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Monthly Newsletter for ncpeFellowship Members Vol. 9 No. 11 November 2018

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Remarks from Beanna

NovemberThe month of Thanksgiving!

The first American Thanksgiving was celebrated by the early settlers of the Plymouth Plantation (in present-day Plymouth, Massachusetts) after their first harvest in 1621. Autumn or early winter feasts continued sporadically in later years, first as an impromptu religious observance, and later as a civil tradition.

Abraham Lincoln announced Thanksgiving would be an official holiday in the US on November 26, 1863.

The celebration of Thanksgiving is early this year, on November 22, 2018.

My sister, Peggy, and I celebrate our birthdays on November 26 and 28, hers first. Frequently her birthday falls on Thanksgiving, mine not so much as it is later in the month. We celebrate because we have a heritage unique to ourselves, same parents, same values and same commitments.

Tax professionals should celebrate with one another and have thanksgiving for each of our colleagues that make the profession one of honor and pride. (See Tax Pros in Trouble) Excepting a few bad apples, shall I say rotten ones, individuals in the business of tax have honored me with their commitments to effective tax administration, to knowing the tax law and applying it to the circumstances of their clients, putting in tireless hours to make tax forms correct and to combat fraudulent filings.

I give thanks for YOU, the unsung heroes of our tax system.

To the constant and continuing contributors to the Taxing Times, Marty Stein, Joan LeValley, Lynn Schmidt, Bonnie Harwick and others, YOU are appreciated.

(continues next pages)

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To ncpe instructors and authors, Wayne Hebert and Jerry Riles who walked us through the complexities of the ACA and now the 199A - we are more than grateful, we are in awe of YOU!

To staff and spouses and clients, where would the tax professional be without YOU.

To those tax professionals whose legacy lives on, Ms. Dorothy Leamon, Ms. Ruth Booth, Ms. Shirley Bolt, Ms. Mary Duncalfe, Ms. Audrey Griffin, Ms. Norma Jean Ogle, Mr. Barney Hardy and Ms. Bess Messmer as well as those who will be remembered long after this is written, we remember and are inspired by your dedication.

To parents, and grandparents, who taught us to work hard, conduct ourselves with dignity and to know the pain of punishment when we did not behave ethically or how we should behave. YOU are remembered and appreciated everyday.

And to my sister, Peggy, did I remember to tell you she is my OLDER sister, thank YOU for sharing your birthday and your birthright - remembering with me the tears in our daddy's eyes when he took off his belt when we behaved badly, me more so than you. How he told us to look in the mirror and like what we see - what I do everyday - as do all in the business of tax.

Happiest of Thanksgivings!

Stay well and finish well.

Beanna

Beanna@ncpefellowship.com or 877-403-1470

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Remarks From Beanna (1)

Tax News (5)TIGTA Warns IRS of Delayed Start to 2019 Tax Season (5)

IRS Impersonator Scam Leader Sentenced to 135 Months in Prison After Stealing Millions of Dollars; Co-Conspirators Also Imprisoned (5)Draft Instructions for 2018 Form 1040 released by IRS (6)Tax Reform Brings Changes to Real Estate Rehabilitation Tax Credit (8)Tesla Says Orders Placed by Oct 15 Eligible for Full Tax Credit (8)AICPA Testimony on Proposed Regulations (REG-136118-15) Regarding the Centralized Partnership Audit Regime (9)Annual List Sets Out Extreme Drought Areas for Extended Livestock Replacement Period (10)Social Security Benefits to Increase in 2019 (11)Prop Regs Explain De Minimis Error Safe Harbor for Info Returns and Payee Statements (11)Simplified Per-diem Rates Increase for Post-Sept. 30, 2018 Business Travel (14)IRS Considering Guidance on Section 355(b) Active Trade or Business Requirement (15)IRS Issues Procedures for Implementing Accounting Method Changes Related to ASC Topic 606 (16)IRS Guidance on the Deductibility of Meals Purchased in an Entertainment Context (18)IRS Clarifies: Safe Harbor for Concrete Foundation Repairs Unaffected by TCJA's Loss Limitations (19)Treasury, IRS Issue Proposed Regulations On New Opportunity Zone Tax Incentive (20)The Opportunity of Opportunity Zones: Eye-Catching Tax Benefits On Your Capital Gains (21)The Rules for Making a Tax-Free Donation from an IRA (22)Tax Law May Prompt Look at Farm Structures (23)Inspector General Warns Public About Caller-ID “Spoofing” Scheme Misusing SSA Customer Service Number (23)New 100-percent Depreciation Deduction Benefits Business Taxpayers (25)Drought-stricken Farmers and Ranchers Have More Time to Replace Livestock (25)Investors Can Get Tax Savings on Advisor Fees by Using This Strategy (25)

