Section 199A: The New Small Business Tax Break—Part III

working_calculator

As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists individuals and businesses with representation in tax examinations, audits, and civil litigation with the Internal Revenue Service (the “IRS”) and the Ohio Department of Taxation. As part of that representation, our tax attorneys keep individuals and businesses informed about new information and guidance provided by the IRS. This article is the third in a series of articles exploring what some tax professionals describe as the best small business tax break of the last half-century—the Section 199A Qualified Business Income Deduction (the “Deduction”).

Brief Reintroduction

Our last article on Section 199A introduced the concept of a specified service trade or business (“SSTB”), which we said is not a qualified trade or business (“QTOB”) for Section 199A purposes. At first pass, the statutory language suggests that SSTB-classification disqualifies a trade or business from the Deduction; however, there is an exception (the “Exception”).i Before we discuss the Exception, we should revisit the definition of an SSTB.

SSTB Defined

For purposes of Section 199A, an SSTB is any trade or business that involves the performance of services in one of the following fields: health; law; accounting; actuarial science; performing arts; consulting; athletics; financial services; brokerage services; investing and investing management; trading; dealing; or a business where the principal asset is the reputation or skill of one or more of its owners or employees.ii Although the Code is broad, the Regulations provide more specific examples of jobs within these fields that do, and do not, fall in SSTB purview.

Calculating the Deduction for an SSTB

The Deduction for qualified business income (“QBI”) from an SSTB is subject to a “phase-out” (the “Phase-out”) once a taxpayer’s taxable income exceeds $157,500 for single filers and $315,000 for joint filers (the “Threshold”).iii

Similar to a QTOB, a taxpayer with QBI from an SSTB enjoys a full 20 percent deduction is their taxable income is less than or equal to the Threshold. But, unlike a QTOB, the Deduction for an SSTB is eliminated once a taxpayer’s taxable income exceeds $207,500 for single filers and $415,000 for joint filers.  The gray area between $157,500 to $207,500 and $315,000 to $415,000 for single and joint filers, respectively, is where the Phase-out occurs.

Calculating the Phase-out

Mechanically speaking, the Phase-out is better described as a “phasing-in” of the “wage/investment” limitation for a QTOB (the “Limitation”) described in our previous article. If you recall, the Limitation is a function of QBI, W-2 wages, and the unadjusted basis in qualified property associated with a trade or business. For an SSTB, these three variables are “phased-out” of the Deduction calculation as a percentage (described in the next paragraph) of their actual values used in the QTOB calculation. Meaning, the QBI, W-2 wages, and unadjusted basis in qualified property values used in the SSTB calculation are less than those used in the QTOB calculation. This difference in value results in a difference in the Deduction between QTOBs and SSTBs.

The percentage described above is equal to 100 percent minus a percentage calculated by the difference between taxable income and the Threshold, divided by either $50,000 for single filers or $100,000 for joint filers (the “Phase-Out Percentage”). The Phase-Out Percentage cannot be less than zero, which results in the complete phase-out of the Deduction once taxable income hits $207,500or single filers and $415,000 for joint filers. The Phase-Out Percentage is then multiplied against the QBI, W-2 wages, and qualified property amounts associated with the SSTB, reducing their values.

Finishing the Deduction Calculation

Once the Phase-On Percentage is applied, the Deduction calculation for an SSTB is lockstep with that of a QTOB. But, because the SSTB calculation QBI, W-2 wages, and qualified property values are a percentage of those used for the QTOB calculation, the SSTB Deduction is smaller. The following are the final steps for the Deduction calculation; however, they are no different than those described in the previous article.

When taxable income exceeds the Threshold, the Limitation is the lesser of: (i) 20 percent of QBI from an SSTB, or (ii) the greater of: (a) 50 percent of W-2 wages from an SSTB, or (b) 25 percent of W-2 wages from an SSTB, plus 2.5 percent of the unadjusted basis in qualified property associated with an SSTB. 

The percentage of phase-in is the difference between a taxpayer’s taxable income and the Threshold, over either $50,000 for single filers or $100,000 for joint filers (the “Phase-In Percentage”). The Phase-In Percentage is used to determine the reduction amount used against the 20 percent of QBI deduction starting point.

The Phase-In Percentage is multiplied against the difference between: (i) 20 percent of QBI and (ii) the Limitation. This figure represents the phase-in of the Limitation, or the amount by which the 20 percent of QBI starting point is reduced to determine the Deduction amount.

Businesses Related to an SSTB

Many taxpayers with SSTB enterprises operate under an organizational structure that keeps their operational entity separate from their real estate entity and sometimes even a management entity. For example, it is not uncommon that an accountant, attorney, dentist, or doctor will conduct their business using two entities. The first entity contains the primary operations of the firm or practice. And, the second entity contains the real property in which the first entity operates.

Under the Section 199A Regulations, when a trade or business provides property or services to an SSTB, and there is a 50 percent or more common ownershipiv between the two trades or businesses, the portion of the trade or business providing property or service to the SSTB is treated as an SSTB.v Thus, the Deduction for either entity is subject to the SSTB Phase-Out limitations even though the entity providing the property or services is otherwise considered a QTOB.

