Larry's Tax Law

Late this afternoon, President Obama signed into law the tax extenders legislation referenced in my blog earlier today.  Hopefully, we can now complete our client year-end tax planning.

The Protecting Americans from Tax Hikes Act of 2015 Passes Both the U.S. House of Representatives and the U.S. Senate

Late in the day on December 15, 2015, the U.S. House of Representatives passed the Protecting Americans from Tax Hikes Act of 2015 (the “Act”). The Act, which represents a $622 billion tax package, revives many taxpayer-friendly provisions of the Code that expired a year ago.

The Act passed the House with a vote of 318 to 109. Voting in favor of the Act were 77 Democrats and 241 Republicans.

The Act moved to the U.S. Senate, where it was presented along with a comprehensive spending bill. As expected, the Senate voted in favor of the legislation today by a vote of 65 to 33. Consequently, the Act moves from Congress to the desk of President Obama. Most commentators expect that he will promptly sign the Act into law, as his administration has shown strong support.

The Chief Financial Officer’s Act of 1990 (“1990 Act”) was signed into law by President George H.W. Bush on November 15, 1990.  One of the major goals of the 1990 Act was to improve the financial management and to gain better control over the financial aspects of government operations.  One provision of the 1990 Act in this regard established a requirement that the government’s financial statements be audited.  Interestingly, we had not seen comprehensive legislation with this focus since the Budget and Accounting Procedures Act of 1950 was enacted by lawmakers.

As a result of the 1990 Act, the Government Accountability Office (“GAO”) annually audits the financial statements of the Internal Revenue Service (“IRS”).  The general objectives of the audit are two-fold:  (i) to determine whether the IRS’s financial statements are fairly presented; and (ii) to determine whether the IRS is maintaining effective internal controls over financial reporting.

As a general rule, in accordance with IRC § 162(a), taxpayers are allowed to deduct, for federal income tax purposes, all of the ordinary and necessary expenses they paid or incurred during the taxable year in carrying on a trade or business.  There are, however, numerous exceptions to this general rule.  One exception is found in IRC § 280E.  It provides:

“No deduction or credit shall be allowed for any payment paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any state in which such trade or business is conducted.”

As reported in previous blog posts (January 17, 2014, January 21, 2014, and January 20, 2015), federal budget setbacks continue to severely impact the Internal Revenue Service (“IRS”) and its ability to carry out its lofty mission:

 “[T]o provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.”

Senator Ron Wyden (D-OR), Ranking Member of the United States Senate Committee on Finance, understands the critical role the IRS plays in maintaining our tax system.  In a letter to IRS Commissioner John Koskinen, dated September 2, 2015, Senator Wyden professionally, but directly, questions the agency’s reallocation of IRS limited resources away from information technology (“IT”), enforcement and collection.

On May 11, 2015, after serving as Director of the Office of Professional Responsibility (“OPR”) for approximately six (6) years, Ms. Karen Hawkins announced her intention to step-down and retire, effective July 11, 2015.

The OPR is responsible for interpreting and applying the Treasury Regulations governing practice before the Internal Revenue Service (commonly known as “Circular 230”).  It has exclusive responsibility for overseeing practitioner conduct and implementing discipline.  For this purpose, practitioners include attorneys, certified public accountants, enrolled agents, enrolled actuaries, appraisers, and all other persons representing taxpayers before the Internal Revenue Service.

As reported in my January 21, 2014 blog post, federal budget cuts continue to hit the IRS hard.  In the Consolidated Appropriations Act of 2014, our lawmakers cut the Service’s budget by more than $500 million.  The Continuing Appropriations Resolution, 2015, signed by President Obama on September 19, 2014, gave the Service about a $350 million budget setback.

While it is hard to debate the need for government budget cuts these days, deciding where to make the cuts is surely a difficult endeavor.  Nevertheless, perplexing as it may be, lawmakers find it necessary and appropriate to cut the funding of the IRS, a division of our government that collects revenue.  Making these budget decisions even more baffling, we currently have an annual tax gap in this country of over $450 billion.  Adequately funding the IRS so that it can enforce our tax laws, thereby reducing the annual tax gap, should be a given.  Apparently, it is not a given to our lawmakers.

Of interesting note, the annual tax gap has increased by approximately $150 billion since 2001.  Yet, the IRS has had its budget slashed by over $1 billion in the last five (5) years.

Thomas v. Commissioner, TC Memo 2013-60 (February 26, 2013)

The saga of Michael and Julie Thomas started in the early part of this decade.  Michael was the head of real estate acquisition for DBSI in Idaho.  There, he met fellow DBSI employee Don Steeves, who was a CPA with seven (7) years of experience, primarily working in the real estate investment industry.  When Michael started two real estate businesses, TIC Capital ("TIC") and TICC Property Management ("TICC"), he hired Steeves as an independent contractor to serve as CFO of TIC and as the managing partner of TICC.  His compensation was incentive based—he received compensation which was based on the financial success of the two businesses.  In good years, Steeves’ compensation was off the charts.  In addition to acting as CFO for the two businesses, Steeves prepared Michael’s and Julie’s income tax returns.  They relied upon him to oversee all aspects of accounting and tax compliance for both of the businesses and their personal affairs.  They let him take total control of these functions.

Treasury issues long-awaited amendments to Circular 230.  On June 9, 2014, Treasury published amendments to Circular 230 that we have been anticipating for the past several months.  It looks like the crazy email disclaimers, just like leisure suits, will be a thing of the past.  Among many changes to Circular 230, the final regulations eliminate or clarify the complex rules for written advice.  Based upon my first read of the regulations, it certainly appears Treasury has been listening to tax practitioners.

Stay tuned, I will be posting a summary of the amended regulations soon.

IRC § 6656(a) provides, in the case of any failure to timely deposit employment taxes, unless the failure is due to “reasonable cause and not due to willful neglect,” a penalty shall be imposed.  The penalty is a percentage of the amount of underpayment.

• • 2% for failures of five (5) days or less;

• • 5% for failures of more than five (5) days, but less than 15 days;

• • 10% for failures of more than 15 days; and

• • 15% for failures beyond the earlier of:  (i) 10 days after receipt of the first delinquency notice under IRC § 6303; or (ii) the day on which notice and demand is made under IRC §§ 6861, 6862 or 6331(a)(last sentence)(jeopardy assessment).

In addition to the “reasonable cause” exception contained in IRC § 6656(a), there are two other means by which taxpayers may avoid the imposition of the penalty.

1.  Secretary has authority under IRC § 6656(c) to waive the penalty if:

• • The failure is inadvertent;

• • The return was timely filed;

• • The failure was the taxpayer’s first deposit obligation or the first deposit obligation after it was require to change the frequency of deposits; and

• • The taxpayer meets the requirements of IRC § 7430(c)(4)(A)(ii) [submits a request within 30 days and comes within certain net worth parameters].

2.  The Secretary has authority under IRC § 6656(d) to waive the penalty if:

• • The taxpayer is a first time depositor; and

• • The amount required to be deposited was inadvertently sent to the Secretary instead of the appropriate government depository.

As the exceptions are limited in application, most taxpayers seeking abatement of the penalty are required to pursue the “reasonable cause” exception.