Question of the Month (26)How and When Does a Taxpayer Make a §871 Election (26)

Tax Practice Management (27)After A Data Theft, Preparers Should Take These Steps (27)

Estate and Gift Taxes (27)How You Can Give Away Up to $11.2 Million and Slash Your Taxes (27)How Does the New Tax Law Affect Your Estate Plan? (28)

Military Taxes (29)How to Get Tax Credits for Hiring Veterans (29)

News from Capitol Hill (30)Tax Reform 2.0 Is Done: Passed by House, Likely Going Nowhere in Senate (30)What's in the Tax Bill That Just Passed the House? (31)Businesses, Trade Groups Urge IRS to Clarify Guidance on Key Part of GOP Tax Law (31)

People in the Tax News (31)Prominent Tax Dodger Winston Shrout Sent to Prison for 10 Years (31)Former Texas Company CFO Pleads Guilty to Employment Tax Fraud (33)

Table Of Contents (page)

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Owner of Pharmacies Charged with Conspiracy to Defraud IRS (33)Ohio Businessman Sentenced to Prison for Tax Fraud (34)The Situation Gets 8-month Sentence in Federal Tax Case (34)

IRS News (36)IRS Commissioner Rettig Seeks ‘Rebuilding Trust’ with Taxpayers (36)IRS "Future State" Bad Idea (37)IRS Tax Fraud Cases Plummet After Budget Cuts (37)Proposed Regs Would Allow Integrating HRAs and Similar Arrangements with Individual Health Insurance Coverage (39)Tips for Taxpayers Who Need to Reconstruct Records After Disaster Strikes (40)

Tax Pros in Trouble (41)Tax Fraud Blotter: Fast, Quick and Guilty (41)New Brunswick CPA Accused of Under Reporting $650K in Income (42)11 New Tax Fraud Counts Filed Against Woodbridge Tax Preparer (43)Supreme Court Won't Review Imposition of Frivolous Claims Sanctions Against Attorney (43)Already in Prison, Former Tax Preparer Gets 10 Years Probation for Other Crimes (44)

Ragin Cagin (44)Who Needs Sec. 179 Expensing When 100% Bonus Depreciation is Available? (44)

Taxpayer Advocacy (46)Execution of Closing Agreement Caused Mitigation Rules to be Met (46)

Reduced 24-percent Withholding Rate Applies to Small Businesses and Other Payers (47)

Foreign Taxes (48)Cryptocurrency Taxation Just Got Nuttier with This Million-Dollar Loophole and the IRS’ “J5” Formation (48)

State News of Note (49)New York Estate Tax Win Opens Floodgates For Millions In Refunds And Future Tax Savings (49)Grewal ‘Proud to Lead’ Latest Challenge to IRS on Federal Tax Changes (49)CA, CT, NJ and NY Submit Comments On Proposed SALT Regulations (51)Disaster Victims in Florida and Other States Qualify for Tax Relief (51)Federal vs. California (56)Disaster Victims in Wisconsin Qualify for Tax Relief (56)

Wayne's World (59)Owner of Return Preparation Business Not Liable for Penalties on Returns He Didn't Sign or Prepare (59)

Tax Jokes and Quotes (60)

Sponsor of the Month (61)Small Business Recordkeeping (61)Other Sponsors (61)

Table Of Contents (page)

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Tax News

TIGTA Warns IRS of Delayed Start to 2019 Tax Season

The high volume of changes in the Tax Code, along with a shortened cycle and missed deadlines, are increasing the risk of a delayed start to the 2019 tax-filing season, according to a new report from the Treasury Inspector General for Tax Administration.

The report pointed out that the Tax Cuts and Jobs Act of 2018 made a number of significant changes to the Tax Code affecting individuals and businesses, as well as tax-exempt organizations, and is the first major tax reform legislation in more than 30 years.

The IRS estimates that implementation of the law will require creating or revising approximately 450 forms, publications and instructions, and modifying around 140 information technology systems to ensure it can accommodate the newly revised tax forms.

