days after the date ofenactment.

3. No more distribution aggregation. Multiple accounts in a529 program with the same owner and beneficiary no longermust be aggregated for purposes of computing the earningsportion of a distribution. Instead, the earnings portion of adistribution will be computed by each 529 program on anaccount-by-account basis.

Families saving for college with a 529 plan may want to review their 2015 qualified expenses. Thanks to the Protecting Americans from Tax Hikes (PATH) Act, computers, Internet access and computer software are now considered qualified expenses, retroactive to January 1, 2015. That means if you bought a laptop for college this year you have until January 1, 2016 to take a tax-free and penalty-free withdrawal from your 529 plan to cover the costs.

New Law Says Money For Wrongful Convictions Is Tax Free

Many are discovering surprises in the massive so-called tax extenders package. With more than six hundred billion tax dollars at stake, it is easy to get overwhelmed. Arguably one of the least noticed and yet most defensible changes to the tax code in this sausage-filled bill is something that for years

15

was proposed as the stand-alone “Wrongful Convictions Tax Relief Act.” Unlike many other tax changes, you do not want this to apply to you. Because if it does, you were wrongfully convicted and wrongfully behind bars.

In the U.S., individuals who have been wrongfully convicted and exonerated by DNA evidence spent on average 14 years wrongfully incarcerated. The new law amends the Internal Revenue Code so a wrongfully incarcerated individual can exclude from taxes the civil damages, restitution, or other monetary awards he or she receives as compensation for a wrongful incarceration.

Since the first DNA exoneration in 1989, wrongfully convicted persons have served more than 3,809 years in prisons across 35 states before being exonerated. Hundreds of DNA exonerees have served an average of 13.5 years in prison, ranging from less than one year to 35 years. Whether you look at an individual case or at the averages, these are some astounding numbers, as Congressmen Sam Johnson and John Larson have noted.

Congressmen Johnson (R-TX) and Larson (D-CT) introduced their bill repeatedly, but didn’t give up. In 2015, they re-introduced the Wrongful Convictions Tax Relief Act. Several members of the Senate, including Charles Schumer (D-NY) and John Cornyn (R-TX), joined in. Thirty states, the District of Columbia, and the federal government provide some form of statutory compensation for wrongful conviction and incarceration. But the only thing the tax law has allowed is that if you are physically injured while in prison and get money for your injuries, that amount is tax free. That’s the same rule is you were injured outside prison in a car wreck, a slip and fall, or skiing accident.

The new law says you no longer have to prove that you were physically injured in prison to get tax free treatment. You also no longer have to fudge the allocation of the money. You no longer need to suggest that you received millions for getting stabbed or beaten up while in prison, and nothing for spending 15 years wrongfully behind bars.

Injustices happen, and when they do and are eventually rectified, the person is never the same. This includes re-entry needs that are hard to comprehend. For the few who end up with money for their ordeal, adding the IRS collectors into the

mix was always a bad idea. Yet until now, the tax issues have been surprisingly cloudy.

In the 1950s and 1960s, the IRS ruled that prisoners of war, civilian internees and holocaust survivors received tax-free money for their loss of liberty. In 2007, the IRS “obsoleted” these rulings suggesting the landscape had changed. The IRS thereafter asked whether a wrongfully jailed person was physically injured/sick while unlawfully jailed. If so, the damages were tax free, just like more garden variety personal physical injury recoveries.

In IRS Chief Counsel Advice 201045023, the IRS sidestepped whether being unlawfully incarcerated is itself tax-free. The Tax Court and Sixth Circuit in Stadnyk suggested that persons who aren’t physical injured during their imprisonment should be taxed.

Finally, though, the Wrongful Convictions Tax Relief Act allows exonerees to keep their awards tax-free. According to Congressman Larson, “Though we can never give the wrongfully convicted the time back that they’ve had taken from them, they certainly shouldn’t have to pay Uncle Sam a share of any compensation they’re awarded. This bill will make sure they don’t have to suffer that insult on top of their injury.”

Legislative Update from Capitol Hill

AICPA Objects to New Bill to Regulate Income Tax Preparers

The American Institute of CPAs (AICPA) has come out strongly against the new bill in Congress that would give the IRS broad authority to regulate tax return preparers. On December 4, it sent a letter to House Ways and Means Committee Chairman Kevin Brady (R-TX) and Ranking Member Sander Levin (D-MI) opposing the measure.

Under the “Tax Return Preparer Competency Act” – introduced by Representatives Diane Black (R-TN) and Pat Meehan (R-PA) on December 1 -- tax return preparers would be required to pass a competency test, attend at least 15 hours of continuing education (CE) classes a year and submit to background checks. CPAs, enrolled agents and tax attorneys

16

would effectively be exempted from the requirements.

The new bill was proposed after a prior regulatory program was successfully challenged in court by unlicensed tax return preparers (Loving, et. al. v. IRS, CA- D.C., No. 13-5061, 2/11/14). Subsequently, the IRS instituted a voluntary program.

In the letter to Brady and Levin, Troy Lewis, CPA, chairman of the AICPA Tax Executive Committee, said, “Ensuring that tax preparers are competent and ethical is critical to maintaining taxpayer confidence in our tax system. Indeed, these goals are consistent with AICPA’s own Code of Conduct and enforceable tax ethical standards. However, we believe the Tax Return Preparer Competency Act allows the IRS to overregulate professional, credentialed tax return preparers and their staff without providing adequate value to taxpayers or additional protection to the public.”

Instead of enacting “yet another set of rules for professional, credentialed tax return preparers,” the AICPA recommends that Congress mandate that the IRS enact a testing and continuing education program similar to the program in effect prior to the Loving decision that would apply exclusively to so-called ‘unenrolled’ tax return preparers not licensed by the states.

“Certified public accountants and attorneys are highly-regulated and licensed at the state level,” explained Lewis. “They are subject to rigorous education, testing and continuing education requirements as opposed to the ‘fly-by-the-night tax preparers’ that the Tax Return Preparer Competency Act intends to address.”

The AICPA also believes the IRS could utilize their current preparer tax identification number (PTIN) system more effectively to protect the public from incompetent and fraudulent tax return preparers.

Furthermore, any legislation should also address the burdensome requirement that non-signers of tax returns obtain PTINs, especially since the IRS lacks the ability to track or use PTINs for individuals who do not sign returns.

In addition, the AICPA recommends that Congress should support the exchange of information between the IRS and state taxing authorities. “The exchange of tax preparer data (particularly as it relates to incompetent and fraudulent prepares) would improve tax administration by reducing duplicate government resource expenditures and increasing taxpayer compliance,” Lewis said in the letter.

Finally, Lewis added that the AICPA is looking forward to working with the committee and the sponsor of the legislation “in order to address our concerns and improve the bill to achieve our shared goal of enhanced tax return compliance and elevation of ethical conduct of tax return preparers.”

A Permanent Internet Tax Ban

End-of-session group gropes rarely yield good results in Congress, and we have been steeling ourselves for the usual damage. But for a change, it looks like there will also be some good news. Members of a House-Senate conference committee have approved a permanent extension of the Internet Tax Freedom Act.

Congressional negotiators have signed and posted their conference report on a trade facilitation bill, which includes the permanent ban on email and Internet access taxes that online consumers have long desired. Since 1998 the Internet Tax Freedom Act has protected the Web from multiple or discriminatory taxation. The idea is simple: Do not allow state and local tax collectors to impose Internet-only taxes. There should be no burdens on this online engine of innovation that do not exist in the off-line world of bricks and mortar.

This is a separate issue from the eternal debate over sales taxes and whether the federal government should give states and localities new powers to force tax-collection duties on out-of-state merchants. But until now the popular ban on taxing Internet access services has been held hostage by the sales-tax debate. The most recent extensions of the Internet Tax Freedom Act have been measured in months.

That political hostage-taking, led by Democrat Harry Reid of Nevada and Republican Mike Enzi of Wyoming, now appears to have ended. The conference report will go to the House and Senate floors and is expected to pass.

Consumers should be thanking legislators from both parties. Sen.Ron Wyden (D., Ore.) co-authored the original law with then-Rep.Christopher Cox, and has fought to make it permanent since. This year he’s finally done it. House Judiciary Chairman Bob Goodlatte and Senate Majority Leader Mitch McConnell also helped bring this across the finish line.

A strong pro-growth, pro-consumer message from Washington has become a political unicorn, more fabled than existing, but it looks like this sighting may be real.

17

Tax Status of Museums Questioned by Senators

The Broad, a museum in Los Angeles financed by Eli and Edythe Broad, opened to the public in September.

The Senate Finance Committee is scrutinizing nearly a dozen private museums opened by individual collectors, questioning whether the tax-exempt status they enjoy provides sufficient public benefit to justify what amounts to a government subsidy.

Senator Orrin G. Hatch of Utah, the committee’s Republican chairman, sent letters this month to small galleries like the Brant Foundation Art Study Center in Greenwich, Conn., and Glenstone museum in Potomac, Md., as well as Eli and Edythe Broad’s new $140 million art museum in Los Angeles, asking for information about visiting hours, donations, trustees, valuations and art loans.

Republican committee staff members said the inquiry was part of a broader effort by Mr. Hatch to re-examine bedrock institutions, including museums and private universities, that have long enjoyed preferential tax treatment.

“Tax-exempt museums should focus on providing a public good and not the art of skirting around the tax code,” Mr. Hatch said in an email statement. “While more information is needed to ensure compliance with the tax code, one thing is clear: Under the law, these organizations have a duty to promote the public interest, not those of well-off benefactors, plain and simple.”

Senator Orrin G. Hatch of Utah sent letters of inquiry this month to several galleries.

A broad debate about the personal and corporate tax system has emerged yet again as an important element in the presidential campaign. But little attention has been paid to the longstanding charitable deductions for museums, nonprofit theaters and other institutions — an exemption that is zealously defended by both donors and recipients.

The Hatch letter noted that “charitable organizations have an important role in promoting good in our society,” but questioned whether “some private foundations are operating museums that offer minimal benefit to the public while enabling donors to reap substantial tax advantages.”

“Such an arrangement would be inconsistent with the letter and intent” of the law, it added.

The letters were sent after an article in The New York Times earlier this year that examined the proliferation of tax-exempt private museums created by wealthy art collectors, sometimes in their own backyards. Some of the galleries severely limit public access, closing their doors to outsiders for several months at a time, shunning signs and advertisements, and requiring visitors to make advance reservations.

As investors have poured money into the skyrocketing art market, financial consultants and tax experts have said that many wealthy individuals are looking to convert their personal collections into private foundations or museums as a way of reducing their tax bills.

Founders can deduct not only the full market value of the art they buy, but also the value of cash and stocks they donate. The cost of insuring, conserving, warehousing and other expenses associated with a masterwork’s upkeep are also tax-free.

Internal Revenue Service guidelines are vague when it comes to establishing the degree of public benefit that justifies an art institution’s tax-exempt status. But public access and adequate signage are both considered prerequisites, according to previous agency rulings. There are also strict restrictions on displaying the art in a donor’s own home.

Aaron W. Fobes, the spokesman for the finance committee, said the panel’s “concerns are confined to a small number of private foundations and are not something that is symptomatic of a larger problem in exempt organizations.”

Some tax experts have questioned whether some of the small, out-of-the-way museums that are on or close to a donor’s property — like the Brant study center (founded by the newsprint magnate Peter Brant) or Glenstone (created by Mitchell Rales) — meet I.R.S. guidelines.

Philippa Polskin, a spokeswoman for Glenstone, said in an email that the museum was “gathering information in response to the questions sent by Senator Hatch and looks forward to sharing information with the committee about their efforts to build Glenstone into a world-class museum.”

18

Since the end of September, she said, “with future reservations already received, Glenstone is tracking toward a 12-month attendance of around 25,000 visitors.” She added that the number of visitors is expected to increase four- or fivefold when a planned expansion is completed.

The Brant Foundation did not respond to requests for comment, but it had previously defended the art center’s charitable work and public service.

Other institutions that were sent a letter, like the Rubell Family Collection in Miami and the newly minted Broad museum, are on an altogether different scale, however.

The Rubells’ 45,000-square-foot contemporary art center, located in a former Drug Enforcement Administration warehouse in Miami, helped revitalize the surrounding Wynwood neighborhood when the family opened it in 1993. The center reports that tens of thousands of people visit the center every year.

Mr. Broad’s grand three-story museum, which opened in September, is one of the most ambitious ventures of its kind in recent decades. Mr. Broad, who has donated millions to other nearby cultural institutions, including the Los Angeles County Museum of Art and the Museum of Contemporary Art, has been active in transforming that stretch of downtown Los Angeles into a cultural hub. The Broad Foundation did not respond to requests for comment, and the Rubell Family Collection declined to comment.

Several well-established art institutions, like the Isabella Stewart Gardner Museum in Boston, the Frick Collection in New York, the Phillips Collection in Washington and the Barnes Collection in Philadelphia, grew out of a wealthy art collector’s private purchases.

Military Taxes

The Military and the Affordable Care Act

The good news! Forms 1095 will be issued! When working with a military member, they may need to be reminded to acquire this form through their “myPay” account,

Active Duty and Reserve military members in addition to most retirees are provided Minimum Essential Coverage through a variety of “TRICARE” programs.

These include: TRICARE Prime, TRICARE Prime Remote, TRICARE Prime Overseas, TRICARE Prime Remote

Overseas, TRICARE Standard and Extra, TRICARE Standard Overseas, or TRICARE For Life, TRICARE Reserve Select, TRICARE Retired Reserve, TRICARE Young Adult , US Family Health Plan, Transitional Assistance Management Program or Continued Health Care Benefit Program.

Persons who will NOT have minimum essential coverage from TRICARE if: they are only eligible for “direct care” from military hospitals and clinics and they are not covered by another TRICARE plan listed previously. Some examples could be the military members dependent parents or in-laws.

Veterans and their beneficiaries who are enrolled in VA Health Care or Civilian Health and Medical Care program are also considered to have minimum essential coverage. In December, VA will begin a mailed letter effort to notify all enrollees and beneficiaries of their VA health coverage for 2015. The letter will include form 1095-B.

Military tax statements will be available through myPay according to the following schedule:

Estate and Trust News

Taxation of Grantor Trusts - During the Lifetime of the Grantor(s) - Optional Methods 2 & 3

Grantor trusts come in all shapes, sizes, and Taxpayer Identification Numbers. Increasingly, we are asked to include grantor trust filing compliance for clients who are the grantor-trustees of their own trusts. Upon review of the payers’ tax reporting documents, we often see that the trust is using an EIN (not the SSN) for tax reporting purposes. We read the trust document to confirm that it is a grantor trust (as opposed to a non-grantor trust). This article will look at two of the filing methods available for EIN-using grantor trusts.