Example: Doctor, a dentist, operates his dental practice using three different entities: Clinic LLC, which holds the clinical operations of the practice; Real Estate LLC, which holds the office building used by the practice; and Management LLC, which holds the non-clinical operations of the practice.  Doctor is the 100 percent owner of all three entities. 

On their own, the activities of Real Estate LLC and Management LLC qualify them as QTOBs, which would subject them to the lesser restrictive Deduction limitations for QTOBs. Clinic LLC is an SSTB because it holds the operations of a trade or business in the health field, which would subject it to the more restrictive Deduction limitations for SSTBs. However, because Real Estate LLC and Management LLC provide property or services to Clinic LLC, with which they share over 50 percent common ownership, all three entities are considered SSTBs.

Therefore, Doctor is unable to take the Deduction for any QBI generated by the three entities once Doctor’s taxable income exceeds $207,500 (if filing single) or $415,000 (if filing joint). Doctor would remain eligible for the Deduction if Doctor’s taxable income falls below these thresholds.

Conclusion

There is a common theme across these first three Section 199A articles—the Deduction is complex.  We now see that the Deduction, in the case of an SSTB, requires an additional level of calculations.  There is also additional analysis required to determine if or when the trade or businesses ancillary to a taxpayer’s SSTB are required to be included as an SSTB even though they would otherwise qualify as a QTOB.  Therefore, it is important that taxpayers work with experienced tax law professionals who understand Section 199A from a legal perspective.  The tax and business attorneys at Nardone Limited have this understanding and are prepared to discuss your Section 199A planning today.

 


i I.R.C. § 199A(d)(3).

ii Reg. § 1.199A-5(b)(1).

iii I.R.C. § 199A(d)(3)(A).

iv Common ownership means a direct or indirect ownership by related parties within the meaning of Sections 267(b) or 707(b). Reg. § 1.199A-5(c)(2)(ii).

v Reg. § 1.199A-5(c)(2)(i).

February 08, 2019

Section 199A: The New Small Business Tax Break—Part II

Small_business2

As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists individuals and businesses with representation in tax examinations, audits, and civil litigation with the Internal Revenue Service (the “IRS”) and the Ohio Department of Taxation. As part of that representation, our tax attorneys keep individuals and businesses informed about new information and guidance provided by the IRS. This article is the second in a series of articles exploring what some tax professionals describe as the best small business tax break of the last half-century—the Section 199A Qualified Business Income Deduction (the “Deduction”).

Tax Law Update: On January 18, 2019 the IRS released its final versions of the Proposed Regulations to Section 199A, which it released in August of 2018.

Brief Reintroduction

As stated in our first Section 199A article, the owners of “pass-thru entities” have the potential to receive a deduction equal to 20 percent of the qualified business income (“QBI”). QBI is the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business (“QTOB”) of the taxpayer.1 As part of our initial understanding of QBI, it is important that we first consider what constitutes a QTOB.

QTOB, or Not QTOB, That Is the Question

QTOB is broadly defined by Section 199A as any trade or business other than: (i) a specified service trade or business (“SSTB”), or (ii) the trade or business of performing services as an employee.2 Let’s first address what Section 199A defines as a non-QTOB trade or business.

Non-QTOB Trades or Businesses

The definition of QTOB does not include an SSTB, which is defined as any trade or business involving the performance of services in one of the following fields: health; law; accounting; actuarial science; performing arts; consulting; athletics; financial services; brokerage services; investing and investing management; trading; dealing; or a business where the principal asset is the reputation or skill of one or more of its owners or employees.3 The Regulations go on to give examples of what specific trades or businesses within each of these fields are, and are not, considered an SSTB. But, it is important to understand that just because a trade or business is considered an SSTB, it does not necessarily mean that the income related to that trade or business does not qualify for the deduction. Part III of this series will further discuss this matter.

Also, a QTOB does not include the trade or business of performing services as an employee. Meaning, an employee who receives W-2 wages cannot take the Deduction for those wages. To prevent potential circumventions of this rule, the IRS added an anti-abuse measure that bars the Deduction from employees who terminate their employment and then re-establish a relationship with the employer as an independent contractor.4

What is Considered a QTOB Trade or Business

The definition of trade or business under the Regulations is equally as vague as the definition in Section 199A. The Regulations state that a Section 199A trade or business is the same as a Section 162 trade or business.5 Section 162 typically requires case law analysis to determine whether an activity is a trade or business. The Court in Commissioner v. Groetzinger held that a taxpayer engages in a trade or business when they are “involved in the activity with continuity and regularity” for the “primary purpose” of earning “income or profit.”6 Although this holding seems broad and open to interpretation, the IRS doubles down on the idea that the Section 199A analysis of a “trade or business” should be as restrictive as the analysis under Section 469 for passive losses.

Unlike Section 162, the Regulations provide that the renting or licensing of tangible or intangible property to a related trade or business is a trade or business under Section 199A so long as there is common ownership as defined by Reg. § 1.199A-4(b)(1)(i).7 But, as we will discuss in our next Section 199A article, there are additional considerations involved where one of the related trades or businesses is an SSTB.