The IRS Information Technology organization’s normal deadline for business units requesting information technology products and services for the next filing season is January 31. After passage of the TCJA last December, the IRS ITorganization set up several interim deadlines to facilitatetimely implementation of the law’s provisions. However, thebusiness units missed the deadlines for submitting workrequest notifications and business requirements. After that,the IT organization set a new deadline of June 1, 2018, forsubmitting final work request notifications. The most recentdeadline shortened the time frame for making systemchanges for the 2019 filing season by four months. But, asof July 5, 2018, the IT organization hadn’t received all thefinal work request notifications and business requirements.Delays in receiving the information mean less time availablefor modifying and testing systems, thereby increasing the riskof a delayed start to the 2019 filing season.

Another major area of concern, according to the report, is the IRS’s ability to quickly fill a number of critical positions that were vacated by IRS employees or contractors. Thanks to the lengthy process involved in hiring IRS employees or bringing contractors on board, the positions might not be quickly filled, against putting the timeliness of the IT updates at risk.

The IRS received $320 million from Congress to implement the TCJA, including $291 million it estimated would be needed for the IT and ancillary operations support work. But TIGTA estimates it would take more than 1.1 million labor hours based on the IRS’s estimate of 542 full-time equivalents to implement the TCJA’s provisions. The IRS intends to use both current and new employees to meet the needs for implementing the act. As of June, 117 current and new employees have been hired or reassigned to carry out the work.

The IRS’s IT organization is planning to identify any potential negative impact on its existing programs and projects from implementing the tax overhaul. But as of mid-July, the IRS hadn’t provided documentation of any ongoing projects or programs that will be negatively affected. TIGTA said that it’s continuing to review the IT organization’s efforts to implement the new tax law.

In response to the report, IRS chief information officer S. Gina Garza said the IRS IT organization is committed to implementing the modifications required by the TCJA and providing a successful tax season for American taxpayers.

“The IRS has created new forms and governance structures to increase communication, collaboration and alignment across critical IT stakeholders and implement tax reform changes, including an Executive Oversight Team comprised of IT leaders,” she wrote. “The IRS has also secured adequate funding and hiring flexibility for tax reform implementation, and proactively addresses outstanding resource gaps.”

IRS chief information officer Gina Garza

IRS Impersonator Scam Leader Sentenced to 135 Months in Prison After Stealing Millions of Dollars; Co-Conspirators Also Imprisoned

Cody Hiland, United States Attorney for the Eastern District of Arkansas, Gary Smith, Special-Agent-in-Charge, Southern Field Division, Treasury Inspector General for Tax Administration (TIGTA), and Robert G. Feldt, Special-Agent-in-Charge, Social Security Administration (SSA), Dallas Field Division, announced today the sentencing of five defendants involved in an IRS impersonation scheme that netted millions of dollars from unsuspecting victims.

United States District Judge Billy Roy Wilson sentenced Yosvany Padilla, 27, of Hialeah, Fla., the leader of the conspiracy, to 135 months’ imprisonment, followed by two years of supervised release, and ordered the repayment of nearly $9 million in restitution. Padilla, in addition to personally collecting threat-induced wire transfers sent by victims believing they were paying owed taxes, supplied co-conspirators with false identification documents and coordinated the collection of wire transfers by other members of the conspiracy.

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Also, Judge Wilson sentenced Jeniffer Valerino Nuñez, 22, and Esequiel Bravo Diaz, 24, both from Miami, to federal prison. Nuñez, who collected more than $1.3 million in wire transfers from more than 1,050 victims, was sentenced to 47 months’ imprisonment, followed by three years of supervised release, and repayment of nearly $2.5 million in restitution. Diaz, who collected approximately $115,000 from 350 victims, was sentenced to 47 months’ imprisonment, followed by two years’ supervised release, and repayment of nearly $115,000 in restitution.

“These criminals stole millions of dollars from thousands of innocent people, using fear, threats, and intimidation to carry out this scam,” Hiland said. “This criminal behavior is unconscionable and will not be tolerated. The prison sentences handed down today represent some measure of accountability for IRS imposters who violated the most vulnerable among us, including honest citizens here in Arkansas. Our office will continue to remain vigilant in working with our law enforcement partners to root out these schemes, and punish those responsible to the fullest extent of the law.”In the scheme, individuals purporting to be employees of the IRS would call and threaten victims with legal action, arrest, and imprisonment for a supposed debt owed to the IRS. The callers made these threats and used other methods of intimidation to persuade the victims to wire money utilizing MoneyGram, Walmart-2-Walmart Money Transfer, and other wire-transfer services. Investigators have identified 6,282 nationwide victims for a total loss currently calculated at $10,735,762.61. Multiple fraudulent wire transfers were collected in Arkansas, as well as in at least 28 other states.