As experienced tax professionals, we are aware that assets, once transferred into a trust, become the legal property of the trust (for property law purposes). At the same time, the grantor trust is not a separate taxpayer for income tax purposes. When a trust is a grantor trust, all taxable transactions inside the trust are treated as though the grantor executed the transaction without the existence of a trust.

19

The reason a grantor trust may use an EIN is not at issue here. When a grantor trust uses an EIN for its Taxpayer Identification Number (TIN), there are three filing methods available: Optional Methods 2, 3 and “Not using an Optional Method.” Please note that grantor trusts using an EIN are not allowed to simply ignore the EIN usage and report all items as though the SSN were being used. Doing that would be not in compliance with federal filing requirements for Optional Method 1 (cf. Taxing Times, December 2015).

Optional method 2 is used when the trust is treated as owned by one grantor. Optional Method 3 is used when the trust is treated as owned by two or more grantors. Note that a husband and wife will be treated as one grantor for purposes of Optional Method 2 if all of the trust is treated as owned by the husband and wife, and the husband and wife file their income tax return jointly for that tax year.

Form 1099 Filing Requirements

With Optional Methods 2 and 3, the TIN (EIN) of the trust is used for tax reporting purposes. The trustee must give all payers of income during the tax year the name, address, and TIN of the trust. The trustee also must file with the IRS the appropriate Forms 1099 to report the income or gross proceeds paid to the trust during the tax year that shows the trust as the payer and the grantor, or other person treated as owner, as the payee. NB: The Form 1099 due dates apply. The trustee must be aware of this compliance issue in order to avoid applicable penalties.

Form 1041 Filings

Under Optional Methods 2 and 3, Form 1041 is completed by entering the entity information in the header of Form 1041 including the FEIN of the trust. Schedule K-1 is not used. Instead, an attachment details the information of the person(s) to whom the income is taxable, the income, deductions, and credits in the same detail as it is to be reported on the grantor’s return.

Grantor Trust Statements

Optional Method 2: In addition to the above, unless the grantor, or other person treated as owner of the trust, is the trustee or a co-trustee of the trust, the trustee must give the grantor, or other person treated as owner of the trust, a “Grantor Trust Statement” which details all items of income, deduction, credits and inform the grantor that all items must be included on the grantor’s individual tax return.

Optional Method 3: Since this method applies to grantor trusts with multiple grantors (two or more), there is no grantor-trustee exception regarding the requirement to provide a Grantor Trust Statement. The statement must be provided to each grantor for his / her applicable share.

The Grantor Trust Statement satisfies the requirement to give the recipient copies of the Forms 1099 filed by the trustee.

In the event these sound more onerous than efficient, please note that one more method, the “Not Using an Optional Method” may be best for your client. Look for that discussion in an upcoming Taxing Times.

People in the Tax News

Collin County Businessman Sentenced for Identity Theft-Related Federal Tax Violations

Plano, Texas – A Princeton, Texas man has been sentenced for identity theft and mail fraud violations in the Eastern District of Texas, announced U.S. Attorney John M. Bales.

Johnny Lee Allie, 44, had pleaded guilty in federal court on June 18, 2015 to one count of aggravated identity theft and one count of mail fraud. Allie was sentenced last month to a 61- month federal prison term by United States District JudgeMarcia Crone.

According to information presented in Court, Allie owned, operated and controlled AMO-PS Limited, located in Allen, Texas, and prepared income tax returns as part of his business. In 2012, Allie devised a scheme to defraud the Internal Revenue Service by filing a false income tax return for the year 2010 in the name of his clients without their knowledge. The tax return, which generated a refund of $26, 523.36, contained fraudulent items such as false business income and expenses, and credits for child care expenses. Allie created fake information indicating that the clients had gross receipts of $493,100.00 and net profit of $51,362.00.

Allie also forged his clients’ signatures and used his own business address rather than the clients’ home address on the tax return, so the IRS would mail any refund checks to Allie’s office at AMO-PS Limited. He used his clients’ names, dates of birth, and Social Security numbers to open an account at Bank of Texas, into which he deposited the fraudulent refund check. Allie then wrote several checks, made payable to himself, forging the clients’ signatures in order to withdraw the refund money.

As part of his plea agreement with the Government, Allie agreed to pay restitution in the amounts of $19,081.01 to his victims, and $4125.00 to the IRS. He began his prison sentence immediately after the sentencing hearing.

This case was investigated by the Internal Revenue Service – Criminal Investigation, and was prosecuted by Assistant U.S. Attorney Christopher A. Eason.

Sumner Redstone Loses Gift Tax Case to IRS

The Tax Court has decided that media mogul Sumner Redstone’s 1972 transfer of stock to a trust set up for his two children was a taxable gift, but declined to impose a penalty

20

for fraud, negligence, or failure to timely file.

Redstone graduated from Harvard Law School in 1947 and spent several years in the practice of law, including a period in the Tax Division of the U.S. Department of Justice. In 1954 he joined his brother and father in the drive-in movie theater business, National Amusements, Inc., which later became the controlling shareholder in CBS and Viacom.

In 1972 Redstone transferred shares of NAI stock to trusts for the benefit of his two children, but did not file a gift tax return. Although the IRS was aware of the transfers due to inquiries connected to the Watergate investigation, nothing was done for 40 years until Redstone testified in a family lawsuit, “I wasn’t sued. I just made on outright gift.”

The testimony came to the attention of the IRS, which began a gift tax examination covering Redstone’s 1972 calendar year.

The IRS determined that the 1972 transfer of stock to his children was a gift, resulting in a deficiency of $737,625, and also determined an addition to tax of $368,813 for fraudulently failure to timely file a gift tax return. The Tax Court, in Redstone v. Commissioner, T.C. Memo 2015-237, agreed that thetransfer was a taxable gift, but concluded that Redstone is notliable for any additions to tax.

Redstone argued that the deficiency should be set aside because the IRS violated the “one examination” rule of section 7605(b), and that the 2011-2013 gift tax examination was an impermissible second inspection. The Tax Court said that since Redstone first raised the issue in 2014, he in effect consented to the 2011-2013 examination and waived any rights that the section might have given him. The 1972 transfer was a gift because it was made out of love and affection, and was not made in the ordinary course of business.

No addition to tax, or penalty, was required because Redstone sought and relied on advice concerning the tax consequences of transferring stock to the trusts.

Oregon Man Lets Loose Flock of Chickens in Tax Collector’s Office in Anger

Talk about fowl play.

An Oregon man released a flock of chickens inside the Oregon Department of Revenue office to demonstrate his anger, police said.

Louis Adler, 66, reportedly delivered seven chickens to the Eugene office, but police have yet to determine the motive behind the poultry protest.

State agency spokesman Derrick Gasperini said office employees had previously dealt with Adler and he was “frustrated with the outcome.”

The chickens were taken to First Avenue Shelter, where they

will stay temporarily.

“This time of year, definitely in our cattery and our kennel we’re full. We are now full of chickens as well,” Cary Lieberman, executive director of the Greenhill Humane Society said.

“It’s not often we take in seven chickens at once and certainly not under this circumstance.”

Adler received a trespass notice and was warned to stay away from the building, police spokeswoman Melinda McLaughlin said.

The chickens inflicted no damage on the office.

Plaxico Burress Pleads Guilty to Tax Evasion Charges

Former New York Giants football star Plaxico Burress in Mercer County Superior Court on Monday agreed to serve five years probation and 364 days in jail for failing to pay $46,000 in taxes on his $1 million income in 2013.

In exchange for the guilty plea, prosecutors dropped an additional charge of issuing a bad check or electronic funds transfer, a third-degree felony.

Burress, 38, will be sentenced on Feb. 5 on the plea deal that was offered in July.

21

Burress, of Totowa, declined to comment outside the courtroom of Superior Court Judge Pedro J. Jimenez Jr.

Prosecutors have said Burress filed his 2013 income tax return with the New Jersey Division of Taxation on Oct. 20, 2014, but the electronic payment to cover his payment did not go through.

The state’s Division of Revenue and Enterprise Services alerted Burress, but received no response, authorities said.

A criminal complaint came in February after additional efforts to reach Burress by the State Department of the Treasury’s Office of Criminal Investigation were unsuccessful, according to the Mercer prosecutor’s office.

Under a 2014 bill signed into law by Gov. Chris Christie, New Jersey law allows criminal penalties to be imposed on people who send insufficient e-payments just as if they were bounced checks.

It is not the first time the former football player has run afoul of the law.

Burress in 2009, while playing for the NY Giants, pleaded guilty to a weapons charge and spent two years in prison after he accidentally shot himself at a Manhattan night club the year before.

Three days after the shooting, the Giants officials placed him on the non-football injury list, making him ineligible to play for the remainder of the regular season and playoffs.

He was released from prison in 2011 and signed a deal with the New York Jets before returning to the Pittsburgh Steelers, where he began his NFL career.

Brother of Real-life Gordon Gekko: I’ll Never Pay $334M Tax Debt

He owes one of the biggest tax debts in New York history — a staggering $334.8 million — but Jon Edelman has dodged Uncle Sam for decades, thanks to a jailbreak and a yacht named Elusive.

Now Edelman, 69 and living in California, tells The Post he won’t pay a dime.

“They took everything away from me,” the one-time Wall Street trader says. “Between the IRS and the attorneys, I don’t have anything.”

After 24 years of chasing the convicted deadbeat fraudster, the feds have collected less than $30,000, according to court papers. They now want to milk $2.5 million from the estate of Edelman’s dead mother to satisfy part of the bill.

The schemes of Edelman and his business partner, Bernhard Manko, were the largest tax fraud in state history at the time of

their 1989 indictment. They made $38 billion in phony trades via shell companies, generating $511 million in tax write-offs for clueless investors, including fashion designer Perry Ellis and billionaire John Kluge, prosecutors said.

Edelman, whose brother was the role model for the “Greed is good” Gordon Gekko character in the 1987 movie “Wall Street,” claims he’s innocent.

“I didn’t do anything wrong,” he insists. “The companies were real companies, making real money.”

Edelman contends he was only charged because he refused to help prosecutors build a case against Manko.

A jury convicted Edelman and Manko after a four-month trial in Manhattan federal court. He was sentenced to five years in prison. After two years of failed appeals, Edelman says, he considered suicide before reporting to a minimum-security Colorado prison in July 1993.

His stay there was short-lived.

“I knew that the kitchen employees left the dormitory at 5 in the morning, so I turned my sweat shirt inside out and made it look white and walked out with them,” he recalls. “Except when they turned to the right to go into the building, I turned left and walked off the property.”

He had been in the clink for only a month.

He fled to San Diego, where he kept his 55-foot racing yacht, Elusive. He changed its name to Verite, the French word for truth, and set sail for the South Pacific with his wife and three kids.

They jumped from one sparsely populated island to another. On one tropical shore where they landed, the island’s chief boarded and discovered the family’s VCR.

“He was fascinated,” Edelman recalls. “He loved action movies. They loved to watch things like ‘Indiana Jones.’ They could watch it over and over again, and in return . . . they built us a beach house.”

After two years in paradise, Edelman was finally nabbed by US marshals on the island of Vanuatu, off Australia’s coast.

Edelman served out his sentence, plus an extra 18 months, but the IRS refused to settle the former fugitive’s tax case.

He calls the debt “fantasy numbers.”

“I didn’t make $300 million. It would be nice if I had,” he says of his time on Wall Street. “I made, I don’t know, $1 [million] or $2 million a year. It wasn’t anything that would lead to these numbers, but they add interest and penalties on it, so it balloons.”

Now suffering from a degenerative spinal condition, Edelman

22

Snipes and partial defeat for prosecutors, since he defeated the more serious felony counts.

But he got jail time, reporting to McKean Federal Correctional Institution on December 9, 2010. He finished at an adjacent minimum security Club Fed, and was released in April, 2013. During 1999 through 2001, Snipes avoided $7 million in taxes. Snipes followed an accountant and an anti-tax advocate down a dangerous path. The advisers claimed they did not legally have to pay taxes.

One of Snipes’ original defenses was that he was relying on Eddie Ray Kahn and Douglas P. Rosile. They were convicted by the same jury of tax fraud and conspiracy and both got longer prison terms than Mr. Snipes. Snipes was such a well-known figure and high earner—about $40 million from 1999 to 2004—that not paying taxes was hard to fathom.

The big victory for Snipes was that he was acquitted of felony tax fraud and conspiracy. He didn’t file false tax returns. But even his misdemeanor convictions meant a sentence of up to 3 years in prison, which he got. Snipes appealed, arguing that his sentence was unreasonable. He even claimed he couldn’t get a fair trial in Ocala, Florida because of his race. Even the U.S. Supreme Court turned him down.

Mr. Snipes’ current fight with the IRS is just about civil tax collections, which is yet another painful lesson he must endure. With many defendants convicted in tax cases, there is a spillover impact on their civil taxes. The IRS not only wants to collect whatever it was owed in the criminal plea agreement or court order. But the IRS may send various other tax bills too, trying to leverage off the conviction. Usually, the IRS succeeds.

Mr. Snipes’ current beef with the IRS appears to be of this sort. He’s trying to resolve all his tax debts and move on. His lawyers have been dealing with the IRS but eventually resorted to taking the IRS to court. The IRS made these assessments in 2013, going back more than 10 years:

• 1999 – $177,263.99• 2001 – $2,573,977.70• 2002 – $1,497,644.97• 2003 – $4,576,925.66• 2004 – $5,625,612.45• 2005 – $3,526,946.38• 2006 – $5,777,543.18

All of these big tax assessments hit Mr. Snipes just as he was coming out of prison. So, Mr. Snipes requested a Collection Due Process Hearing (filing IRS Form 12153) seeking an offer-in-compromise or installment agreement. He was trying to work it out with the IRS. He even paid off the two amounts the IRS wanted for 1999 and 2002.

Then, he made the IRS an offer in early 2014 to settle his taxes for 2001, 2003, 2004, 2005, and 2006. By the summer of 2014, his lawyers were talking with the IRS, and sending additional documents the IRS said it needed. By March 2015,

lives in an assisted-living facility in California. “It’s just existing,” he said.

NY Cigar Distributor Convicted of Skirting Millions in Taxes

Prosecutors say a New York City cigar distributor has been convicted of dodging millions of dollars in tobacco taxes on cigars he sold after buying them in Pennsylvania.

State Attorney General Eric Schneiderman’s office said Wednesday that Sulaiman Aamir was convicted of criminal tax fraud and other charges. They carry the potential for up to 25 years in prison.