Proposed Treatment for Rental Real Estate Activity Under Section 199A: The treatment of rental real estate activity as a trade or business is an area of uncertainty in many Code sections. This uncertainty is due to inconsistencies in the case law for determining whether the generally “passive” act of renting real estate satisfies the definition of trade or business. The IRS hopes to eliminate such uncertainty as it relates to Section 199A. To do so, the IRS published Notice 2019-07 contemporaneously with the release of the Section 199A final regulations (the “Notice”). The Notice specifically addresses the treatment of rental real estate activity and describes a proposed revenue procedure that provides safe harbor treatment for certain rental real estate activity as a trade or business under Section 199A. Nardone Limited will publish a separate article that discusses the Notice and highlights the requirements for the safe harbor treatment to apply.

Identifying Items Included in QBI

Remember that QBI includes the net amount of income, gain, deduction, and loss from a taxpayer’s QTOB.8 The Code defines this to include everything from the trade or business’s operating income to the ordinary gains and losses resulting from the disposition of assets used in the trade or business.9 But, QBI does not include short-term and long-term capital gains and losses, interest income other than that allocable to a trade or business, and C corporation dividend income.10 

Calculating the Deduction for a QTOB

As discussed in our first Section 199A article, the Deduction is subject to a “wage/investment” limitation (the “Limitation”) when QBI comes from a QTOB and the taxpayer’s taxable income exceeds $157,500 for single filers and $315,000 for joint filers (the “Threshold”).11


Taxpayers whose taxable income is less than or equal to the Threshold enjoy a full 20 percent deduction. But, the Limitation phases-in once a taxpayer’s taxable income exceeds the Threshold. Regardless of the Limitation, the starting point for the Deduction is always 20 percent of QBI.

Calculating the Limitation

When taxable income exceeds the Threshold, the Limitation is the lesser of: (i) 20 percent of QBI from a QTOB, or (ii) the greater of: (a) 50 percent of W-2 wages from a QTOB, or (b) 25 percent of W-2 wages from a QTOB, plus 2.5 percent of the unadjusted basis in qualified property.

Phase-In of the Limitation

The percentage of phase-in is the difference between a taxpayer’s taxable income and the Threshold, over either $50,000 for single filers or $100,000 for joint filers (the “Phase-In Percentage”). The Phase-In Percentage is used to determine the reduction amount used against the 20 percent of QBI deduction starting point. It is important to note that the Phase-In Percentage is capped at 100 percent.

The Phase-In Percentage is multiplied against the difference between: (i) 20 percent of QBI and (ii) the Limitation. This figure represents the phase-in of the Limitation, or the amount by which the 20 percent of QBI starting point is reduced to determine the Deduction.

Conclusion

If all of that seems confusing, it’s because it is. First, the taxpayer is required to determine whether their trade or business constitutes a QTOB. The taxpayer must then determine the amount of QBI generated from their QTOB, which, in comparison, is relatively easy. After all of that, the taxpayer can then start to calculate their Deduction—which we know can be a mess. Calculating the taxpayer’s Deduction is far from simple and requires one to understand the impact of figures beyond the QBI realm (e.g., wages, the unadjusted basis in qualified property, etc.). This introduces an additional level of complication. Maybe that is why the IRS estimates Section 199A creates an additional 25-million-hour burden annually?12 25 million hours!

Therefore, it is important that taxpayers not only work with their bookkeepers and external accountants, but also with experienced tax law professionals who understand the Code’s implications from a legal perspective. The tax and business attorneys at Nardone Limited have this understanding and are prepared to discuss your Section 199A planning today.

P.S. Keep an eye out next week for Part III where we discuss the Deduction from the perspective of an SSTB owner, and the potential impact the SSTB classification has on otherwise “clean” QBI from a QTOB.


1 I.R.C. § 199A(c)(1).

2 I.R.C. § 199A(d)(1).

3 Reg. § 1.199A-5(b)(1).

4 Reg. § 1.199A-5(d)(3).

5 Reg. § 1.199A-1(b)(14).

6 Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).

7 I.R.C. § 1.199A-1(b)(14).

8 I.R.C. § 199A(c)(1).

9 Reg. § 1.199A-3(b).

10 I.R.C. § 199A(c)(3)(B).

11 I.R.C. § 199A(b)(3).

12 Preamble to the § 199A Final Regulations release January 18, 2019.

January 24, 2019

Section 199A: The New Tax Break for Small Business

Business_owners

    As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists individuals and businesses with representation in tax examinations, audits, and civil litigation with the Internal Revenue Service (the “IRS”) and the Ohio Department of Taxation.  As part of that representation, our tax attorneys keep individuals and businesses informed about new information and guidance provided by the IRS.  This is the first blog in a series which will explore what some tax professionals describe as the best small business tax break of the last half-century—the Section 199A Qualified Business Income Deduction (the “Deduction”).

Background

    The Tax Cuts and Jobs Act of 2017 (the “TCJA”) added the Deduction, which is enacted to apply for tax years 2018 through 2025.  The Deduction comes in conjunction with a repeal of the Section 199 deduction, enacted under the American Jobs Creation Act of 2004.  The Section 199 deduction provided up to a 9-percent deduction based on the qualified production activities income for businesses that perform domestic manufacturing and other production activities.  Commentary surrounding the Deduction suggests that it is intended to provide tax relief to the owners of “pass-thru entities” that are unable to take advantage of the TCJA reduction to the corporate tax rate.