“Over the last several years, American taxpayers have been subjected to unprecedented attempts to fraudulently obtain money by individuals impersonating Internal Revenue Service employees,” TIGTA SAC Smith said. “Victimizing taxpayers by impersonating IRS employees is a serious crime. TIGTA and our law enforcement partners will do everything within our power to ensure that those involved in the impersonation of IRS employees are prosecuted to the fullest extent of the law. Today’s significant sentencings should serve notice to those who engage in this type of criminal activity that they will be held accountable.”

Another of the scheme’s co-conspirators, Dennis Delgado Caballero, 40, of Miami, collected more than $1.1 million in wire transfers from 950 different victims and recruited others into the scheme. On September 27, 2018, Judge Wilson sentenced Caballero to 72 months’ imprisonment, followed by three years of supervised release, and repayment of approximately $2.5 million in restitution.

Angel Carrillo, 43, of Hialeah, Fla., collected more than $1.3 million in wire transfers from more than 750 people. On Tuesday, Judge Wilson sentenced Carrillo to 72 months’ imprisonment, followed by three years of supervised release, and repayment of the $1.3 million as restitution.

“The Social Security Administration, Office of the Inspector General (SSA-OIG) is committed to closely working with

our law enforcement partners to pursue identity thieves who deceive and defraud American taxpayers,” SSA SAC Feldt said.

Three other defendants (Elio Carballo Cruz, Alejandro Valdes, and Alfredo Echevarria Rios) have pleaded guilty to the scheme and await sentencing, while one (Ricardo Fontanella Caballero) is set for trial on December 11, 2018.

Investigators verified the identity of the suspects and their activities through a variety of investigative methods. TIGTA and the SSA-OIG led the investigation. The case is being prosecuted by Assistant United States Attorneys Hunter Bridges and Jana Harris.

Editors Note: Appreciation to Fellowship member Joan LeValley for bringing this information to our attention.

Draft Instructions for 2018 Form 1040 released by IRS

IRS has released the Draft Instructions for the 2018 Form 1040. The new draft version of the 2018 Form 1040 is significantly smaller in size and contains far fewer lines than the 2017 Form 1040 — the reduction in length being countered by six new accompanying schedules. The Draft Instructions note these changes and highlight a number of changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017) for the 2018 tax year.

Overview on the new Form 2018. The Draft Instructions (as of Sept. 26, 2018) explain that the 2018 Form 1040 has been redesigned using a "building block" approach. While many taxpayers can file the simplified Form 1040 by itself, taxpayers who have more complex tax returns may need to file one or more additional schedules (i.e., new Schedules 1 through 6).

The Draft Instructions note that Forms 1040A and 1040-EZ are no longer available for a taxpayer to file for his or her 2018 taxes. Taxpayers who used to file such returns in the past will now file the new 2018 Form 1040.

IRS cautions that some forms and publications that were released in 2017 or early 2018 may still have references to Form 1040A or Form 1040-EZ. Taxpayers should disregard these references.

The 2018 Form 1040 is generally to be filed by Apr. 15, 2019. However, taxpayers who live in Maine or Massachusetts have until Apr. 17, 2019 because of the Patriots' Day holiday in those states and the Emancipation Day holiday in the District of Columbia.

Highlights of TCJA changes. The Draft Instructions alerted taxpayers to some of the major changes under the TCJA affecting returns filed for 2018.

Change in tax rates. For 2018, most tax rates have been reduced. The 2018 tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

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Standard deduction amount. For 2018, the standard deduction amount has been increased for all filers. The amounts are: $12,000 for single or married taxpayers filing separately; $24,000 for married filing jointly or qualifying widows or widowers; and $18,000 for heads of household.

Personal exemption. For 2018, taxpayers can't claim a personal exemption deduction for themselves, their spouses, or their dependents.

Child tax credit and additional child tax credit. For 2018, the maximum child tax credit has increased to $2,000 per qualifying child, of which $1,400 can be claimed for the additional child tax credit. The modified adjusted gross income threshold at which the credit begins to phase out has been increased to $200,000 ($400,000 if married filing jointly).

New credit for other dependents. If taxpayers have a dependent, they may be able to claim the credit for other dependents. The credit is a $500 nonrefundable credit for each eligible dependent who can't be claimed for the child tax credit. A taxpayer uses the Child Tax Credit and Credit for Other Dependents Worksheet to figure this new credit.