Schneiderman says the conviction shows that “those who skirt our tax laws will face serious consequences.” Aamir’s lawyer hasn’t immediately returned a phone message.

Prosecutors said Aamir brought in millions of cigars from Pennsylvania wholesalers and resold them in New York without fully paying a 75% state tax on the wholesale price. Authorities said records showed he paid only $100,000 for a nine-month span in which he owed nearly $7 million.

Wesley Snipes Sues IRS Over Abusive $17.5M Tax Bill, False Promise Of ‘Fresh Start’

Wesley Snipes at the world premiere of “Chi-Raq” at the Chicago Theatre on Nov. 22, 2015 in Chicago.

Wesley Snipes is in court with the IRS, again, and this time he has gone on the offensive. He was one of the more high profile criminal tax defendants in recent memory, facing an all-out prosecution on multiple serious felony tax evasion counts. In 2008, Mr. Snipes was convicted of three misdemeanor counts of failing to file tax returns. It was a partial victory for Mr.

23

it appeared that the IRS would take $6,416,396. But then the IRS suddenly upped its figure to $18,116,396.

Rather than bargaining over figures, the IRS filed more notices for $17,482,152. Mr. Snipes claims in court that the IRS is making arbitrary determinations, and abusing its discretion. After all, the whole purpose of the IRS office in compromise program is to provide a resolution that is in the best interest of the taxpayer and the government. The idea is to resolve things and move on, keeping the taxpayer in compliance.

In fact, the program seeks to provide the taxpayer with a “fresh start” toward tax compliance. The IRS launched the “Fresh Start Initiative” on May 21, 2012, in IR-2012-53. This initiative revised the offer in compromise program to make its terms more flexible. The idea was to enable more of the most financially distressed taxpayers to resolve their tax problems. Mr. Snipes wants the court to make the IRS fly right.

IRS News

IRS Suggests Using Transcripts in Lieu of Estate Tax Closing Letter

A federal estate tax closing letter shows that the IRS has either accepted an estate tax return as filed, or after audit final adjustments have been agreed to. They do not close the statute of limitations, but provide comfort to executors that they can make distributions or pay creditors with little likelihood of IRS review of the estate tax computations.

In the past, closing letters were automatically issued. Earlier this year the IRS indicated that would no longer happen – taxpayers now need to specifically request a closing letter, and must wait at least 4 months from filing of the estate tax return before making the request.

The IRS has now indicated on its website that an estate tax transcript can be used as an alternative method for taxpayers to determine that the IRS has accepted an estate tax return or closed an audit. More particularly, the IRS provides:

“Transaction Code 421 [on a transcript] indicates an Estate Tax Return (Form 706) has been accepted as filed or that the examination is complete. Please note that the Transaction Code 421 explanation will display “Closed examination of tax return” in all instances. If Transaction Code 421 is not present, the tax return remains under review.”

The IRS goes on to provide how taxpayers or their representatives can request a tax transcript from the IRS (either online or via the mail). It also notes that “[t]he decision to audit a Form 706 is typically made four to six months after the filing date. Please wait four to six months after filing Form 706 before submitting a request for an account transcript.”

Since many probate courts require an estate tax closing letter

before closing an estate when an estate tax return is filed, it remains to be seen whether an IRS estate tax transcript will be accepted as a valid substitute for those returns.

Gulag America

A few years back, Congress passed FATCA. While purportedly aimed at reaching money of tax evaders hidden offshore, a practical effect has been it is nearly impossible for U.S. persons to hold or open bank or brokerage accounts outside of the U.S. That is, for a tax policy objective, the freedom enjoyed by U.S. persons to hold their liquid assets wherever they want in the world has been substantially curtailed.

The construction of Gulag America under the guise of tax policy continues apace with the passage and signing of the Fixing America’s Surface Transportation (FAST) Act in the last few days. The Act adds new Section 7345 to the Internal Revenue Code. This provision provides that if the IRS Commissioner certifies that a taxpayer is delinquent in his her federal taxes to the tune of $50,000 or more, the Secretary of State can take action to deny, revoke or limit the taxpayer’s passport. That is, persons with delinquent taxes may now be barred from leaving the U.S.

The U.S. has enforced its taxes for over one hundred years with civil and criminal enforcement mechanisms. Apparently, that enforcement arsenal is no longer sufficient, and U.S. citizens in financial straits will now lose their travel “privileges.” I wonder how many federal government employees, including members of Congress, will feel the heat of this.

IRS Makes One of Two Changes for Small Businesses, Farms and Ranches

The Internal Revenue Service has agreed to a change that will make life a little easier for many small businesses and family farms and ranches. Attention shifts now to another proposed tax law change that agriculturalists, farm equipment manufacturers and ag groups support.

The IRS is raising the “safe harbor threshold” for expensing the purchase, acquisition or improvement of tangible property from $500 to $2,500. That will simplify record-keeping

24

requirements for taxpayers who made purchases of items such as smart phones.

The change takes effect Jan. 1, 2016.

Both North Dakota senators — Republican John Hoeven and Democrat Heidi Heitkamp — say they worked to have the threshold raised from $500 to $2,500 and that the revision will benefit taxpayers in the state.

The question now is what will become of the $500,000 limitation for Section 179 expensing.

Section 179 of the U.S. Internal Revenue Code had allowed farmers and other businesspeople to deduct up to $500,000 of new or used equipment purchased during the tax year. As things stand now, however, the limit for the 2015 tax year will be limited to $25,000.

Farmers and ag groups have pushed to restore the $500,000 limitation. There’s been speculation that the $500,000 limitation — which is supported by business groups outside agriculture, as well — will be restored or extended late in the year.

“I’m optimistic that we’ll get something done by the end of the year,” Hoeven told Agweek Thursday.

But he’s uncertain whether the higher limitation will be restored permanently, an option he supports, or just for two years.

Heitkamp said this in a statement sent to Agweek:

“We need to ease harsh tax burdens on North Dakota’s hardworking farmers and ranchers. As we finish the year, I’m hopeful that Congress will recognize what I’ve long heard from our state’s producers and small business owners – that we need to extend the Section 179 expensing and depreciation provision to provide certainty for farmers and businesses,” she said.

IRS Introduces New Compliance Questions on Form 5500

The Internal Revenue Service (IRS) has revised the Form 5500-series returns for 2015 to include certain Internal Revenue Code compliance questions. A Form 5500 must generally be filed for qualified retirement plans as well as any welfare benefit plan that covered at least 100 participants as of the beginning of the plan year. The new questions are primarily, but not exclusively, directed at qualified retirement plans. For the 2015 plan year, answering the new questions is optional but strongly encouraged.

Optional Compliance Questions

Below is a list of the new questions. In order to help plan sponsors answer these questions, the IRS released corresponding FAQs.

• Did the plan trust incur unrelated business taxableincome during the plan year?• Were in-service distributions made during the planyear?• What is the name of the trustee or custodian?• What is the trustee’s or custodian’s telephone number?• Is the plan a 401(k) plan?• If the plan is a 401(k) plan, does the plan satisfy thenondiscrimination requirements for employee deferrals andemployer matching contributions through a design-basedsafe harbor method or through ADP/ACP testing?• If the ADP/ACP test is used, did the 401(k) plan performtesting using the “current year testing method” for non-highly compensated employees?• Which method is used by the plan to satisfy thecoverage requirements under section 410(b)?• Does the plan satisfy coverage and nondiscriminationtests by combining the plan with any other plans under thepermissive aggregation rules?• Has the plan been timely amended for all required taxlaw changes?• What is the date that the last plan amendment/restatement for the required tax law changes was adoptedand is the tax law change pursuant to the Pension ProtectionAct of 2006 (PPA), the Economic Growth and Tax ReliefReconciliation Act of 2001, or GATT, USERRA, SBJPA,and TRA?• If the plan is a pre-approved master and prototype orvolume submitter that is subject to a favorable IRS opinion or advisory letter, what is the date of that letter and what is the letter’s serial number?• If the plan is an individually-designed plan with afavorable determination letter from the IRS, what is thedate of the last favorable determination letter?• Is the plan maintained in a U.S. territory (i.e. PuertoRico, American Samoa, Guam, the Commonwealth of theNorthern Mariana Islands, or the U.S. Virgin Islands)?

Lastly, the IRS has clarified that for multiple-employer plans these questions should generally be answered at the plan level, not at the participating-employer level.

IRS Power To Revoke Passports Signed Into Law

The passport provision is now official, as President Obama signed the 5-year infrastructure spending Bill. It adds a new section 7345 to the Internal Revenue Code. It is part of H.R. 22 – Fixing America’s Surface Transportation Act, the “FAST Act.” Why are passport covered in the tax code, you might ask? The title of the new section is “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.” The idea goes back to 2012, when the Government Accountability Office reported on the potential for using the issuance of passports to collect taxes.

It was controversial then, but this time sailed through, slipped into the massive highway funding bill, passed here. The section on passports begins on page 1,113. The joint explanatory statement is here, beginning on page 38. The law says the State Department can revoke, deny or limit passports for

25

anyone the IRS certifies as having a seriously delinquent tax debt in an amount in excess of $50,000. Administrative details are scant. It could mean no new passport and no renewal. It could even mean the State Department will rescind existing passports.

The State Department will evidently act when the IRS tells them, and that upsets some people. We think of passports when traveling internationally, but some people may find that passports are required for domestic travel in 2016. That could make the IRS hold even more serious. The list of affected taxpayers will be compiled by the IRS. The IRS will use a threshold of $50,000 of unpaid federal taxes. But this $50,000 figure includes penalties and interest. And as everyone knows, interest and penalties can add up fast.

Notably, if you are contesting a proposed tax bill administratively with the IRS or in court, that should not count. That is not yet a tax debt. There is also an administrative exception, allowing the State Department to issue a passport in an emergency or for humanitarian reasons. But how that will work isn’t clear, nor is the amount of time it will take to get special dispensation. You would still be able to travel if your tax debt is being paid in a timely manner, as under a signed installment agreement. The rules are not limited to criminal tax cases or where the government thinks you are fleeing a tax debt.

In fact, you could have your passport revoked merely because you owe more than $50,000 and the IRS has filed a notice of lien. A $50,000 tax debt including interest and penalties is common, and the IRS files tax liens routinely. It’s the IRS way of putting creditors on notice. The IRS can file a Notice of Federal Tax Lien after the IRS assesses the liability, sends a Notice and Demand for Payment, and you fail to pay in full within 10 days.

The right to travel has been recognized as fundamental,

both between states and internationally. And although some restrictions have been upheld, it is not clear that this measure will pass the constitutional test if it is challenged. Speaking of challenge, it is not off-topic to mention FATCA, the Foreign Account Tax Compliance Act.

FATCA penalizes foreign banks that don’t hand over American account holders. There are approximately eight million Americans living overseas, many of whom are still reeling from FATCA compliance problems.

Editor’s Note: Our appreciation for his sharp eyes goes to ncpeFellowship Member Cos Borsumate for this contribution. Thank you Cos.

Eight Facts about New ACA Information Statements

Many individuals will receive new ACA information statements for the first time in 2016:

• Form 1095-B, Health Coverage

• Form 1095-C, Employer-Provided Health InsuranceOffer and Coverage

Here are eight facts about these forms:

• While the information on these forms may help youcomplete your tax return, they are not needed to file. Youcan file your federal tax return even if you have not receivedone of these statements.

• Form 1095-B, Health Coverage, is used by coverageproviders to report certain information to the IRS and totaxpayers about individuals who are covered by minimumessential coverage and therefore aren’t liable for theindividual shared responsibility payment.

• Form 1095-C, Employer-Provided Health InsuranceOffer and Coverage is used by employers with 50 or more full-time employees, including full-time equivalent employees,in the previous year use, to report the information requiredabout offers of health coverage and enrollment in healthcoverage for their employees.

• Form 1095-C is also used by employers that offeremployer-sponsored self-insured coverage to reportinformation to the IRS and to employees about individualswho have minimum essential coverage under the employerplan and therefore are not liable for the individual sharedresponsibility payment for the months that they are coveredunder the plan.

• Individuals who worked for multiple employers that arerequired to file Form 1095-C may receive a Form 1095-Cfrom each employer.

• The Form 1095-B and 1095-C sent to you may includeonly the last four digits of your social security number or

26

taxpayer identification number, replacing the first five digits with asterisks or Xs.

• In general, 1095-B and 1095-C must be sent on paperby mail or hand delivered, unless you consent to receivethe statement in an electronic format.

• Health coverage providers should furnish a copy ofForm 1095-B, to you if you are identified as the “responsibleindividual.”

‘Cash Only’ Small Business Targeted By IRS: The Case Of Nick’s Roast Beef

Nick’s Roast Beef celebrated 40 years of being in business during 2015, an amazing accomplishment for small business owners/partners Nicholas Koudanis and Nicholas Markos. Its single location in North Beverly, MA (about 20 miles north of Boston) is as noted for its sliced roast beef sandwiches as it is for the arduous navigation of its tight parking lot. The place is packed from 10:00 am until closing at 10:00pm and patrons not only rave about the food, they are evangelical about spreading the word globally. Photos throughout the restaurant depict tourists holding their “Nick’s Roast Beef” bumper sticker at locales ranging from Mt. Everest to the Sydney Opera House. It is “cash only” at Nick’s and an ATM in the corner accommodates the modern customer who carries more plastic than currency. On December 10, things took a bad turn for the restaurant’s owners. They were indicted on 17 federal criminal counts.

Koudanis, his wife, his son and Markos were arrested for diverting cash to themselves and not paying taxes to the Internal Revenue Service (IRS). Based on the indictment, not only were they paying themselves in cash, but also suppliers and employees. Over the past seven years the government said that Koudanis and Markos avoided paying nearly $2 million in taxes. An IRS audit in 2013 showed sales of about $1 million when the government claims that it was really over $2.3 million. There were similar ratios of real income versus the alleged doctored amounts in other years.

According to defense attorney Joel Androphy, who is not involved with this case, the federal government can easily target small businesses who tend to be less sophisticated in their business practices and financial controls. “Businesses like this are low hanging fruit for prosecutors,” Androphy said, “which is a shame because large corporations are skating around paying taxes because of the inefficiency of the IRS Whistleblower program.” That program is supposed to reward

whistleblowers who tell on companies and individuals who are avoiding paying taxes. Androphy says there are hundreds of millions that the government could go after but those cases can be complicated. He has a point, in a report from Watchdog.org, the IRS program is mired in delays and the majority of the cases they work are for claims under $2 million–that hits small businesses hard.