    For purposes of the Deduction, the term “pass-thru entities” includes sole proprietorships, partnerships (including publicly traded partnerships), S corporations, certain real estate investors, and trusts and estates to the extent they own and operate a trade or business.  In certain circumstances the Deduction also applies to limited liability companies, real estate investment trusts, and qualified cooperatives.

How Much Is the Deduction Worth?

    The Deduction offers its greatest impact on taxable income that would otherwise be treated as ordinary income and taxed at the highest individual tax rates (i.e., 32, 35, and 37-percent).  Owners of “pass-thru entities” have the potential to receive a deduction equal to 20-percent of the qualified business income (“QBI”).1 For example, taxpayers taxed at the new 32, 35, or 37-percent individual tax rates have the potential to save $640, $700, or $740 for every $10,000 of pass-thru taxable income, respectively.  Thus, the higher the QBI and tax rate, the greater the tax savings.

Who Does the Deduction Apply To?

    The Deduction generally applies without limitation. However, additional considerations and restrictions apply when a taxpayer’s taxable income exceeds a certain threshold or when QBI is generated from a specified trade or business (“STOB”), rather than from a qualified trade or business (“QTOB”).

    For 2018, the taxable income threshold is $157,000 for single filers and $315,00 for joint filers (the “Threshold).2  In essence, taxpayers with taxable income below the Threshold enjoy the full 20-percent deduction regardless of the QBI source.  But, when taxable income exceeds the Threshold either the “wage/investment” limitation (when QBI is sourced to a QTOB)3 or the “Deduction phase-out” (when QBI is sourced to a STOB)4 will apply. [NOTE: Both of these concepts will be further explained in later blog articles]

Start Planning Today In Order to
Take Advantage of the Deduction

    In its commentary from the proposed regulations for Section 199A, the IRS discusses the significant work anticipated to implement the Deduction into the tax preparation process.  On average, the estimated additional annual burden is a combined 3 to 4 hours for taxpayers and the “pass-thru entities” that they own.5  Certain taxpayers may need to make operational, legal, and or accounting changes in order to take advantage of the Deduction. Therefore, it is imperative to discuss the Deduction with a qualified tax professional today in order to maximize your potential benefit.

    Although certain instances provide a clean application of the Deduction, other instances where a limitation or phase-out applies will require a greater understanding of the applicable tax and business law.  The tax and business attorneys at Nardone Limited have this understanding, and are prepared to discuss your Section 199A planning today.

 


1 I.R.C. §§ 199A(a) and (b)

2 I.R.C. § 199A(e)

3 I.R.C. § 199A(b)(3)

4 I.R.C. § 199A(d)(3)

5 Preamble to the § 199A proposed regulations.

January 18, 2019

When Should Married Couples File Separately?

Wedding-cake

    As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists businesses with representation in tax examinations, audits, appeals, and civil litigation with the Internal Revenue Service (the “IRS”) and the Ohio Department of Taxation. As part of that representation, our tax attorneys help individuals analyze their options when it comes to their tax-filing status. For example, when filing their taxes, married couples have the option to either file jointly or separately, and must weigh the pros and cons of each. While most married couples file their returns jointly, there are instances when filing separately may be advantageous based on the taxpayer’s situation.

Joint and Several Liability

    For starters, taxpayers who file joint tax returns are jointly and severally liable for liabilities arising from mistakes or omissions on that joint return. Imposition of joint and several liability means that each taxpayer is legally responsible for the entire liability—unless the taxpayer qualifies for innocent spouse relief. This means that the IRS can proceed against either spouse—or both—to resolve the tax liability. IRC §6013(d)(3). For this reason, a taxpayer may want to consider filing separately if they have an untrustworthy spouse or suspect that their spouse is not complying with their tax obligations. A spouse should also consider filing separately if one or both spouses own a business—and that business is a pass-through entity—and the spouses is not involved in the day-to-day activities of the business. We say this because if a business owner spouse is not paying or properly reporting the business’s tax liability to the government, the innocent spouse may also be liable, since the entity’s profit and loss would be reported on the couple’s income tax return.

Nardone Limited Comment: Taxpayers should be aware that qualifying for innocent spouse relief is very time consuming and difficult to achieve. Generally, it is tough for the petitioning spouse to prove that they did not know or have reason to know of the tax deficiency, since they did in fact sign the income tax return. For more information on innocent spouse relief, see our previous blog, “Tax Relief for Innocent Spouses.”

Additional Considerations

    A spouse may also choose to file separately if at least one spouse has significant itemized deductions that are limited to adjusted gross income (“AGI”), or one or both spouses qualify for head of household status because the couple is living apart or separated. Common itemized deductions limited by AGI are medical expenses, personal casualty losses, miscellaneous itemized expenses, and charitable contributions. Taxpayers should also be advised that, to qualify for head of household status: (i) you and your spouse cannot have lived together during the last six months of the year; (ii) the spouse’s home must have been at least one of the children’s primary residence for more than half of the year; and (iii) the spouse filing for head of household status must have paid more than half the cost of keeping up the home for the year. IRS Pub. 501 (2018).

    In sum, before a taxpayer decides to file a joint return or a married filing separate return, the taxpayer should work with their tax return preparer or attorney to better understand the intended and unintended consequences of that filing. If a married couple’s goal is to simply limit their tax liability, it may be helpful to prepare the tax return both ways. That way, the couple can see which filing status would give them the biggest tax savings.