Social Security number required for child tax credit. A taxpayer's child must have a Social Security number (SSN) valid for employment issued before the due date of the 2018 return (including extensions) to be claimed as a qualifying child for the child tax credit or additional child tax credit. If a taxpayer's child doesn't qualify the taxpayer for the child tax credit but has a taxpayer identification number issued on or before the due date of the taxpayer's 2018 return (including extensions), the taxpayer may be able to claim the new credit for other dependents for that child.

Section 199A qualified business income deduction. Beginning in 2018, a taxpayer may be able to deduct up to 20% of his or her qualified business income from the taxpayer's qualified trade or business, plus 20% of the taxpayer's qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

Itemized deduction changes. For 2018, changes to the itemized deductions that can be claimed on Schedule A include: overall itemized deductions are no longer limited because the taxpayer's adjusted gross income is over a certain limit; a taxpayer's deduction of state and local income, sales, and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if married filing separately); and a taxpayer can no longer deduct job-related expenses or other miscellaneous itemized deductions that were subject to the 2%-of-adjusted-gross-income floor.

Alternative minimum tax exemption amount. The alternative minimum tax (AMT) exemption amount is increased to $70,300 ($109,400 if married filing jointly or a qualifying widow or widower; $54,700 if married filing separately). The income levels at which the AMT exemption begins to phase out has increased to $500,000 ($1,000,000 if married filing jointly or a qualifying widow or widower.

Section 965 deferred foreign income. If taxpayers own (directly or indirectly) certain foreign corporations, they may have to include on their return certain deferred foreign income. Taxpayers may pay the entire amount of tax due with respect to this deferred foreign income this year or elect to make payment in eight installments or, in the case of certain stock owned through an S corporation, elect to defer payment until the occurrence of a triggering event. Taxpayer should see the instructions for Line 11a; Schedule 1, line 21; Schedule 5, line 74 for more information.

Section 951A global intangible low-taxed income. If taxpayers are U.S. shareholders of a controlled foreign corporation (CFC), they must include their global intangible low-taxed income (GILTI) in their income. If they own an interest in a domestic pass-through entity that is a U.S. shareholder of a CFC, they may have a GILTI inclusion related to that interest, even if they are not a U.S. shareholder of the CFC. The Draft Instructions also note that the Former Code Section 199 domestic production activities deduction (DPAD) has been repealed with limited exceptions

Expired tax benefits. The Draft Instructions note that at the time these instructions went to print, some tax benefits had expired, including the deduction for qualified tuition and fees, the mortgage insurance premium deduction, and the non-business energy property credit.

New schedules. The Draft Instructions outline which taxpayers may need to use the additional new schedules on their 2018 Form 1040.

Schedule 1 (Additional Income and Adjustments to Income) is to used by taxpayers who have additional income, such as capital gains, unemployment compensation, prize or award money, or gambling winnings or have any deductions to claim, such as student loan interest deduction, self-employment tax, or educator expenses.

Schedule 2 (Tax) is to be used by taxpayers who owe AMT or need to make an excess advance premium tax credit repayment.

Schedule 3 (Nonrefundable credits) is to be used by taxpayers who can claim a nonrefundable credit other than the child tax credit or the credit for other dependents, such as the foreign tax credit, education credits, or general business credit.

Schedule 4 (Other Taxes) is to be used by taxpayers who owe other taxes, such as self-employment tax, household employment taxes, additional tax on IRAs or other qualified retirement plans and tax-favored accounts.

Schedule 5 (Other Payments and Refundable Credits) is to be used by taxpayers who can claim a refundable credit other than the earned income credit, American opportunity credit, or additional child tax credit or who have other payments, such as an amount paid with a request for an extension to file or excess social security tax withheld.

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Rows of the new Tesla Model 3 electric vehicles are seen in Richmond, California, U.S.

In July, Tesla said it delivered 200,000 electric cars to buyers in the United States, meaning tax credits will now begin to be lowered while rivals such as Mercedes-Benz, BMW AG and Audi AG will bring electric models to the market with a full tax credit in place.

Buyers of electric cars get full tax credit for the quarter in which the company hits the 200,000 delivery mark and the next, according to Internal Revenue Service regulation.

This means Tesla has until the end of the year to hand out full tax credits, which could invite a further rush of orders and hit the company’s already strained production and delivery chain. Tesla has scrambled to deliver the Model 3 - a mass-market sedan that it hopes is the key to success - and many customers have been waiting since early 2016.