While everyone should play by the rules, the rules seem to be enforced more on those who can least afford to fight. Defending a criminal case is expensive and the U.S. government has the resources to go as long as it takes to get a conviction. The charges, in the case of Nick’s filing false tax returns and obstruction, do not carry long prison terms, but prosecutors are known for adding more charges later in order to pressure defendants into a guilty plea. In cases involving large amounts of cash, that could mean money laundering charges and that could lead to more than a decade in prison. “Nobody should cheat,” Androphy said, “but the rich and large corporations can fight the government in a way the small businessman cannot.”

Accepting credit cards for business transactions comes with convenience but also high fees that can cut into the bottom line of the ‘mom and pop’ shops . Having open invoices and clients that take a long time to pay is also a heavy burden for small businesses that are often getting money in as fast as they are paying it out. So cash-based businesses are the best solution but that comes with increased scrutiny from the government and risks associated with crossing legal lines. The Bank Secrecy Act from 1970 is getting renewed interest for fighting terrorism, drugs, and money laundering, but it also catches up with small businesses like Nick’s. Banks have become the watchdogs who are supposed to monitor large cash deposits and withdrawals. While the indictment did not state how the Nick’s investigation progressed, one can be sure that the popular restaurant was being monitored. At the time of their arrest, the Koudanis’s had $1.6 million in cash in a safe in their home.

The fear in the community, which is near where I live, is not that some crime family is potentially running a deli, but instead concern for the families charged and whether the restaurant will close. The success of the business has been because at least one of the two owners (65 and 70 years old) could be seen behind the counter working everyday. I have visited Nick’s a number of times and it is a place where you see little league teams gather after games. It is where families go after church on the weekend and it is where hardworking people head to for lunch. Policeman, fireman, doctors, nurses, all can be seen walking out the door with a recognized white paper bag of hot food from Nick’s that is more take-out than dine-in. It has become a place that identifies with the people and the people identify with it.

Many times, the public’s perception is that white collar crime prosecutions seem to bypass Wall Street, that may or may not be true. However, they hit Main Street America very hard and these stories rarely make national news–they barely make the local news. Few have the resources to mount a legal

27

defense and save their company at the same time. Tonight, we are going to help a bit on both fronts because we will be eating at Nick’s. It is not because we would support anyone breaking the law, in fact that has yet to be proven, but we believe in supporting small businesses that have supported our community, and did I mention they have a great sandwich?

Cases like this play out across the U.S., however, we should hope in this case that justice should also take into consideration the larger impact that the outcome will have on the people in the surrounding community. If banks are too big to fail, then businesses like Nick’s are too essential to fail. There should be a way to resolve this matter in some way other than the usual zero sum game of justice of people being tossed in prison for years and prosecutors proclaiming we are better off as a result.

Interest Rates Remain the Same for the First Quarter of 2016

The Internal Revenue Service announced that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2016, as they were in the previous quarter. The rates will be: • three (3) percent for overpayments [two (2) percent inthe case of a corporation];

• three (3) percent for underpayments;• five (5) percent for large corporate underpayments;

and• one-half (0.5) percent for the portion of a corporate

overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate determined during Oct. 2015 to take effect Nov. 1, 2015, based on daily compounding.

New Early Interaction Initiative Will Help Employers Stay Current with Their Payroll Taxes

The Internal Revenue Service has launched a new initiative designed to more quickly identify employers who are falling behind on their payroll or employment taxes and then help them get caught up on their payment and reporting responsibilities. The effort is called the Early Interaction Initiative.

The initiative is designed to help employers stay in compliance and avoid needless interest and penalty charges. The initiative will seek to identify employers who appear to be falling behind on their tax payments even before an employment tax return is filed. The IRS will offer helpful information and guidance through letters, automated phone messages, other communications and in some instances, a visit from an IRS revenue officer.

In the past, the first attempt by the IRS to contact an employer having payment difficulties often did not occur until much later in the process, after the employment return was filed and the employer’s unpaid tax obligation had already begun to spiral out of control.

“Employers play a key role in our tax system, and we want to offer them the information and assistance they need to carry out that responsibilities,” said IRS Commissioner John Koskinen. “With early interaction, we will be able to offer help weeks or even months sooner, when it can often do the most good.”

Two-thirds of federal taxes are collected through the payroll tax system. By law, employers must withhold federal income, Social Security and Medicare taxes from employees’ wages.Shortly after employees are paid, employers typically must turn over withheld amounts, along with employer-matching contributions, to the federal government. Though payment schedules vary, these payments, known as federal tax deposits (FTDs), are made electronically through the Electronic Federal Tax Payment System EFTPS. These FTDs are later reported on a return , usually filed quarterly, with the IRS.

Employers, especially those facing liquidity difficulties, sometimes inappropriately divert funds withheld from employees’ pay for working capital or other purposes. Even when well-intentioned, such diversions can quickly result in mounting tax liabilities for the employer, along with interest and penalties, potentially threatening the employer’s financial viability.

Also, employers may have a payroll processor or others handling their payroll, withholding, matching, remittance, and/or reporting responsibilities, which sometimes leads to miscommunication between the parties and may result in tax deposits and reporting not being made as required. Such miscommunication may also quickly result in mounting tax liabilities, interest and penalties that are costly and risky to the business.

To help employers avoid these problems, the new IRS initiative will monitor deposit patterns and identify employers whose payments decline or are late. Employers identified under this initiative may receive a letter reminding them of their payroll tax responsibilities and asking that they contact the IRS to discuss the situation. In addition, some employers may receive automated phone messages from the IRS providing information and assistance. Where appropriate, an IRS revenue officer will also contact some of these employers

28

at their place of business.

IRS Criminal Investigation Releases Fiscal Year 2015 Annual Report

The Internal Revenue Service announced the release of its IRS Criminal Investigation (CI) annual report, reflecting significant accomplishments and enforcement actions taken in fiscal year 2015. Focusing on tax-related identity theft, money laundering, public corruption, cybercrime and terrorist financing, IRS CI initiated 3,853 cases in FY 2015.

“Our criminal investigators continue to bring complex and meaningful cases that have a significant impact on tax administration,” said John Koskinen, IRS Commissioner. “This work also plays an important deterrent effect on would-be criminals, helping ensure fairness for taxpayers and protecting voluntary compliance in our tax system. The report is a tribute to the important work done by IRS Criminal Investigation.”

“This report reflects the extremely high level of commitment that CI agents bring to the job and the great case work accomplished in the past year,” said Richard Weber, Chief, IRS Criminal Investigation. “But the story that the report tells this year is that fewer agents do mean fewer cases. I’m extremely proud of all that we accomplished in spite of our budget challenges, but the inability to hire is really taking a toll.”

The annual report is released each year for the purpose of highlighting the agency’s successes while providing a historical snapshot of the make-up and priorities of the organization. The very first Chief of IRS CI, Elmer Lincoln Irey, served from 1919 to 1946 and envisioned releasing such a document each year to showcase the agency’s work. CI is the only federal law enforcement agency with jurisdiction over federal tax crimes. This year, CI again boasted the highest conviction rate in all of federal law enforcement— 93.2%.

CI is routinely called upon by prosecutors across the country to be the lead financial investigative agency on a wide variety of financial crimes including international tax evasion, identity theft and transnational organized crime.

“While our highest priority is to enforce the nation’s tax laws, we cannot underestimate the deterrent effect we are having on would-be criminals and the impact we are having on tax administration,” said Weber. “I’m certain that a majority of Americans who follow the law would tell you that they want consequences for those who do not.”

CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in a manner to foster confidence in the tax system and compliance with the law. The 50-page report summarizes a wide variety of IRS CI activity throughout the fiscal year and includes case summaries on a range of tax crimes, money laundering, public corruption, terrorist financing and narcotics trafficking financial crimes.

The cases in this year’s report represent the diversity and complexity of CI investigations. They touch almost every part of the world and were again some of the most successful in the history of CI. In May, indictments were unsealed in the FIFA investigation, a case that continues to this day. At the time, the investigation involved coordination with police agencies and governments in 33 countries and was one of the most complicated international white-collar cases in recent memory. Ross Ulbricht, the creator and owner of the “Silk Road” website, was sentenced to life in prison and ordered to forfeit more than $183 million. A Michigan man, Dr. Farid Fata was sentenced to 540 months in prison and ordered to forfeit $17 million for his role in a health care fraud scheme. Fata purposefully misdiagnosed people with cancer, pumping their bodies with chemotherapy that they did not need, in order to get rich.

“I’m proud of IRS-CI and the reputation that this agency has as the best financial investigators in the world. We have a long and storied history and we continue to write new chapters to that history each year,” said Weber. “Regardless of our budget situation, I am proud that we have not lost sight of our impact or mission and that the quality of our cases remains high.”

IRS Criminal Investigation Scales Back Use of Cell Phone Tracking

The Internal Revenue Service’s Criminal Investigation unit released its annual report as the group contends with a shrinking budget and recent controversy over its use of cell phone tracking technology.

Richard Weber, IRS Chief of Criminal Investigation

The report highlights the IRS CI’s significant accomplishments and enforcement actions taken in fiscal year 2015. Focusing on tax-related identity theft, money laundering, public corruption, cybercrime and terrorist financing, IRS CI initiated 3,853 cases in FY 2015.

“Our criminal investigators continue to bring complex and meaningful cases that have a significant impact on tax administration,” said IRS Commissioner John Koskinen in a statement. “This work also plays an important deterrent effect on would-be criminals, helping ensure fairness for taxpayers and protecting voluntary compliance in our tax system. The report is a tribute to the important work done by IRS Criminal Investigation.”

29

During a press conference IRS Criminal Investigation chief Richard Weber discussed some of the findings in the report, as well as how the IRS has changed its policy on the use of cell site simulators for tracking cell phones. He noted that IRS CI has issued reports on its activities going back to 1919 and has been issuing the reports on an annual basis for the past three years since he took over as chief.

“The report showcases the great work that my special agents across the country have worked on over the last year on a host of different types of cases, focusing on tax fraud and all forms of financial crime, money laundering, cybercrime, terrorist financing and corruption,” he said.

The report also shows the impact of budget cuts on the IRS over the last few years. “We can’t get around the simple truth that we’re going to do less with less resources,” said Weber. “We’re not going to be able to do more with less, although I still think the quality of our cases have been significant and the types of cases have been significant. The one statistic I’m incredibly proud of is our conviction rate, which was 93.2 percent, the highest conviction rate of all the law enforcement agencies in this country. I think that shows the sustained quality of the work that we do in the agency.”

Among the recent high-profile cases are the IRS’s work on uncovering corruption among top soccer officials at FIFA, working with Department of Justice officials, and the conviction of Ross Ulbricht, the creator and owner of the “Silk Road” website, who was sentenced to life in prison and ordered to forfeit more than $183 million for his role in money laundering and drug charges.

Weber was asked about recent revelations that IRS criminal investigators have been using cell phone tracking technology through a cell site simulator device. In a letter last week to Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, Koskinen said the IRS would not use cell phone tracking technology without first getting a warrant.

“CI issued a policy on November 30 which basically tracked the Department of Justice policy, similar to the Department of Homeland Security policy,” said Weber. “Effective November 30, we will follow the DOJ guidance, which is that our agents will obtain search warrants any time that we use a cell site simulator. That policy was distributed to our agents on the 30th of November.”

He explained further about the policy. “I do know that my agents have followed the law every time that they utilized the cell site simulator device,” he said. “We have one device that we were using since 2012. We used it in 11 grand jury cases, and 37 phone numbers were recorded that were connected to the 11 cases. We work with the U.S. Attorney offices and every one of those cases our agents work with a federal prosecutor and we follow all U.S. Attorney procedures as well as the law.”

Weber noted that the law does not require IRS CI to obtain search warrants, although the Department of Justice came out with guidelines in October requiring that agents and

prosecutors should now obtain a search warrant.

“We decided to follow that guidance,” he said. “Prior to that, there was no requirement at all to obtain a search warrant, and we followed every aspect of criminal law and criminal procedure.”

He stressed that the IRS followed the law in every instance, but it has now changed its policy to align with the Justice Department’s policy. “We have not used the device since October, the day that the Justice policy came out,” he added. “We suspended the use of the tool until our policy was finalized and sent out on November 30.”

The cases where the devices were used included cases involving murder, attempted murder and gun trafficking.

Weber also gave an update on the IRS’s efforts to combat identity theft. He noted that while the effort appeared to be working, particularly in Florida, as the IRS stepped up its efforts to work with state and local law enforcement, the identity thieves appear to be moving from Florida to other parts of the country such as the Charlotte, Dallas and Atlanta areas.

Will Scammers Hide Behind New Law for Private Tax Collectors?

Internal Revenue Service Commissioner John Koskinen.

No one likes bill collectors, but now Uncle Sam will start using them to collect taxes.

And that could play right into the hands of crooks, who already have been very successful in cheating taxpayers out of their money.

Congress, in a law that took effect this month, instructed the Internal Revenue Service (IRS), against its objections, to use private collection agencies for “outstanding inactive tax receivables.” Before the legislation passed, the IRS Taxpayer Advocate Service pointed to a number of problems with this approach, including that it loses money and had failed twice before – a characterization that congressional proponents reject.

30

January, when his office reported 290,000 complaints and almost 3,000 victims losing a total of $14 million.

“There is no question that the ongoing telephone scam involving the IRS will prove challenging to the IRS and debt collectors working with it,” George said Friday. “Therefore, it is imperative that the IRS effectively educates taxpayers and debt collectors to ensure that the scammers don’t have another vehicle in which to engage in their illegal activity.”

When he issued the October warning, George said, “This scam has proven to be the largest of its kind that we have ever seen. The callers are aggressive, they are relentless, and they are ruthless. Once they have your attention, they will say anything to con you out of your hard-earned cash.”

Sounds like bill collectors.

Scammers claim taxes are overdue and must be satisfied with a prepaid debit card or with a wire transfer, according to the scam alert. Scammers have threatened tax debtors with arrest, deportation and even the loss of a driver’s license.

“If someone unexpectedly calls claiming to be from the IRS and uses threatening language if you do not pay immediately, that is a sign that it is not the IRS calling and your cue to hang up,” George said. “Again, do not engage with these callers. If they call you, hang up the telephone.”

But now, will taxpayers know whether the callers are legit or not?

Internal Revenue Service Reminds Taxpayers to Plan Ahead If You Need a Tax Transcript

The IRS reminds taxpayers that the quickest way to get a copy of their tax transcript is to order it online using the Get Transcript application on IRS.gov. By planning ahead, they should receive their transcript in the mail within five to 10 days from the time the IRS receives the request online.