Contact Nardone Limited

    The tax attorneys at Nardone Limited have experience in advising taxpayers when it comes to deciding how to file their taxes, as well as preparing requests for innocent spouse relief. If you are married and are unsure whether you should file your taxes jointly or separately, then you should contact one of our experienced attorneys. We will thoroughly review your case and determine the most advantageous option based on your specific circumstances.

December 28, 2018

Tax Cuts and Jobs Act-Impact on Charitable Giving

Tax cuts and jobs act

The tax attorneys at Nardone Limited, in Columbus, Ohio, assist businesses and taxpayers with representation in tax examinations, audits, appeals, and civil litigation with the Internal Revenue Service (the “IRS”) and the Ohio Department of Taxation. As part of that representation, our tax attorneys advise taxpayers of the affects and consequences of changes to federal tax law. The recently enacted Tax Cuts and Jobs Act (“TCJA”) will affect charitable contributions made by taxpayers, as well as how taxpayers will strategize their contributions to ensure they are receiving the maximum benefits.

More Taxpayers May Choose
Standard Deduction Over Itemizing

During this time of year, many taxpayers consider making charitable contributions because those who itemize their deductions are entitled to deduct the amount of contributions made to qualified charitable organizations from their taxable income. Qualified charitable organizations are those that exist exclusively for the advancement of religious, charitable, or educational purposes. Congress allows taxpayers to deduct charitable contributions from their taxable income because it believes that a robust charitable sector is vital to the U.S. economy. The recent increase in the standard deduction, as a result of the TCJA, however may negatively affect Congress’ efforts to incentivize taxpayers to donate to charities going forward.

Nardone Limited Comment: Taxpayers should be aware that there are rules for substantiating different types of charitable donations. If audited or examined by the IRS, taxpayers must be familiar with the types of documentation required by the IRS. For more information on documentation requirements, as it relates to charitable contributions, see our blog article titled, “IRS Documentation Requirements Concerning Charitable Contributions.”

The TCJA increases the standard deduction for individuals from $6,350 to $12,000, and from $12,000 to $24,000 for married couples. Generally, if a taxpayer itemizes their deductions rather than taking the standard deduction, the tax deduction for charitable contributions helps to reduce the taxpayer’s taxable income. But, due to the increase in the standard deduction, it is much more difficult for itemizing taxpayers to meet the threshold of the standard deduction in order to benefit from itemizing their deductions. Professionals, however, suggest a strategy called “bunching” in order for taxpayers to still benefit from charitable giving. This strategy suggests that, rather than giving a smaller amount to charity every year, the taxpayer gives every other year instead. This way taxpayers are in a better position to get their itemized deductions over the standard deduction amount, and thus benefit from the charitable giving.

Nardone Limited Comment: The TCJA also increases the charitable contribution-base percentage (the taxpayer’s adjusted gross income) for deductions of cash contributions, for individuals, from 50% of the taxpayer’s contribution-base to 60%. Note, that cash contributions taken into account for purposes of applying the 60% limit are not taken into account again in applying the 50% limit for non-cash contributions.

Contact Nardone Limited

The tax attorneys at Nardone Limited have vast experience representing taxpayers involved in IRS audits and examinations. To the extent that you have questions regarding the effects of the TCJA or charitable tax deductions and substantiations, you should contact one of the experienced attorneys at Nardone Limited.

December 14, 2018

IRS Criminal Investigation releases Fiscal Year 2018 Annual Report

Irs_criminal_investigations

As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists individuals and businesses with representation in tax examinations, audits, appeals, and civil litigation with the Internal Revenue Service (the “IRS”) and the Ohio Department of Taxation. As part of that representation, our tax attorneys keep individuals and businesses informed about new information and guidance provided by the IRS.

Updates regarding Criminal Tax Enforcement

The Internal Revenue Service recently released the Criminal Investigation Division’s (CI) annual report reflecting significant accomplishments and criminal enforcement actions taken in fiscal year 2018. According to the IRS:

“This report shows that as financial crime has evolved and proliferated around the world, so have IRS Criminal Investigation special agents and their abilities to track the proceeds of financial crime,” said IRS Commissioner Chuck Rettig. “CI uses cutting-edge technology combined with sophisticated investigative work to bring the most impactful cases that affect tax administration. I am extremely proud of our special agents and professional staff and their work serving the nation.”

In prior years, CI would involve itself with violent crime-type matters, like drug cases and criminal organizations. But, from our perspective, that is not the best use of their time. Thus, it was good to see that a major focus of CI in fiscal 2018 was traditional tax cases, including international tax enforcement, employment tax, refund fraud and tax-related identity theft. Other areas of emphasis included public corruption, cybercrime, terrorist financing and money laundering.

Criminal Tax Enforcement Statistics

Again, according to the IRS:

“We prioritized the use of data in our investigations in fiscal 2018,” said Don Fort, Chief of CI. “The future for CI must involve leveraging the vast amount of data we have to help drive case selection and make us more efficient in the critical work that we do. Data analytics is a powerful tool for identifying areas of tax non-compliance.”