Vehicles have piled up in lots around California awaiting transport, and Musk said last month that Tesla had moved from “production hell to delivery logistics hell.”

Friday’s news confirms that many customers may still have to wait three months or more. Musk said earlier this month that a surge in third-quarter production had driven it to the verge of profitability.

The declining tax credit is likely to put Tesla at a disadvantage as rivals such as Mercedes-Benz, BMW AG and Audi AG bring electric models to the market with a full tax credit in place.

It also adds to what’s been a bad month for Tesla, which has seen increased investor calls for stronger oversight of Musk, whose recent erratic public behavior raised concerns about his ability to steer the money-losing company through a rocky phase of growth.

The company recently settled with the U.S. Securities and Exchange Commission a lawsuit that had threatened to force him out.

Electrek, which earlier reported on the deadline on new orders,

Schedule 6 (Foreign Address and Third Party Designee) is to be used by taxpayers who have a foreign address or a third party designee.

Tax Reform Brings Changes to Real Estate Rehabilitation Tax Credit

The rehabilitation tax credit offers an incentive for owners to renovate and restore old or historic buildings. Tax reform legislation passed in December 2017 changed when the credit is claimed and provides a transition rule:

• The credit is 20 percent of the taxpayer’s qualifyingcosts for rehabilitating a building.

• The credit doesn’t apply to the money spent on buyingthe structure.• The legislation now requires taxpayers take the 20percent credit spread out over five years beginning in theyear they placed the building into service.

• The law eliminates the 10 percent rehabilitation creditfor pre-1936 buildings.

• A transition rule provides relief to owners of eithera certified historic structure or a pre-1936 building byallowing owners to use the prior law if the project meetsthese conditions:

• The taxpayer owned or leased the building on January1, 2018, and the taxpayer continues to own or lease thebuilding after that date.

• The 24- or 60-month period selected by the taxpayerfor the substantial rehabilitation test begins by June 20,2018.

Taxpayers use Form 3468, Investment Credit, to claim the rehabilitation tax credit and a variety of other investment credits. Form 3468 instructions have detailed requirements for completing the form.

Tesla Says Orders Placed by Oct 15 Eligible for Full Tax Credit

Electric carmaker Tesla Inc said bit.ly/2NCbs1r orders for cars placed by Oct. 15 will be eligible for a full federal tax credit of $7,500 and these customers will get their cars delivered by the end of the year.

Under a major tax overhaul passed by the Republican-controlled U.S. Congress late last year, incentives in the way of tax credits that lower the cost of electric vehicles are available for the first 200,000 such vehicles sold by an automaker. The tax credit is then reduced by 50 percent every six months until it phases out.

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described the company's latest move as an attempt to boost sales.

However, the incentives could go if a new bill, introduced by a Republican senator to end the federal tax credit for electric cars altogether, is passed, Electrek reported.

AICPA Testimony on Proposed Regulations (REG-136118-15) Regarding the Centralized Partnership Audit Regime

Presented at Public Hearing – October 9, 2018

Good morning. My name is Michael Greenwald and I am a partner at Friedman LLP. I am testifying today on behalf of the American Institute of CPAs. I am currently the chair of the AICPA Partnership Tax Technical Resource Panel.

The AICPA has submitted a series of comments to the IRS on the Centralized Partnership Audit Regime and the proposed regulations, including our latest letter issued this morning. My testimony will focus on the proposed regulations on Partner-Level Penalty Defenses, as well as two areas not covered by any guidance issued to date - an audited partnership’s access to the Office of Appeals and the impact of the provisions under the Tax Cuts and Jobs Act (commonly referred to as TCJA) on the Regime.

The Regime significantly changes the way adjustments made by the IRS during an exam are assessed and paid. By default, a partnership is liable for any imputed underpayment. The underpayment is potentially reduced through requested modifications (such as, the filing of amended returns by partners). Alternatively, a partnership may elect to “push-out” an adjustment to its partners, who must then prepare and file “adjustment statements” for the audited and affected tax years.

First, let’s talk about penalties and the process for raising a defense to a penalty. Under the Regime, the IRS determines and assesses penalties at the partnership-level. However, the actual calculation and ability to raise a defense occurs at the partner-level. We have suggestions on how to reconcile and streamline this process.