The IRS continues to work to bring the viewable/printable functionality of the application back online in the near future with enhanced identity protection security features. In the meantime, taxpayers can still request a mailed transcript by going online to Get Transcript.

Though taxpayers should always keep a copy of their tax return for their records, some may need the information from filed tax returns for many reasons. This includes college financial aid applicants or taxpayers who have applied for a loan to buy a home or start a business.

If a taxpayer is returning to college this January and applying for financial aid, they should check with their financial aid department at school to see if they will need a copy of their transcript before they start classes. Frequently, students get all the tax return information they need on the FAFSA application via the IRS Data Retrieval Tool.

But since those attempts, there has been a growing menace that makes the use of bill collectors even more problematic. Generally, the IRS does not contact taxpayers by phone. But legitimate bill collectors and tax scammers do. Once the private collection program begins, which Congress says should be early next year, it will be even more difficult to distinguish between the real and fake bill collectors.

“We are concerned about that,” IRS Commissioner John Koskinen said in an interview, while noting his efforts to comply with the law. “We are doing our best to make sure the existence of private tax collectors doesn’t complicate our public awareness campaign about how the scams work.”

A major part of that campaign is telling taxpayers “if you are surprised to be hearing from us, you’re probably not hearing from us because you won’t hear from us first by phone,” Koskinen said.

In July, he told a Senate hearing: “So now if you suddenly have private debt collectors calling up, saying they’re from the IRS, they’re going to run into the work that we and the inspector general and everybody else has had warning taxpayers.”

Nina Olson, the national taxpayer advocate, echoed that message . “There has been a huge spike in the number of scam callers seeking immediate ‘tax payments’ from unsuspecting taxpayers in the last couple of years. The IRS has responded by emphasizing it doesn’t make outbound calls of that kind. As this program stands up, there is a risk calls from private debt collectors will muddy that message,” she said. “There is also a risk scammers will study the dynamics of the private collection agency calls and try to mimic them to fool taxpayers. As the IRS develops the program’s procedures, it will have to take steps to minimize the risk of taxpayer confusion.”

Sen. Charles Grassley (R-Iowa), a supporter of private tax collectors, plays down that risk, noting that the private companies should mail taxpayers before calls are made. Although the law’s language does not require such letters, a statement from his office pointed to a congressional “joint explanatory statement” that says: “First, the private debt collection company contacts the taxpayer by letter.”

Will that be enough to remove any confusion between the legally mandated bill collectors and the scammers?

Calls by scam artists to unsuspecting taxpayers have become a booming business. The Treasury Inspector General for Tax Administration received 736,000 complaints in the two years ending in October. During that period, the inspector general’s office said, it “has become aware of approximately 4,550 victims who have collectively paid over $23 million as a result of the scam, in which criminals make unsolicited calls to taxpayers fraudulently claiming to be IRS officials and demanding that they send them cash via prepaid debit cards.”

The scams are increasing, according to Inspector General J. Russell George, who has urged taxpayers to be on “highalert.” The October report showed significant growth from

31

• Letter 5621 asks the taxpayer to review his/her taxreturn to determine if the children claimed each met all thequalifying child rules for the credit.

• Letter 5621-A asks the taxpayer to review his/her taxreturn to determine if all the income and expenses reportedfrom self-employment on Schedule C or Schedule C-EZare complete and correct.

Tax Pros in Trouble

Former Owner and Former Supervisor of “Direct Tax” Preparation Business Sentenced for Tax Fraud

Jessica Hills and Kiisha Hills have been sentenced for their roles in a tax fraud scheme involving Direct Tax, a tax preparation business with three locations in the Atlanta-College Park area. Jessica Hills owned and operated Direct Tax, and her sister, Kiisha Hills, acted as a supervisor in one office.

“The Hills’ stole the identities of thousands of taxpayers and then used the information to steal millions of dollars from the U.S. Treasury by filing fraudulent tax returns,” said U. S. Attorney John Horn. “Sadly, these “false filing” schemesare now all too common. As we approach tax filing season,this case is a reminder that taxpayers should carefully guardtheir Social Security numbers and other sensitive personalinformation and monitor any tax filing made on their behalf.”

“Return Preparer fraud is a priority for IRS Criminal Investigation and we have committed many resources to investigating and prosecuting cases just like this one,” stated Veronica F. Hyman-Pillot, Special Agent in Charge. “It is our hope that today’s sentencing will send a strong message to other return preparers that committing refund fraud is a crime and can result in jail time.”

“Using the Social Security number of another to commit fraud, unfortunately, has become a common occurrence”, said Margaret Moore-Jackson, Special Agent-in-Charge, Social Security Administration-Office of the Inspector General. “SSA-OIG special agents are well-trained to detect, investigate, and locate identity thieves,” and that her office, “will utilize collaborations between law enforcement agencies at all levels, and continue to present cases to the U.S. Attorney’s Office to prosecute those who commit identity theft and financial fraud.”

According to U.S. Attorney Horn, the charges and other information presented in court: During tax years 2012, 2013, and 2014, Direct Tax filed over 2,000 federal income tax returns, seeking millions of dollars in refunds. These returns included either fraudulent information designed to increase the refund amount, or were filed using stolen identities. Direct Tax not only continued to file fraudulent tax returns after College Park police executed a search warrant at the College

Similarly, if a taxpayer plans to apply for a loan, they should ask their financial institution if a transcript will be necessary so they can plan ahead and have it at the appropriate time.

The fastest way to get a transcript is through the Get Transcript tool on IRS.gov. Although the IRS temporarily stopped the online viewing and printing of transcripts, Get Transcript still allows taxpayers to order their transcript online and receive it by mail. Taxpayers simply click the “Get a Transcript by Mail” button to order the paper copy of their transcript and have it sent to their address of record. Among the options available:

• To order a transcript online and have it delivered bymail, go to IRS.gov and use the Get Transcript tool.

• To order by phone, call 800-908-9946 and follow theprompts.

• To request an individual tax return transcript by mailor fax, complete Form 4506T-EZ, Short Form Requestfor Individual Tax Return Transcript. Businesses andindividuals who need a tax account transcript should useForm 4506-T, Request for Transcript of Tax Return.

The IRS will mail the transcript to the address of record entered on the prior year’s tax return. The mailed transcript is an official document. It does not need to be a “certified” copy as is the case with some other documents. If a taxpayer has moved since they last filed a tax return with the IRS, they need to first submit a Form 8822, the Change of Address form, to ensure that the transcript is mailed to the correct address. Allowing time for the Form 8822 is another reason for taxpayers to plan ahead for their transcript needs.

If a taxpayer is applying for financial aid, they are encouraged to use the IRS Data Retrieval Tool on the FAFSA website to easily import their tax return information to their financial aid application. The temporary shutdown of the Get Transcript tool does not affect the Data Retrieval Tool. Taxpayers may also click on the FAFSA help page for more information.

If they are applying for a mortgage, most mortgage companies only require a tax return transcript for income verification purposes. Most of these companies participate in our IVES (Income Verification Express Service) program and can request (with the taxpayer’s consent) to have a transcript sent directly to the financial institution. If a taxpayer needs to order a transcript, they should follow the process described above and have it mailed to the address the IRS has on file for them.

EITC Letters

The IRS is sending letters to some taxpayers who may not be entitled to some or all of the Earned Income Tax Credit claimed on their 2014 tax return. If your client(s) receive a letter, 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:

32

and prosecute those engaged in these illegal activities. Our agency will continue to work with the United States Attorney’s Office to aggressively protect innocent taxpayers and preserve the integrity of our tax system. Participation in refund fraud schemes does not pay

Alabama Resident Indicted For Stolen Identity Tax Refund Fraud Scheme

An Alabama resident was arrested after being indicted on Dec. 9 by a federal grand jury sitting in Montgomery, Alabama, on 15 counts of wire fraud, 15 counts of aggravated identity theft and two counts of passing U.S. Treasury checks with a false endorsement, announced Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division and U.S. Attorney George L. Beck, Jr. of the Middle District of Alabama.

According to the allegations in the indictment, James Vernon Battle, a resident of Montgomery County, used stolen personal identification information to prepare and file false federal income tax returns for tax years 2013 and 2014 for the purpose of obtaining fraudulent tax refunds. Battle directed the Internal Revenue Service (IRS) to issue the requested refunds by depositing the funds onto prepaid debit cards and by issuing U.S. Treasury checks.

If convicted, Battle faces a statutory maximum sentence of 20 years in prison for each count of wire fraud, a mandatory minimum sentence of two years in prison for aggravated identity theft and a statutory maximum sentence of 10 years in prison for each count of passing a U.S. Treasury check with a false endorsement. He also faces substantial monetary penalties and restitution.

Acting Assistant Attorney General Ciraolo and U.S. Attorney Beck commended special agents of IRS-Criminal Investigation and the U.S. Secret Service, who investigated the case, and Trial Attorneys Michael C. Boteler and Robert J. Boudreau of the Tax Division and Assistant U. S. Attorney Jonathan Ross of the Middle District of Alabama, who are prosecuting this case

Fontana: Former Tax-preparation Business Owner Admits Filing False Returns

The former operator of a Fontana tax preparation business pleaded guilty to being involved in the filing of false returns totaling more than $800,000, say Internal Revenue Service

Park location, it also filed fraudulent tax returns after the IRS canceled its electronic filing number and after Jessica L. Hills was detained on federal charges. In total, Direct Tax filed returns claiming over $4 million in tax refunds.

Jessica L. Hills, 30, of Atlanta, Georgia, was sentenced by U.S. District Judge Steve C. Jones to 12 years in federal prison, followed by three years supervised release, and ordered pay restitution in the amount of $954,756.00 to the IRS and $62,528.00 to Georgia Department of Revenue. Jessica L. Hills was convicted on these charges on August 25, 2015, after she pleaded guilty.

Kiisha Hills, 26, of Atlanta, Georgia, was also sentenced by U.S. District Judge Steve C. Jones to four years and three months in federal prison, followed by three years supervised release, and ordered to pay $346,850.00 in restitution to the IRS, and $9.248 to the Georgia Department of Revenue. Kiisha Hills was convicted on these charges on September 14, 2015, after she pleaded guilty.

This case was investigated by the Internal Revenue Service Criminal Investigation, Georgia Department of Revenue, Social Security Administration, and U.S. Secret Service.

Baton Rouge Resident Convicted Of Stealing Federal Dollars In Fraudulent Tax Refund Scheme

United States Attorney Walt Green announced that LAGUARDIA COSTON, age 28, of Baton Rouge, Louisiana, pled guilty before Senior U.S. District Judge James J. Brady to theft and conversion of government funds, in violation of Title 18, United States Code, Section 641. During the guilty plea hearing, COSTON admitted to preparing and filing numerous fraudulent tax returns using stolen personal identifiers, such as names and social security numbers, of 73 separate victims. In addition, COSTON admitted to unlawfully obtaining $102,000 in tax refunds from the U.S. Treasury.

As a result of IRS data analysis, COSTON was identified as a suspect in the preparation of fraudulent tax returns. In many instances, COSTON used names and social security numbers of unknowing victims to prepare fraudulent W-2 Forms that were then used to electronically file the fraudulent tax returns. COSTON also admitted to unlawfully obtaining tax refunds in the form of U.S. Treasury checks and electronic bank deposits.

U.S. Attorney Green stated: “This case is another example of my office working in conjunction with the IRS to aggressively identify and prosecute criminals who use stolen identities to defraud the United States and unlawfully obtain money to satisfy their own greed. We look forward to continuing our work with IRS-CI and other investigative agencies in the fight against such conduct.”

Special Agent in Charge of Internal Revenue Service Criminal Investigation, Jerome R. McDuffie, stated: “We are pleased with Ms. Coston’s conviction. Identity theft is an on-going problem and IRS-CI will continue to vigorously investigate

33

Miramar Tax Preparer Admits to Filing Fraudulent Returns

The owner of a tax preparation business on Miramar Road admitted in federal court that she filed more than 4,000 false income tax returns, and obtained more than $7 million in bogus refunds, according to the U.S. Attorney’s Office.

Melissa Ann Vega, the 44-year-old owner of L&T Works, pleaded guilty to conspiracy to file false, fictitious, and fraudulent claims for federal tax refunds, tax evasion and aggravated identity theft before U.S. Magistrate Judge Bernard Skomal, prosecutors said.

The plea agreement said that Vega conspired with others to file the false income tax returns with the Internal Revenue Service without the knowledge of her clients.

Prosecutors said that, among other things, they claimed thousands of dollars in false education expenses and tax credits for which the clients were not qualified. They also stole identity information from clients, including the personal data of minors.

“Tax return preparers owe a duty to their clients to prepare tax returns that are accurate and comply with the law,” said U.S. Attorney Laura Duffy. “Tax return preparers who defraud the IRS out of millions of dollars, intentionally falsify tax returns, and steal the identities of minor dependents breach the public’s trust and undermine confidence in the tax system.”

The defendant, who prosecutors said is an ex-con also known as Lisa Vega, is scheduled to be sentenced March 4. She was also required to relinquish ownership of several firearms seized in a raid on her home in April.

Three co-defendants — Tammie Cowles, Stephen Elliott, and Justin Vega — previously entered guilty pleas to conspiracy to file false claims for tax refunds. Justin Vega is Melissa Vega’s son.

Their sentencing hearings are scheduled for early next year.With a new filing season right around the corner, Duffy reminded the public to always review a copy of any tax return prepared and filed on their behalf, and to be skeptical of tax preparers who offer to obtain substantial tax refunds.

officials.

Kismaea Rouzan owned and operated Mobile Tax Preparers in 2011 and 2012.

She faces a maximum prison term of six years during a sentencing hearing set for Feb. 29. She pleaded guilty Monday, Nov. 30, in U.S. District Court in Los Angeles to two counts of aiding and assisting in the preparation of false tax returns.

“Rouzan obtained personal identification information ... of taxpayers from ‘runners’ who were also involved in the fraudulent tax preparation scheme,” investigators said in a written statement. “Rouzan used the ... information to prepare fraudulent tax returns.

Two Massachusetts Men Indicted In Massive Stolen Identity Tax Refund Fraud Scheme

A federal grand jury sitting in Boston returned an indictment , which was unsealed charging two Massachusetts residents with conspiracy to defraud the United States, theft of government property, access device fraud and aggravated identity theft, announced Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division, U.S. Attorney Carmen M. Ortiz for the District of Massachusetts, and Special Agent in Charge William Offord of Internal Revenue Service-Criminal Investigation (IRS-CI), Boston Field Office.