CI initiated 2,886 cases in fiscal 2018, with traditional tax cases accounting for 73 percent of the total. The number of CI special agents dipped below 2,100 by the end of fiscal 2018, which is the lowest level since the early 1970’s. Consequently, CI turned to data analytics to assist in finding the most impactful cases.

CI is the only federal law enforcement agency with jurisdiction over federal tax crimes. CI achieved a conviction rate of 91.7 percent in fiscal 2018, which is among the highest of all federal law enforcement agencies. According to commentators, which we would agree with, the high conviction rate reflects the thoroughness of CI investigations and the high quality of CI agents. CI is routinely called upon by prosecutors across the country to lead financial investigations on a wide variety of financial crimes.

Nardone Limited Comment: The takeaway for our individual and business clients is, seek the appropriate tax advice and tax professionals to ensure that integrity, fairness, and respect for our voluntary tax system.  We want to make sure that you are not put in a position where you have intentionally crossed the line or inadvertently crossed the line by following the advice of your tax professional.  These statistics make it pretty clear that the IRS, once they have placed their focus and efforts on your particular case, it will be difficult to cause CI to redirect their focus.  Rather, at that point, it becomes more of an effort of minimizing the potential disruption or punishment, versus all-together avoiding it.

Contact Nardone Limited

Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters.  If you or your business have been contacted by the IRS, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine what options and alternatives are available to you.

 

Tax Attorney Vince Nardone Speaks at Day Two of the 2018 Mega Tax Conference

Ohio society of cpas

    On December 11, 2018, tax attorney Vince Nardone spoke on day two of The Ohio Society of CPAs Mega Tax Conference. Vince discussed the various voluntary disclosure programs to a group, consisting mostly of CPAs and accountants from across the state of Ohio. The presentation focused on the most common voluntary disclosure programs at both the federal and state levels. We spent a good bit of time discussing the IRS’ closure of the 2014 Offshore Voluntary Disclosure Program, and the Streamlined Filing Compliance Procedure submission program.  Nardone also discussed the benefits and strategies available in each voluntary disclosure, while avoiding pitfalls. 

    The Ohio Society of CPAs is the #1 provider of CPE for Ohio CPAs year after year, and the 2018 Mega Tax Conference was a great opportunity for CPAs to learn about the latest advancements on a variety of important topics in the industry.  We appreciate and thank The Ohio Society of CPAs’ accounting learning manager, Amber McAuliffe, for inviting us and allowing us to participate. 

December 12, 2018

Tax Attorney Vince Nardone Speaks at the 2018 Mega Tax Conference

Ohio society of cpas

    On December 10, 2018, tax attorney Vince Nardone spoke at The Ohio Society of CPAs Mega Tax Conference. Vince presented “Ethics in Tax Practice” to a group, consisting mostly of CPAs and accountants from across the state of Ohio. The presentation focused on reviewing Circular 230 and other federal and state laws impacting CPAs, as well as Board of Accountancy rules governing the conduct of CPAs performing tax services in Ohio.  Nardone spent a lot of time discussing best practices in terms of tax return preparation, interacting with clients and the tax authorities, and the important aspects of protecting their own businesses and livelihood.

    The Ohio Society of CPAs is the #1 provider of CPE for Ohio CPAs year after year, and the 2018 Mega Tax Conference was a great opportunity for CPAs to learn about the latest advancements on a variety of important topics in the industry.  We appreciate and thank The Ohio Society of CPAs’ accounting learning manager, Amber McAuliffe, for inviting us and allowing us to participate. 

 

November 29, 2018

IRS Private Debt Collection Program

Tax_debt

    The tax attorneys at Nardone Limited, in Columbus, Ohio, routinely advise taxpayers who have been contacted by an Internal Revenue Service (“IRS”) revenue officer. If a taxpayer fails to make a payment on a federal tax liability, the IRS has broad authority and tools available to collect delinquent tax from individuals and businesses. One of the tools the IRS has recently utilized is the use of private debt collection agencies. The private debt collection program allows certain designated companies to collect tax debts on the IRS’s behalf.

    The program is authorized under the Fixing America’s Surface Transportation Act (“FAST Act”) and requires the IRS to use private collection agencies once the IRS is no longer actively working on the taxpayer’s case. The IRS will only use a third party for certain accounts, such as older overdue accounts that have been removed from the IRS’s active list due to lack of resources. The IRS, however, has provided a list of accounts that it will not assign to private collection agencies. The following is a list of account types the IRS will not assign to a private collection agency:

  1. The taxpayer is deceased or under the age of 18;
  2. Taxpayers in a designated combat zone;
  3. Taxpayers that are victims of tax-related identity theft;
  4. Taxpayers under examination, litigation, criminal investigation or levy;
  5. Accounts subject to pending or active offers in compromise;
  6. Accounts subject to an installment agreement;
  7. Accounts subject to a right of appeal;
  8. The case is classified as an innocent spouse case; and
  9. Taxpayers in a disaster area.

Nardone Limited Comment: On February 14, 2018, United States Senators Elizabeth Warren, Ben Cardin, and Sherrod Brown introduced legislation to repeal authority from the IRS to contract with private debt collection agencies. The bill, however is still in the “introduced” phase. For more information, or to track the bill, click here

How Will You Know it is a Designated 

Private Collection Agency?