Under the proposed regulations, a partner can only assert a penalty defense (such as, reasonable cause or good faith) if the partner first pays the tax and penalty due and then files a claim for refund of the penalty. This process will result in the needless expenditure of additional resources by the taxpayer and the IRS, while further extending the length of time until final resolution of the case.

Instead, we recommend allowing partnerships to submit defenses on behalf of the partners (both direct and indirect) during the modification period. In the case of a partnership electing the “push-out” procedures, the IRS should allow the direct and indirect partners to submit a statement supporting a

partner-level defense. They could submit it with their reporting year return.

It is both fair and more efficient for the IRS to consider the validity of any partner-level defense early in the process. Otherwise, the agency would force some partners to unnecessarily pay the proposed penalties.

Penalties can represent a sizable dollar amount and the requirement that taxpayers must provide advance payment of penalties, even in cases where they have a valid penalty defense, has the potential of imposing a significant economic burden. Partners no longer have the ability to participate in the actual exam, or challenge IRS determinations regarding items reported on the partnership return. They have lost all ability to challenge the actual assessment of additional tax determined by the IRS. To impose additional, unreasonable restrictions on their ability to timely raise legitimate penalty defenses, is contrary to the goal of a fair, equitable and transparent tax system. It is also important to note that requiring the prepayment of penalties and then having to file a claim for refund is inconsistent with the procedures in place for other scenarios involving amended returns and audit adjustments.

Next……. I would like to address our concern that there is no reference in the preamble, the proposed regulations or any other guidance related to the Regime to an audited partnership’s right to challenge, with Appeals. The appeals process is a vital option for taxpayers to resolve an issue without having to go to Tax Court.

The Regime creates a significant number of new elections which apply to partnerships under examination. Further, the Regime establishes new procedures and stringent statutory deadlines. Together these changes will create issues for taxpayers wishing to challenge IRS decisions under the Regime.

In our comment letter submitted this morning, we have identified eight specific actions or determinations by the IRS that taxpayers should, at a minimum, be able to challenge.For example, taxpayers need the ability to appeal a decision on the validity of an opt-out election, a denial of a requested modification or the proposed audit adjustments among other issues.

In general, they should have the right to appeal any decision by the IRS which directly affects the proposed audit adjustments, the calculation of imputed underpayment, or the ability of a partnership to make any valid election under the Regime. It is also important that the Appeals process is both fair and equitable.

• For example, a partnership should have the right toappeal the determinations under sections 6221 and 6241within 60 days of receiving a determination;

• Next, it is important that the IRS establish a singleunified appeals process for a partnership to challenge boththe underlying adjustments and any denial of requested

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modifications.

1. We recommend that if a partnership has notsubmitted a request for modification, then it should have270 days after issuance of the NOPPA to challenge withAppeals.

2. If a partnership has filed a request for modification,then its right to challenge IRS decisions should extenduntil the latter of 270 days after the NOPPA or 45 daysafter the IRS has responded.

3. The IRS should not have the ability to issue aFinal Partnership Adjustment until at least 30 days aftera final decision is made by Appeals.

The partnership’s right to challenge a decision with Appeals is an important step that we need to preserve. Under the Regime, the IRS has the authority to invalidate partnership elections, refuse requested modifications to the adjustments and overrule partnership decisions without explanation. The stringent statutory deadlines established for certain actions will not provide sufficient time for a partnership to properly review and challenge the decisions made by the IRS.

Such absolute authority, mainly invested in one IRS employee (the examiner assigned to the audit), is contrary to good tax policy. It violates the IRS’s own Taxpayer’s Bill of Rights. In the interest of fairness, the IRS should explicitly identify those decisions which a taxpayer may challenge with Appeals, the timeframes for taking such actions, and the effect of such challenges on the various new deadlines.

Finally, taxpayers and their tax preparers need guidance on the impact of the new partnership-related provisions of TCJA to the Regime. The TCJA contains several new provisions which impact partnerships and the distributive shares of income and expenses to their partners. In particular, section 163(j) concerning interest expense limitations, section 199A for the Qualified Business Income deduction, and section 954A on GILTI, all contain substantial new partnership reporting and calculation elements.

These new reporting and calculation procedures for partnerships will present significant challenges for taxpayers. A key issue is that in some cases partnership items are now treated under both the entity and aggregate concepts at the same time. As an example, questions have been raised as to whether the 199A QBI deduction might be allowed as a modification item. The treatment of partner level carryforwards for disallowed interest under section 163(j) is another example. The challenge of integrating these new TCJA provisions into adjustments under the Regime exist regardless of whether a partnership elects to pay an imputed underpayment (both with and without any modification requests) or issues “push-out” statements.