Furvio Flete-Garcia, 42, and Juan Santiago, 36, both of Lawrence, Massachusetts and nationals of the Dominican Republic, are alleged to have participated in a scheme to prepare and file fraudulent federal income tax returns using stolen identities for the purpose of obtaining U.S. Treasury tax refund checks. According to the indictment, during 2013 and 2014, Flete-Garcia and Santiago possessed more than 800 names and social security numbers of U.S. citizens including Puerto Rican residents, which Santiago sold to another individual for the purpose of using those identities to prepare and file fraudulent federal income tax returns. The indictment further alleges that Flete-Garcia and Santiago sold more than 16 U.S. Treasury tax refund checks with a total face value of more than $100,000 to the same individual. These tax refund checks were issued by the IRS as a result of the fraudulent income tax returns that were filed using the stolen identities.

Acting Assistant Attorney General Ciraolo, U.S. Attorney Ortiz and Special Agent in Charge Offord thanked agents of IRS-CI, Homeland Security Investigations, U.S. Secret Service and the Social Security Administration’s Office of the Inspector General, who investigated the case and Senior Litigation Counsel Corey J. Smith of the Tax Division, who is prosecuting the case.

ncpeFellowship MembersAdd Value

To Their Clients

34

Department’s Tax Division.

Rodney Chestnut, a retired corrections officer for the New York City Department of Corrections, pleaded guilty to count one of the pending indictment, which alleged that between 2008 and 2012, he participated in a scheme to submit false tax returns seeking fraudulent income tax refunds in excess of $3.4 million to the Internal Revenue Service (IRS). According to the indictment, Chestnut worked with Clive Henry, a former IRS employee in the business of preparing tax returns, and another individual, to recruit clients to this scheme, which involved using fraudulent IRS Forms 1099-OID to falsely claim refunds of taxes that never paid over to the IRS. The indictment alleged that Chestnut, Henry and the other individual collected fees from clients based on a percentage of the refunds received, and supplied the clients with correspondence containing false and frivolous claims to send to the IRS in response to IRS warning letters regarding the false tax returns.

In 2013, a federal court permanently enjoined Chestnut from promoting a tax fraud scheme involving fraudulent Forms 1099-OID and from preparing tax returns for anyone other than himself.

U.S. District Judge Kiyo A. Matsumoto scheduled sentencing for May 12, 2016. Chestnut faces a statutory maximum sentence of five years in prison and a fine of up to $250,000, or twice the loss from the offense. Henry pleaded guilty to conspiracy to defraud the United States on Nov. 17. His sentencing is set for March 23, 2016.

Former Tax Return Preparer Pleads Guilty To Theft Of Public Money And Aggravated Identity Theft

A former tax return preparer and resident of New Orleans, Louisiana, pleaded guilty today to one count of theft of public funds and one count of aggravated identity theft, announced Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division and U. S. Attorney Kenneth A. Polite, Jr. for the Eastern District of Louisiana.

Donald Stewart, 59, prepared tax returns under the business names Stewart’s Tax Service and Stewart LTD from approximately 2001 through 2008, before the Internal Revenue Service (IRS) suspended his Electronic Filing Information Number, according to court documents. Stewart admitted that he used the means of identification of individuals, including their names and social security numbers, without lawful authority, to electronically file false federal income tax returns with the IRS that claimed income refunds. From January 2011 through February 2012, Stewart caused approximately $37,809 in federal and state tax refunds in the names of others to be electronically deposited into bank accounts under his control. Stewart also admitted to cashing or depositing U.S. Treasury checks totaling approximately $539,393 and payable to other individuals at a bank in the New Orleans area.

Former Rochester Tax Preparer Sentenced For Preparing False Returns

William J. Hochul Jr. announced that Jason R. Pastore, 34, of Yonkers, NY, formerly of Rochester, NY, who was convicted of preparing false tax returns, was sentenced to 12 months in prison and ordered to pay restitution totaling $144,604.00 to the Internal Revenue Service by U.S. District Judge Elizabeth A. Wolford.

Assistant U.S. Attorney Richard A. Resnick, who handled the case, stated the defendant operated a tax return business known as JRP Tax Consultants in Rochester. Pastore, without the knowledge of clients, prepared fraudulent federal income tax returns. Specifically, the defendant reported false charitable contributions and un-reimbursed employee expenses on Schedule A, and false business deductions on Schedule C. As a result, clients received tax refunds to which they were not entitled.

For the tax years, 2008, 2009, and 2010, Pastore prepared approximately 234 fraudulent returns which resulted in the Internal Revenue Service paying more than $400,000 in tax refunds to which the clients were not entitled. The defendant also prepared and filed fraudulent tax returns for himself during the same time period.

The sentencing is the result of an investigation by Special Agents of the Internal Revenue Service, Criminal Investigation Division, under the direction of Shantelle P. Kitchen, Special Agent in Charge, New York Field Office.

New York Tax Preparer Sentenced to Year in Prison

A New York tax preparer received a 12-month prison sentence and was ordered to pay $144,604.00 in restitution to the Internal Revenue Service after he was convicted of preparing false tax returns.

Jason R. Pastore, 34, of Yonkers, N.Y., formerly of Rochester, N.Y., was sentenced last week by U.S. District Judge ElizabethA. Wolford.

Pastore operated a tax preparation business known as JRP Tax Consultants in Rochester. Without the knowledge of clients, he prepared fraudulent federal income tax returns, according to prosecutors, reporting false charitable contributions and unreimbursed employee expenses on Schedule A, and false business deductions on Schedule C.

Former New York City Corrections Officer Pleads Guilty To Multimillion Dollar Tax Refund Conspiracy

A Middle Island, New York resident pleaded guilty in the U.S. District Court for the Eastern District of New York to one count of conspiracy to defraud the United States, announced Acting Assistant Attorney General Caroline D. Ciraolo of the Justice

35

U.S. District Judge Eldon E. Fallon set sentencing for March 17, 2006. Stewart faces a statutory maximum sentence of 10 years in prison for the theft of public money charge and a mandatory term of two years in prison for the aggravated identity theft charge, which must run consecutive to any other prison term he receives. As to each count, Stewart also faces a fine of $250,000, or twice the gross gain or loss caused by the offense and terms of supervised release.

Acting Assistant Attorney General Ciraolo and U.S. Attorney Polite thanked special agents of IRS-Criminal Investigation, who investigated the case and Assistant U.S. Attorney Hayden Brockett and Trial Attorney Lauren M. Castaldi of the Tax Division, who prosecuted the case.

Blackstone Man Pleads Guilty to Tax Crime

A Blackstone, Mass. man was sentenced in U.S. District Court in Boston to charges that he impeded the IRS by cashing nearly $3 million in checks from his masonry business at check cashing services to evade the IRS.

John W. Lippolis, 56, was sentenced by U.S. District Judge Richard G. Stearns to one year and one day in prison, one year of supervised release and restitution of $172,759 to the IRS. In June 2015, he pleaded guilty to one count of corruptly endeavoring to impede the IRS.

From 2005 to 2011, Lippolis was the sole proprietor of JW Masonry, a masonry company which operated in Rhode Island and Massachusetts. At various times, he also worked for his son’s business, JM Masonry Inc. When Lippolis was paid by check for work performed, he used check cashing services to cash the checks instead of depositing the funds into a bank account in an effort to avoid IRS scrutiny. Lippolis operated his business in cash, paid workers in cash, and requested that customers not write checks to him for amounts exceeding $10,000, which would trigger a reporting requirement for financial institutions that cashed the checks. Lippolis also failed to file tax returns for many years.

United States Attorney Carmen M. Ortiz and William P. Offord, Special Agent in Charge of the Internal Revenue Service’s Criminal Investigation in Boston, made the announcement today. The case was prosecuted by Assistant U.S. Attorney Sandra S. Bower of Ortiz’s Economic Crimes Unit.

Woman Sentenced to 2 Years in Federal Prison for Preparing Fraudulent Tax Returns

An Indianapolis woman has been sentenced to two years in federal prison for preparing fraudulent tax return earnings for her clients, a release from the United States Department of Justice said.

Amanda Lynch, 34, is a former employee of the H&R Block Co. who started preparing returns from her home, the release said. Returns completed between 2010 and 2013 were flagged by the Internal Revenue Service when a pattern of household

help income, abnormal student loan interest and education credits was detected.

Over 400 returns, the release said, were identified as coming from Lynch’s apartment. In total, she attempted to steal over $400,000.

“Filing false tax returns is stealing; there is no other way to characterize it,” said U.S. Attorney Josh J. Minkler. “If you steal from the U.S. Treasury, you will be held accountable.”Detectives interviewed several of her clients and all stated many of the deductions listed by Lynch on their returns were completely false, the release said. Lynch filed tax returns for one client two consecutive years without the client’s authorization.

“The sentencing of Ms. Lynch sends a clear message to the people of Indianapolis that what she was doing was illegal, and there is a price to pay,” said IRS Criminal Investigations Special Agent in Charge Stephen Boyd in a statement. “One of IRS Criminal Investigations’ main objectives is to ensure that all tax practitioners, tax preparers and others who practice in the tax law profession adhere to professional standards and follow the law. Those who break the law will be held accountable for their actions.”

Lynch must serve one year of supervised release after her sentence, according to Assistant U.S. Attorney Bradley P. Shepard, who prosecuted this case.

Tax Preparers Plead Guilty to Federal Offenses in Separate Cases

One Also Admits Stealing Section 8 Housing Assistance Benefits

Dallas — Two tax preparers who operated tax preparation businesses in Irving, Texas, and Duncanville, Texas, recently pleaded guilty to federal offenses, announced U.S. Attorney John Parker of the Northern District of Texas.

In one case, Hector Gerardo Nunez pleaded guilty to one count of aiding and assisting in the preparation of a false tax

36

#1 Tax Lady Found Guilty Of 27 Tax Felonies, Could Face 131 Years

Ms. Fontrice Lenee Charles, also known as the #1 Tax Lady business she operated, was convicted of of 25 counts of filing false tax returns for clients. The jury also found her guilty of two more counts: filing false tax returns for herself. The press release from the U.S. Attorney’s Office in Michigan confirms the details and the extraordinary jail time she could face when she is sentenced.

Prosecutors claimed that Ms. Charles lied on tax documents to get her clients larger refunds. The Justice Department statement noted her involvement in 967 bad tax returns filed for clients between 2011 and 2014. They led to improper tax refunds of approximately $4 million. Each of the first 25 counts is punishable by up to five years in prison. The final two counts regarding Ms. Charles’ own taxes are each punishable by up to three years in prison.

It is a good example of the harsh stance the law takes on tax return preparation businesses. The IRS has long tried to regulate them, something that has become a controversial subject in recent years. When the #1 Tax Lady was arraigned on 27 counts of tax fraud, it was her role in filing false returns for others that was the focus. The feds claimed that Ms. Charles filed numerous bogus tax return while operating as #1 Tax Lady.

The charges for not reporting the income she was earning in her tax business were not as serious. Neither was the charge that she was illegally claiming a dead person as a dependent. The feds are especially tough on return preparers. Claiming excess deductions on your own return is a bad idea and can backfire. Helping others to claim bogus deductions is even worse. The criminal penalty structure reflects that dichotomy.Everyone must sign under penalties of perjury, so don’t lie on your tax return. You may never be audited, but what if you are? You should be prepared to defend your return and to provide substantiation for each item if you are asked. And report accurately, whether or not you believe the IRS has received reporting forms. You may not have received a Form 1099 from someone who paid you. But perhaps they sent it in to the IRS and your copy was lost in the mail.

The vast majority of tax audits are civil and have little risk of criminal liability. However, a majority of criminal tax cases start with a civil audit. The IRS and Justice Department are particularly likely to crack down on tax preparers who are defrauding their clients and the government at the same time. A case in point was a husband and wife team running a Texas tax preparation business. In fact, the couple got 15 years in prison – each.

There can be considerable fallout for all of the clients of a preparer who is prosecuted. Errors will usually have to be corrected and taxes may need to be paid by the individuals involved even if they were duped. You are responsible for the contents of your tax return, so go over it carefully and raise any questions you have with your preparer.

return. According to the factual resume filed in his case, from at least 2007 through 2010, Nunez did business under the name of Speedy Tax Service, located on W. Airport Freeway in Irving. During this period, Nunez knowingly and willfully prepared, and caused to be filed with the Internal Revenue Service (IRS), income tax returns that were materially false. Nunez would include false or inflated deductions and credits that were intended to produce a fraudulently inflated refund to be paid by the IRS. He would then collect a fee that was deducted from the refund generated by each return he prepared. Nunez faces a maximum statutory penalty of three years in federal prison as well as a fine and restitution. Sentencing is set for March 10, 2016, before U.S. District Judge Jane J. Boyle.

In the other case, Sherene Warren pleaded guilty to the same offense as well as to one count of theft of government money. According to the factual resume filed in her case, Warren was the owner and manager of the tax preparation business Fast Tax Services that was located on N. Cedar Ridge Drive in Duncanville and then later on W. Wheatland Road in Duncanville. Warren falsified, according to the factual resume, line items on clients’ tax returns to obtain larger refunds. She also admitted receiving approximately $121,701 in 2010, $218,517 in 2011 and $360,491 in 2012 in fees/bonuses for preparing the tax returns. Warren further admitted that she did not disclose any Fast Tax Services’ income on her 2010 tax returns, and that she did not file a tax return in 2011 or 2012.

Warren also submitted false and fraudulent information about her income and employment to the Dallas Housing Authority in connection with receipt of Section 8 housing benefits, admitting that she stole approximately $28,786 in housing assistance to which she was not entitled. Each year, the factual resume goes on to state, Warren submitted false and fraudulent documents to the Dallas Housing Authority showing she had no income, when, as she well knew, she received substantial income from the operation of Fast Tax Service.

Warren faces a maximum statutory penalty of three years in federal prison on the tax conviction and five years on the theft of government money conviction, as well as fines and restitution. Warren was also charged with stealing disability benefits and, according to the plea agreement filed, while she did not plead to that offense, she has agreed to pay restitution of an amount proven at sentencing to the IRS, the U.S. Department of Housing and Urban Development (HUD) and the Social Security Administration (SSA). Sentencing is set for March 17, 2016, before U.S. District Judge Reed C. O’Connor.

IRS Criminal Investigation is investigating both cases. HUD Office of Inspector General and the SSA Office of Inspector General are also investigating the Warren case.

Assistant U.S. Attorney Christopher Stokes is prosecuting the Nunez case, and Assistant U.S. Attorney Nicholas Bunch is prosecuting the Warren case.

37

Finally, even if you aren’t happy with your taxes, please, don’t take it out on your tax preparer! It’s one thing to wring your hands over your taxes, or perhaps even to curse a bit. But don’t choke your tax preparer.