    First, the IRS has listed the following companies as those authorized to collect on its behalf: CBE Group, Conserve, Performant, and Pioneer. But, before assigning a taxpayer’s account to a third party, the IRS will send the taxpayer and the taxpayer’s representative a notice indicating that their account is being transferred. The IRS will then send a second letter confirming the transfer. If one of the collection agencies listed above contacts you, they will not ask for payment on any prepaid card, such as a gift card or prepaid debit card.  Any payments for unpaid taxes should be sent directly to the IRS, not the private collection agency.

    Further, the collection agencies authorized to collect on the IRS’s behalf are required to follow the Fair Debt Collection Practices Act (the “Act”). This means that the collection agency may not contact a taxpayer: (i) before 8:00 A.M. or after 9:00 P.M.; (ii) without permission from the taxpayer’s attorney (if the debt collector knows the taxpayer is represented); or (iv) at the taxpayer’s place of employment. Fair Debt Collection Practices Act §805. The Act also prohibits the collector from threatening or harassing the taxpayer. Id at §806. Taxpayers may file a complaint about a private collection agency or report misconduct by contacting the Treasury Inspector General for Tax Administration.

Nardone Limited Comment: If a taxpayer or business is contact by an IRS revenue officer or private collection agency, it is important to understand the various collection alternatives available to taxpayers to resolve federal tax liabilities. Some collection alternatives include: (i) offer-in-compromise, (ii) installment agreements, (iii) currently not collectible status, (iv) discharging taxes in bankruptcy, and (v) challenging the underlying tax liability. For more information about collection alternatives, see our previous blog articles “Bankruptcy as a Collection Alternative for Tax Liabilities” and “Offers-In-Compromise Under our Current Administration.”

Contact Nardone Limited

    If you or your business have been contacted by the IRS or a private collection agency regarding outstanding tax liabilities, it is important to consult with a legal professional who is experienced in communicating with IRS revenue officers and private debt collection agencies. The tax attorneys at Nardone Limited have vast experience representing clients before the IRS. Contact us today for a consultation to discuss your case.

November 16, 2018

Tax Relief for Innocent Spouses

Innocent-spouse-relief

    The tax attorneys at Nardone Limited, in Columbus, Ohio, have extensive experience representing taxpayers who are involved in various stages of Internal Revenue Service (“IRS”) collection processes. We specialize in working with IRS revenue officers, and guiding clients through tax collection alternatives, including offers-in-compromise, installment agreements, discharges in bankruptcy and innocent spouse relief. Generally, taxpayers who file a joint tax return are jointly and severally liable for liabilities arising from mistakes and omissions on that tax return. Imposition of joint and several liability means that each taxpayer is legally responsible for the entire liability. This means that the IRS can proceed against either taxpayer—or both—to resolve the tax liability. IRC §6013(d)(3). But, there is an exception to the general rule if a spouse is innocent. IRC §6015. Petitioning taxpayers may be able to persuade the IRS that joint and several liability should not apply, in consideration of the facts and circumstances surrounding preparation of the return. The IRS’s review of innocent spouse relief is fact-intensive, with no one factor being determinative.

Request for Innocent Spouse Relief

    Taxpayers can request innocent spouse relief in three forms: (i) relief from liability for additional tax owed where the spouse or former spouse failed to correctly report income or claim deductions; (ii) relief in the form of separation of the liability attributable to the taxpayer and liability attributable to the taxpayer’s estranged or former spouse; and (iii) relief where the taxpayer does not otherwise qualify for innocent spouse relief, however holding the taxpayer liable for the tax deficiency would be inequitable. A taxpayer requesting innocent spouse relief must generally do so within two years of the tax liability assessment.

    Requesting innocent spouse relief in any of the forms described above requires filing IRS Form 8857, Request for Innocent Spouse Relief. To qualify for liability relief, a petitioning taxpayer must demonstrate: (i) that they filed a joint tax return with an understatement of tax due to reporting of their then-spouse’s erroneous items; (ii) that at the time of signing the return the taxpayer did not know or have reason to know about the understatement of tax; and (iii) that it would be unfair, after considering the facts and circumstances, to hold the innocent spouse liable. IRC §6015. To qualify for separation of liability relief, a petitioning taxpayer must demonstrate that: (i) the taxpayer is no longer married to or is legally separated from the spouse with whom the taxpayer filed the joint return; and (ii) the taxpayer was not a member of the same household as the other spouse on the joint tax return for the 12-month period preceding the request for relief.

Knowledge or Reason to Know of the Misstatement

    It is often difficult for the petitioning spouse to prove that they did not know or have reason to know of the deficiency. After all, the petitioner did sign the return. Further, even if the petitioning spouse had actual knowledge of only a portion of the erroneous items, the IRS will not grant relief. The IRS will argue that the petitioner should have known about the deficiency if the petitioner benefited from the understatement of tax or the return represented an unqualified departure from the couple’s prior returns. The presumption when an individual affixes their signature to a document is endorsement of its contents. But, a petitioner may satisfy the lack of knowledge element even in certain conditions where a petitioner was given the opportunity to review the return. For example, if the petitioner’s spouse was hiding an income source, then it would be reasonable for the petitioner, having reviewed the return, to be ignorant of the understatement of income. In other situations, the disparity in education between the petitioner and the other person named on the return may be so great as to impede the petitioner’s meaningful review. Our previous blog article illustrates an example of the IRS denying a spouse relief for failure to prove she did not know, or have reason to know of the understatement of tax.