Ragin Cagin

Social Security Changes: What Tax Pros Need to Know

Major changes are coming to Social Security retirement benefits, and now is the time to meet with clients and formulate a plan before a window of opportunity closes on April 30, 2016. Individuals turning age 66 before April 30, 2016 that have not filed for Social Security retirement benefits are the most exposed to the changes. It is also time for advisors to meet with all of their baby boomer clients to discuss the rule changes and their retirement plan timeline.

The Bipartisan Budget Act of 2015, signed into law Nov. 2, 2015, effectively eliminates two highly-discussed Social Security claiming strategies: file-and-suspend and file restricted. These two strategies have gained popularity with married couples as a way to increase lifetime Social Security income. File-and-suspend and file restricted strategies are an unintended consequence of The Senior Citizens Freedom to Work Act of 2000, which was designed to encourage more seniors to work. Now considered a “loophole,” the file-and-suspend caveat was originally intended to help senior citizens increase their Social Security benefit by delaying retirement.

The new law was passed with major changes to the tax code without any Congressional hearings, major discussion or debates on the floor of the House or Senate. The Center for Retirement Research at Boston College previously estimated the file restricted approach could add $9.5 billion in annual benefit costs to the program if everyone eligible pursued the strategy. The cost of the file-and-suspend tactic was estimated to have a more modest impact.

Advocates for rule changes argue that the ultra-wealthy are abusing the system to reap excessive rewards. In reality, removing the file-and-suspend and file restricted strategies will meaningfully reduce the overall Social Security benefits to

millions of Americans across every income level.

The good news is there is time left to take action. Those who are already receiving benefits are not impacted at all, and clients who turn 66-years-old before April 30, 2016 can still file and suspend benefits, but they must do so by that date. Additionally, the file restricted strategy continues to be available to those who are age 62 or older on Dec. 31, 2015. Either strategy, or a combination of the two, can add tens of thousands of dollars in spousal benefits.

Advisors need to act fast to ensure their clients take the best course of action considering the new rules. First, it is important to fully understand the amendments. Because of their complexity, this can be a daunting task. The best way to go about tackling the complicated rules is to explain by using examples.

File-and-suspend, old rules

The idea behind file-and-suspend was to permit one spouse — usually the higher earning spouse — to file for retirement benefits at full retirement age, only to immediately suspend them. Once the benefits were suspended, the other spouse could then file for, and receive, spousal benefits. Remember, spousal benefits are not available until the primary worker files. The higher earning spouse then earns 8 percent delayed retirement credits until age 70, resulting in a 132 percent increase in monthly benefits.

Example: Jonathan is 65-years-old and still working. He plans to retire in the next year, but wants to let his Social Security benefits grow until age 70 to ensure the largest monthly and survivor benefit. His 61-year-old wife, Emily, has worked less than 10 years and does not qualify for her own retirement benefit.

Emily wants to start receiving her spousal benefit at age 62, even though her check would be reduced for claiming early. Jonathan plans to go online to the Social Security website at his full retirement age (FRA) and complete a file-and-suspend application in order for Emily to be able to file for a spousal benefit.

File-and-suspend, new rules

Under the new rules in Section 831 of the Bipartisan Budget Act of 2015, when the higher earner suspends his benefits, he will also suspend any benefits payable to his spouse or children.

Unfortunately for this couple, Jonathan is not FRA until after the April 30, 2016 file and suspend deadline. Therefore, Emily will not receive any benefits until Jonathan begins collecting his Social Security payments.

Additionally, there will no longer be an option to retroactively claim suspended benefits. Before the tax law change, a person who filed and suspended benefits could request a lump sum payment of the amount deferred. This caveat was

38

Example: Rebecca is 60 years old when her husband dies. She has worked and will be eligible for her own retirement benefit. She can take a reduced widow’s benefit now based on her deceased spouse and then switch to her own benefit later if it is higher. Alternatively, she can start with her own retirement benefit at age 62 and switch to a full survivor benefit when she reaches full retirement age.

Divorce benefits

Divorced parties do not fare well under the amended rules. Under the old rules, an ex-spouse who had been married for 10 years can collect a benefit based on the former spouse’s work record even if he or she is not collecting benefits. However, that ex-spouse must be more than 62 years old.

Under the new rules, divorced spouses who are younger than 62 years of age by the end of 2015 will not be able to collect spousal benefits while their own retirement benefits continue to grow up to age 70. Now, when the divorcee makes a claim, they either receive their own benefit or a spousal benefit, whichever is higher.

Example: Julie is 57-years-old today and divorced. Whenever she decides to claim benefits, she will receive the higher of her retirement benefit or her former spouse’s benefit period. Her friend Cindy, who is also divorced, was age 62 in December 2015. Unlike her friend, Cindy will be able to file for a spousal benefit at her full retirement age and then file for her own retirement benefit later.

Additionally, it is unclear what happens to the spousal benefit if the ex-spouse suspends his or her own benefit. According to the new Social Security Act section 202(z)(3)(B), when someone suspends a benefit, “no monthly benefit shall be payable to any other individual on the basis on the (worker’s) wages and self-employment income.” This unintended consequence will hopefully be fixed.

Look at the new tax law as an opportunity to bring value and solutions to your clients. For most retirees, it still pays to delay Social Security benefits. Individuals who wait receive the 8 percent per year delayed retirement credits from their FRA to age 70. For many clients, they will need to increase their Social Security benefits and tap other financial resources to fill in the retirement funding gap. Retirees can continue to work or retire and draw down other assets such as cash from tax efficient permanent life insurance.

Jerry

also used by single individuals when the retiree became ill or had a change in financial circumstances. This option also goes away on April 30, 2016.

Deemed filing rule

The deemed filing rule is set to change as well. Under this rule, a spouse filing early before their full retirement age was deemed to be filing for their own retirement benefit first. It did not apply to those who filed for benefits after their full retirement age. This rule was considered the door-opener for couples’ strategies. This door has closed except for those who are 62 years old or older by the end of 2015. Under the new set of rules, deemed filing applies regardless of what age benefits are claimed. The person filing will receive the higher of their own benefit or the spousal benefit.

File restricted, old rules

A restricted application allowed individuals to get spousal benefits while delaying their own Social Security retirement benefit. This strategy let their own benefit grow from age 66 to age 70 with the 8 percent delayed retirement benefits.

Example: Tom and Susan, both 60 years old, met with their financial advisor last year to review their retirement income goals. At full retirement age, Tom expects to receive $25,000 in annual Social Security benefits and Susan expects $20,000 in benefits. They plan for Susan to claim her benefit first and for Tom to file a restricted application to receive a spousal benefit from Susan of $10,000 a year. Tom’s own benefit will continue to grow. At age 70, he will notify Social Security he is turning on his own benefit. At this point, Tom will receive $39,600 annually due to delayed retirement credits of 8 percent, not counting cost of living adjustments.

File restricted, new rules

Under the new rules, a spouse born in 1954 or later who files for Social Security will be deemed to have filed for both their own and spousal benefits, and will receive whichever benefit is higher. In effect, it kills the strategy. As a young baby boomer, Tom can no longer choose to collect a restricted spousal benefit at full retirement age and let his retirement benefit grow until age 70.

Widow/widower benefits

Good news: Surviving spouses are not impacted by the tax law change. The survivor is eligible for a widow or widower’s benefit equal to 100 percent of the deceased spouse’s benefit. The rule also applies to a divorcee whose former spouse has died, as long as the couple was married for 10 years and the divorcee remained unmarried until age 60.

Deemed filing never applied to survivor benefits, and it does not now. The surviving spouse has a choice about when to claim for each benefit. Widows and widowers can file a restricted application for survivor benefits and let their own retirement benefit grow, or vice versa.

National Center for Professional Education Fellowship

39

Taxpayer Advocacy

These 3 Tax Deductions Could Lead to an Audit.Getting audited is many taxpayers’ worst nightmare, but that shouldn’t stop you from taking advantage of the tax deductions you’re legally entitled to take. You should just take care to make sure you have the documentation you need to back up your deduction if the IRS decides to take a closer look at your return.

Below are three tax deductions that often raise red flags from would-be auditors.

1. Home office deduction

Self-employed entrepreneurs often work out of their homes, and the tax laws provide for such businesses to deduct the legitimate expenses that are connected with their home-based business. If you meet the requirements for a portion of your home that’s used regularly and exclusively for business use, and is your principal place of business, you can usually prorate your overall household expenses by the fraction of your home’s total area that your business takes up. In addition, you can deduct in full expenses that are directly linked to your business and aren’t shared throughout the remainder of your home for personal use.

Abuse of this provision has led to increased IRS scrutiny. The most important thing to remember is that you need to be able to document the separate area and its exclusive business use, so if your business takes up a large fraction of your overall property, you’ll need to prepare to prove it. In addition, ensuring that all claimed expenses are business-related is

important in maintaining your credibility during an audit.

2. Charitable deductions

Donations to charity are usually tax-deductible to those who itemize their deductions, and the IRS has paid increasing amounts of attention to charitable deductions in recent years. Gifts by check are hard to falsify, but claiming large amounts for donated items like cars or used clothing has been a frequent area of abuse among taxpayers.

In judging your charitable donations, the IRS will compare your deductions with those of taxpayers in a similar financial situation based on your tax return. If you’re on the high side of average, the risk of an audit will increase, and it’ll be more important for you to keep good records on what you gave, when you gave it, and how you determined the appropriate value of the property. Fail at any of those tasks, and you could be left unable to support your deduction to an IRS auditor.

3. Unreimbursed business expenses

Most of the time, employees get reimbursed by their employers for any business expenses they pay for themselves. As a result, the IRS looks carefully at unreimbursed business expenses, even though they’re an itemized deduction and are only deductible to the extent that they exceed 2% of adjusted gross income.

Many items are potentially deductible, including dues and license fees, subscriptions to trade journals and publications related to your work, tools and supplies, and specialty uniforms. Yet the temptation among many taxpayers is to try to deduct additional items that are only somewhat connected to their jobs. Before taking this deduction, make sure the expenses you’re seeking to claim are legitimately business-related, and be prepared to explain in an audit why your employer didn’t reimburse you for them.

Finally, bear in mind that any deduction could lead to an audit if it’s unusually large compared to what most people report on their tax returns. If you’re entitled to a big deduction for any reason, make sure you have the records to prove it in case the IRS comes knocking.

Getting audited is no fun, but as long as you have the required documentation, you should be able to stand up to IRS scrutiny with your deductions intact. Keeping good tax records with these three deductions in particular is a smart move that will keep you from paying extra tax after an audit.

Claims Court Denies Motion To Dismiss Tax Refund Lawsuit When Cause of Delay Lies With Government

In recent U.S. Court of Federal Claims case, the government moved to dismiss the taxpayers’ tax refund suit as untimely. But, as the Claims Court noted, “the cause of the delay lies squarely on the doorstep of the Internal Revenue Service.”

40

Foreign Taxes

Qualified Dividends from Foreign Corporations

Code Sec. 1(h)(11)(C), treats dividends paid by certain qualified foreign corporations (QFCs) as qualified dividend income taxed at long-term capital gains rates. While most international tax planning focuses on foreign operations of U.S. C corporations, many of the same tax planning principles apply to stand alone foreign corporations owned by U.S. individuals, directly or through U.S. pass-through entities, such as partnerships, S corporations and trusts. From the perspective of such corporations, Code Sec. 1(h)(11(C) is a critical piece of international tax planning in that it determines, in large part, whether investment returns will be taxed as long-term capital gains or ordinary income. For proper planning, Code Sec. 1(h)(11)(C) must be considered in tandem with the U.S. anti-deferral rules-Subpart F and the passive foreign investment company (PFIC) rules. At the same time, the possibility of using Code Sec. 1(h)(11)(C) to obtain long-term capital gains on low-taxed foreign income can yield significant benefits if these rules are properly managed.

The U.S. has a classical two-tier system of corporate taxation for an individual shareholder in a C corporation, domestic or foreign. Dividends from domestic C corporations are generally taxed at the long-term capital gains rate. As a result, the tax effect of earning $100 through a domestic C corporation is two levels of tax: federal corporate tax at 35%, plus shareholder-level taxation at 20%, for an overall federal tax burden of 48%.The Code retains the same two-tier system for a U.S. shareholder of a foreign corporation:

(1) corporate level tax at the foreign tax rate and

(2) a shareholder-level tax on distribution or realizationof capital gains.

As part of the original enactment of the qualified dividend income rules, Congress included Code Sec. 1(h)(11)(C) to treat dividends only from certain QFCs as eligible for long-term capital gains treatment. Thus, unlike the return from a domestic C corporation, which is subject to federal income taxation at a uniform blended rate of 48%, the all-in tax rates on U.S. shareholders’ investment in a foreign corporation may

The tax dispute regarded federal tax returns filed for tax years 1995, 1996, and 1997. During those years, the taxpayer was a shareholder of a holding company. The taxpayer filed joint tax returns that included passive-activity losses. The IRS audited the 1995 and 1996 tax returns under TEFRA. Because of the two-step process of TEFRA (i.e., entity-level and individual-level procedures), there were “twenty years of tax examinations, litigation, and unexplained IRS delay before the resolutions of the [taxpayer’s] 1995, 1996, and 1997 tax liability.” However, due to a change in the law, tax year 1997 was not subject to the TEFRA procedures, so it was resolved more quickly.

In 2007, the holding company and the IRS entered into a closing agreement resolving the corporate-level taxes. The IRS then began the reviewing the shareholder-level items. Thirteen months later, in 2009, the IRS issued a notice of deficiency to the taxpayer for taxes due for 1995 and 1996; this notice did not explain the delay or note additional audit activity. The IRS determined that the taxpayer had non-passive income, which resulted in additional tax liability, based on disallowed passive-activity losses.

I.R.C. § 469 allows disallowed losses and credits to be carriedforward. Here, that carryforward would be for tax year 1997.However, the statute of limitations for tax year 1997 expiredsix months before the IRS issued the notice of deficiency.

In 2009, the taxpayers filed an amended tax return for the “1995, 1996, and 1997 tax periods,” basically seeking to amend the 1997 tax return based on the passive-activity loss carryforwards and passive-activity credit carryforwards created by the 1995 and 1996 assessments. The taxpayers paid the difference between the 1995 and 1996 assessments and their claimed 1997 refund. However, the IRS insisted that the taxpayer owed the full amount of the deficiency. The taxpayers paid the balance under protest. In 2010, the taxpayers resubmitted the amended tax return. After waiting a year with no response, they filed the amended 1997 tax return for a third time.

In January 2012, the statute of limitations expired for filing a refund claim for their 1995 and 1996 tax years; this was nearly 2 years after the deadline for the 1997 tax year. The 1997 year expired before 1995 and 1996 due to the TEFRA procedures involved for 1995 and 1996 and IRS delays. In March of 2012, the IRS disallowed the amended tax return.

National Center for Professional Education Fellowship

41

is made). In addition, gain from the sale of CFC stock may be characterized as a dividend under Code Sec. 1248 , which makes the CFC’s eligibility for Code Sec. 1(h)(11) at the time of exit particularly important.

One little known, but in this context important, provision of Subpart F is Code Sec. 962 . Code Sec. 962(a) allows a U.S. individual to elect to be treated as if it were a domestic C corporation, and limit its tax on Subpart F income to an amount that would be imposed if the Subpart F income had been earned by a domestic corporation and the corporation were eligible to claim an indirect credit under Code Sec. 960. This election, which is made year-by-year by each individual shareholder with respect to all of its CFCs, can yield significant benefits.

Code Sec. 1248 deemed dividends, unlike Subpart F inclusions, are eligible for treatment as qualified dividend income. Thus, on a sale of a CFC by U.S. individuals, the Code Sec. 1248 “pickup” remains eligible for a reduced rate of tax. This can be especially significant when the buyer is a U.S. corporation that requires a Code Sec. 338(g) election to be made. Such an election will create large amounts of E&P in the CFC being sold, and absent Code Sec. 1(h)(11) , convert capital gain into ordinary dividend income. If the dividend income is qualified dividend income, however, the shareholders may be indifferent as to the Code Sec. 338(g) election being made with respect to its CFCs.

In short, at age 12, Code Sec. 1(h)(11) remains a fruitful area of tax planning for foreign corporations owned by U.S. individual shareholders directly and through pass-through entities. After an uncertain period as a temporary tax provision, it graduated in 2013 into a permanent feature of the Code, and a well-advised taxpayer will find many opportunities to maximize the benefits of the provision. At the same time, the PFIC and Subpart F anti-deferral rules present significant roadblocks. If not properly managed, these anti-deferral provisions may negate the taxpayer’s efforts to maximize the benefits of Code Sec. 1(h)(11) or, in some cases, make the taxpayer worse off than if no tax planning were undertaken at all.

State News of NoteThe Taxation of Legal Cannabis

With the recent legalization of recreational cannabis sales in Alaska, Colorado, Oregon, and Washington, the writing is on the wall for the world’s eighth largest economy. There are eleven competing ballot propositions seeking to legalize recreational cannabis use in California in 2016. As Colorado and Washington have already experienced, the legalization of recreational cannabis brings an abundance of new business opportunities. And, as with any business, properly complying with legal obligations is critically important to minimizing risk. Chief among these obligations is tax compliance.

vary from as low as 20% to 60% or more. The two levers to affect that tax rate are planning to reduce foreign corporate-level tax and ensuring that the shareholder level tax is imposed at the long-term capital gains rate. Understanding and properly applying Code Sec. 1(h)(11)(C) , as well as the Subpart F and PFIC anti-deferral rules, are central to both aspects of this tax planning.

A QFC is a foreign corporation that meets one of the following three tests:

(1) the corporation is organized in a U.S. possession;

(2) the foreign corporation is eligible for benefits of a“comprehensive” U.S. tax treaty that contains anexchange of information provision; or

(3) the stock of the foreign corporation with respectto which the dividend is paid is regularly tradable on anestablished financial market in the U.S.

A foreign corporation cannot be a QFC if it is, or was during the preceding tax year, a PFIC within the meaning of Code Sec. 1297 .

The treatment of publicly traded and U.S. listed foreign corporations and possessions corporations as QFCs is fairly straightforward. However, the treaty test may apply to a range of privately-held foreign corporations, including both operating companies and treaty-based holding companies. As a starting point, IRS maintains a list of tax treaties that are considered to be “comprehensive.” With the current or pending adoption of modern Limitation on Benefits (LOB) provisions throughout the U.S. tax treaty network, essentially all income tax treaties currently in force qualify as comprehensive.

The key question is what it means for a foreign corporation to be “eligible for benefits” of the treaty within the meaning of Code Sec. 1(h)(11) . For example, unless the QFC is being used to earn U.S.-source income, it will not have any occasion to invoke the U.S. tax treaty and establish its eligibility for benefits at the corporate level. Thus, eligibility for the benefits of the tax treaty for purposes of Code Sec. 1(h)(11) is a purely hypothetical inquiry. Perhaps the most straightforward path into Code Sec. 1(h)(11) is through the ownership-base erosion test. In several major U.S. tax treaties, the ownership test can be established by having at least 50% U.S. ownership of the treaty corporation.

While the above discussion provides an overview of obtaining Code Sec. 1(h)(11) benefits from the foreign corporation, it represents only half of the necessary analysis. If a foreign corporation is also a controlled foreign corporation (CFC) and/or PFIC with respect to the U.S. owners, the anti-deferral rules can significantly curtail the shareholders’ ability to derive qualified dividend income. PFICs are not eligible for Code Sec. 1(h)(11)(C) unless covered by the CFC overlap rule. CFCs, on the other hand, continue to be eligible for the benefits of Code Sec. 1(h)(11) , but not with respect to Subpart F income or Code Sec. 956 investments (unless a Code Sec. 962 election

42

Despite the policy preferences that these states expressed (with the exception of California as of now), discussing state cannabis legalization and its taxation should not omit the obvious point that the United States federal government regulates cannabis. The federal government continues to treat cannabis as a Schedule I narcotic under the Controlled Substances Act (“CSA”). This means that Food and Drug Administration licensed physicians cannot prescribe cannabis; and, distributing or manufacturing cannabis is a serious felony.

Cannabis’s classification under the CSA also empowers federal tax law to stand in the way of permitting states from realizing their full policy objectives. This isn’t news to businesses who have operated in the medical cannabis space for some years. As the industry’s lead trade publication reported, “the federal tax situation is the biggest threat to [state-sanctioned cannabis] businesses and could push the entire industry underground. An industry insider put it another way, “[n]o business, including ours can survive if it is taxed on its gross revenue. The IRS is trying to tax us out of existence.”

What this industry insider referred to is Internal Revenue Code section 280E. Section 280E proscribes businesses trafficking in Schedule I or II substances under the CSA from deducting their ordinary and necessary business expenses from gross income. Thus, current federal tax law bars state-sanctioned cannabis sellers from deducting their expenses before calculating their taxable income.

While the status quo is far from ideal, commercial cannabis enterprises are not without recourse.

Corporate Net Operating Loss Carryforward and Carryback Provisions by State

When businesses suffer losses in a calendar year, well-structured corporate tax codes allow them to deduct those losses against previous or future tax returns. These provisions are called net operating loss (NOL) carrybacks and carryforwards. While the federal code allows 20 years of NOL carryforwards and 2 years of NOL carrybacks, states vary widely on their net operating loss policies.

Net operating loss deductions are important because many businesses operate in industries that fluctuate greatly with the business cycle. They might experience considerable profits one year, but then be in the hole the next year. Net operating loss carryforwards and carrybacks help those businesses to “smooth” their income, so that the tax code is more neutral with respect to time.

Thirty states and the District of Columbia conform to the federal standard of offering 20 years of NOL carryforwards, while six states offer 15 years. Other states are less generous; Illinois offers 12 years; Kansas, Michigan, New Hampshire, and Vermont offer ten years; Montana offers seven, and Arkansas and Rhode Island only offer five. This year, Louisiana and New York both increased their number of carryforward years from 15 to 20.

Twelve states conform to the federal standard of offering 2 years of NOL carrybacks, and three states have a more generous provision of three years. Twenty-nine states and the District of Columbia do not allow NOL carrybacks. This year, New York increased its number of carryback years from 2 to 3, while Louisiana eliminated its carryback provisions while increasing the amount of available carryforward years.

NOL Caps

It is also important to mention that some states limit the effectiveness of their NOL policies by placing a “cap” on the net operating losses that businesses are allowed to carry forward or back. New Hampshire caps its carryforwards at $10 million and Pennsylvania caps its carryforwards at $5 million. Illinois allowed a particularly low $100,000 cap to expire.Utah caps its carrybacks at $1 million, West Virginia at $300,000, Idaho at $100,000, and Delaware at $30,000. As part of a corporate tax reform package, New York eliminated its nation’s lowest $10,000 carryback cap this year.

Wayne’s World

FAQs Clarify Application of ACA Rules to HRAs & Other Employer Health Care Plans

Notice 2015-87, 2015-52 IRB

IRS has issued a notice with 26 frequently asked questions (FAQs) explaining how various provisions of the Affordable Care Act (ACA) apply to health reimbursement arrangements (HRAs) and certain other forms of employer-provided health coverage. Among other topics, IRS addresses the impact of HRA contributions, employer flex contributions, opt-out payments, and fringe benefit payments on determination of the employee’s required contribution for purposes of Code Sec. 36B and Code Sec. 5000A.

HRAs. Part II of Notice 2015-87, which contains six FAQs, supplements prior guidance (see, e.g., Notice 2013-54, 2013-40 IRB 287, and Notice 2015-17, 2015-10 IRB 845, on the application of ACA’s market reforms to various types of employer health care arrangements. Among other things, the FAQs provide that:

43

• A current-employee HRA fails to be integrated withanother group health plan if the amounts credited to theHRA may be used to buy individual market coverage.(Q&A 2)

• An HRA available to reimburse the medical expensesof an employee’s spouse and/or dependents (a familyHRA) can’t be integrated with self-only coverage underthe employer’s other group health plan. (Q&A 4)

• he ACA isn’t violated if the HRA or employer paymentplan, by its terms, may only be used to reimburse (or paydirectly for) premiums for individual market coverageconsisting solely of excepted benefits (such as dentalcoverage). (Q&A 5)

• An employer payment plan offered through a cafeteriaplan that uses salary reduction or other contributionsto buy coverage on the individual market cannot beintegrated with the individual market coverage. (Q&A 6)

Affordability of employer-sponsored health coverage. Part III of Notice 2015-87, which contains 11 FAQs, clarifies, with detailed illustrations, certain aspects of the employer shared responsibility provisions of Code Sec. 4980H, the application of the adjusted 9.5% affordability threshold under Code Sec. 36B(c)(2)(i)(II) to the safe harbor provisions under Code Sec. 4980H, and the employer status of certain entities for Code Sec. 4980H purposes.

For determining whether an applicable large employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan under Code Sec. 36B and Code Sec. 5000A, and any related consequences under Code Sec. 4980H, the FAQs provide guidance on taking into account: IRA contributions (Q&A 7), employer flex contributions to a cafeteria plan (Q&A 8), employer payments that are available only if an employee declines coverage under an eligible employer-sponsored plan (Q&A 9), and employer payments for fringe benefits made under laws requiring that workers employed under certain federal contracts be paid prevailing wages and fringe benefits (Q&A 10).

In addition, among other things, the FAQs provide that:

• . . . The inflation-adjusted applicable dollar amounts inCode Sec. 4980H used to calculate the employer sharedresponsibility payment, $2,000 and $3,000 in 2014, are$2,080 and $3,120 for calendar year 2015, and $2,160and $3,240 for calendar year 2016. (Q&A 13)

• . . . The definition of hour of service under Reg. §54.4980H-1(a)(24), which makes reference to LaborReg. Sec. 2530.200b-2(a), does not incorporate (a) theprovisions of Labor Reg. 2530.200b-2(a) which requirehours of service to be credited for certain periods of timeduring which no duties are performed “irrespective ofwhether the employment relationship has terminated,”or (b) the limitation on hours of service contained inLabor Reg. 2530.200b-2(a)(2)(i). (Q&A 14)

• . . . IRS will amend its regs to address the application ofthe special rehire rules under Reg. § 54.4980H-3(c)(4)(ii) and Reg. § 54.4980H-3(d)(6)(ii), to employees whoprimarily perform services for one or more educationalorganizations. (Q&A 15)

COBRA coverage. Part V of Notice 2015-87, which contains five FAQs, clarifies the application of the COBRA continuation coverage rules to unused amounts in a health FSA carried over and made available in later years under as well as conditions that may be imposed on the use of carryover amounts.

Among other things, the FAQs provides that:

(1) Any carryover amount is included in determining theamount of the benefit that a qualified beneficiary is entitledto receive during the remainder of the plan year in which aqualifying event occurs. (Q&A 21)

(2) The maximum amount that a health FSA is permittedto require to be paid for COBRA continuation coverage(that is, 102% of the applicable premium) does not includeunused amounts carried over from prior years. (Q&A 22)

(3) A health FSA may limit the availability of the carryoverof unused amounts (subject to the $500 limit) to individualswho have elected to participate in the health FSA in thenext year, even if the ability to participate in that next yearrequires a minimum salary reduction election to the healthFSA for that next year. (Q&A 24)

(4) A health FSA may limit the ability to carry over unusedamounts to a maximum period (subject to the $500 limit).(Q&A 25)

Other subjects covered. Part IV of Notice 2015-87, clarifies how certain ACA provisions apply to government entities and to certain forms of government-provided health coverage. And Part VI of Notice 2015-87, details the relief available to employers required to report under Code Sec. 6056 (Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C, Employer-Provided Health Insurance Offer and Coverage) from penalties for incomplete or incorrect returns filed in 2016, or statements furnished to employees in 2016, regarding coverage offered (or not offered) in calendar year 2015. (Q&A 26)

Wayne

Letters to the Editor

None this month, but look for a new column in the February 1 Taxing Times - Question of the Month and learn what has been stumping Members of the Fellowship.

44

Sponsor of the Month

The ncpeFellowship welcomes our NEW Sponsor:

Tax Jokes and Quotes

For every tax problem there is a solution which is straightforward, uncomplicated-and wrong. — anonymous

Why can’t Americans do their own taxes? Because the federal Tax Code is out of control, that’s why. It’s gigantic and insanely complex, and it gets worse all the time. Nobody has ever read the whole thing. IRS workers are afraid to go into the same ROOM with it.

Dave Barry

Visit the Sponsors Tab on www.ncpeFellowship for our Sponsors who will help you get started for this filing season:

• Affordable Checks and Supplies• Audit Detective• CFS• Monroe Calculator• ncpe Research Department• TASC• Target Insurance• Charlene Zack - Small Business Bookkeeping

Use Resources and Toolsfor Tax Professionals

On Our WebsitencpeFellowship.com

Next Edition of Taxing Times,ncpeFellowship Monthly Newsletter:

February 1st, 2016

Call Brenda,she is a friend of tax professionals

and you can rely on her.