    Satisfaction of the above elements require the petitioning taxpayer to be familiar with tax law. To fill out Form 8857 the taxpayer must be equip with detailed and relevant information in order successfully plead their case to the IRS. Form 8857 includes questions about the petitioner’s marriage, educational background, health problems, involvement with the couple’s finances and current financial status. Petitioners may have to conduct extensive investigation into past financials and proffer documentation about sensitive private topics. Thus, preparing to request innocent spouse relief can be difficult, especially while facing persistent IRS revenue officers during the collections process.

Contact Nardone Limited

    The tax attorneys at Nardone Limited have experience preparing requests for innocent spouse relief and guiding clients through other tax collection alternatives. The IRS recognizes certain situations where it would be inappropriate to impose joint and severable liability, however, it is up to the petitioner to prove the elements for entitlement to innocent spouse relief. A taxpayer’s review or non-review of her joint tax return will not prelude innocent spouse relief. The tax attorneys at Nardone Limited have vast expertise in representing taxpayers in all stages of IRS tax collections processes. If you have questions regarding your tax liability, or communications you have received from an IRS revenue officer, please contact Nardone Limited.

November 09, 2018

IRS Publishes New Guidance on TCJA and Tips for Filing

Tax-cuts-and-jobs-act

    As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists businesses with representation in tax examinations, audits, appeals, and civil litigation with the Internal Revenue Service (the “IRS”) and the Ohio Department of Taxation. As part of that representation, our tax attorneys keep individuals and businesses informed about new information and guidance provided by the IRS. As a follow-up to our prior blog article on posted non October 19, 2018, this article explores how to properly prepare for the new tax changes as a result of The Tax Cuts and Jobs Act (“TCJA”).

Publication 5307

    On October 30, 2018, the IRS published a news release informing taxpayers that it published new information—IRS Publication 5307 (the “Publication”)—that will help taxpayers learn how the tax reform affects their taxes, as well as tips for filing their 2018 tax returns. IR-2018-209. This news release is part of a series of information provided by the IRS regarding the effects of the TCJA. The Publication contains information about (i) increasing the standard deduction, (ii) suspending personal exemptions, (iii) increasing the child tax credit, and (iv) limiting or discounting certain deductions. In addition to the Publication, the IRS also indicated that it recently updated a special page on its website dedicated to helping taxpayers understand the tax changes. This page highlights information taxpayers should be aware of and provides tips to taxpayers before they file their 2018 tax returns.

Tips for Filing 2018 Tax Returns

    Because taxpayers are adjusting and responding to the TCJA for the first time, it is important for taxpayers to prepare in advance before filing their 2018 tax returns. The IRS warns taxpayers that refunds may be different in 2019 than in previous years, and that some taxpayers may even owe money this year. In order to avoid surprises or delays as it relates to filing tax returns for 2018, the IRS offers the following advice to taxpayers.

  1. IRS Withholding Calculator. If taxpayers are unsure or concerned that they may have a tax bill after filing their 2018 tax returns, they should perform a “paycheck checkup.” Taxpayers can use the IRS Withholding Calculator located on the IRS website. This tool will provide taxpayers guidance on whether they need to adjust their withholding or make estimated or early payments.
  1. Documents. Before filing their taxes, taxpayers should ensure that they have all of the necessary documents, and that all of those documents are complete. Filing before the taxpayer has gathered all of the necessary documents could result in the taxpayer having to file an amended return, which could significantly delay the taxpayer in receiving a tax return.
  1. E-File. Electronic filing is the most efficient and easiest way to avoid errors. The IRS indicated that it has been working with tax preparers to ensure that the new tax law changes are incorporated into the tax filing systems.
  1. Direct Deposit. In order to avoid delays in receiving tax refunds, the IRS suggests having the refund directly deposited into the taxpayer’s bank account, as opposed to having it sent via mail. This, in conjunction with electronically filing, is the fastest way for the taxpayer to get their refund.
  1. Renewing ITIN’s. Taxpayers who file using an expired Individual Taxpayer Identification Number (“ITIN”) are likely to experience processing delays. ITIN’s may expire in two ways: (i) the taxpayer has not used their ITIN on any tax return for years 2015, 2016, or 2017; or (ii) the ITIN has a middle digit of 73, 74, 75, 76, 77, 81, or 82. To avoid delays, expired ITIN’s should be renewed before the end of the year.

    Taxpayers should already be considering how the TCJA will affect their 2018 tax returns. Ensuring that you are up to date on the latest details and guidance regarding issues that may affect you or your business are necessary in order to avoid penalties or delays. If you or your business need guidance on navigating the TCJA and its affects, it is important that you seek guidance from a legal professional experienced in tax matters.

Contact Nardone Limited

    Nardone Limited represents employers with federal tax issues, including changes as a result of the TCJA. If you are unsure how the TCJA will affect you or your business, you should contact an experienced tax attorney before filing your taxes. Nardone Limited’s tax attorneys and professionals are well experienced with representing businesses regarding federal tax issues. Contact us today for a consultation to discuss your case.

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