We need guidance as soon as possible, including examples of how the Regime’s adjustments to partnership items and tax attributes specific to these new provisions are treated under

sections 6225 and 6226 by partnerships and their partners.

The AICPA appreciates the opportunity to testify today. We hope Treasury and the IRS will consider these thoughts and our comment letters as you move forward in developing the final regulations, forms and procedures necessary to implement the Centralized Partnership Audit Regime. Thank you.

Annual List Sets Out Extreme Drought Areas for Extended Livestock Replacement Period

Notice 2018-79, 2018-42 IRB

IRS has released the latest version of an annual list (published each September) of counties or parishes in which exceptional, extreme, or severe drought has been reported during the preceding 12 months. Farmers and ranchers in these areas whose drought sale replacement period for a tax-free sale or exchange under Code Sec. 1033 was scheduled to expire at the end of this tax year—Dec. 31, 2018, in most cases—will now have until the end of their next tax year. The list can be used instead of U.S. Drought Monitor maps to determine whether an extended replacement period applies for livestock sold because of drought.

Background on livestock replacement period. An involuntary conversion is the compulsory or involuntary conversion of a taxpayer's property into similar property, dissimilar property or money as a result of the property's destruction, theft, seizure, requisition or condemnation (actual or threatened). (Code Sec. 1033(a)) Involuntary conversion includes the sale or exchange of livestock (in excess of the number that the taxpayer would sell if following his or her usual business practices) solely on account of drought, flood, or other weather-related conditions. (Code Sec. 1033(e)(1)) Where property is involuntarily converted into other property similar or related in service or use to the converted property, no gain is recognized. (Code Sec. 1033(a)(1))

If a taxpayer sells livestock on account of drought, flood, or other weather-related conditions which result in the area being designated as eligible for assistance by the federal government, the involuntary conversion replacement period is four years. This 4-year period may be extended further by IRS on a regional basis if the weather-related conditions continue for more than three years. (Code Sec. 1033(e)(2))

In Notice 2006-82, 2006-2 CB 529, IRS said that if a sale or exchange of livestock is treated as an involuntary conversion because of drought, the 4-year replacement period is extended until the end of the taxpayer's first tax year ending after the first drought-free year for the applicable region. The first drought-free year for the applicable region (which is the county that experienced the drought and all contiguous counties) is the first 12-month period that: (1) ends on Aug. 31; (2) ends in or after the last year of the taxpayer's 4-year replacement period; and (3) does not include any weekly period for which exceptional, extreme, or severe drought is reported for any location in the applicable region. Taxpayers can determine

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whether drought conditions exist for an applicable region by referring to either the U.S. Drought Monitor maps produced by the National Drought Mitigation Center (NDMC) or a list that IRS publishes in September.

Notice 2006-82, noted that while taxpayers can generally determine whether severe drought is reported for all or part of a county by looking at the U.S. Drought Monitor maps, in some cases, such as on the borders of a drought zone, IRS's list might be more helpful.

List of areas with exceptional, extreme, or severe drought. In the Appendix to Notice 2018-79, IRS lists counties in 41 states and the District of Columbia for which exceptional, extreme, or severe drought was reported during the 12-month period ending Aug. 31, 2018. Any county contiguous to a county listed by the NDMC also qualifies for relief. (Notice 2006-82)

Under Notice 2006-82, the 12-month period ending on Aug. 31, 2019, is not a drought-free year for an applicable region that includes any county on this list. For a taxpayer who qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and whose replacement period is scheduled to expire at the end of 2018 (or, in the case of a fiscal year taxpayer, at the end of the tax year that includes Aug. 31, 2018), the replacement period under Code Sec. 1033(e)(2) and Notice 2006-82 will be extended if the applicable region includes any county on this list. This extension will continue until the end of the taxpayer's first tax year ending after a drought-free year for the applicable region.

Social Security Benefits to Increase in 2019

Each year we announce the annual cost-of-living adjustment (COLA). Usually there is an increase in the Social Security and Supplemental Security Income (SSI) benefit amount people receive each month, starting the following January. By law, federal benefits increase when the cost of living rises, as measured by the Department of Labor’s Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The CPI-W rises when prices increase for the things the

average consumer buys. This means that when prices for goods and services we purchase become more expensive, on average, the COLA increases monthly benefit levels and helps you keep up with the changing cost of living.

As a result, more than 67 million Americans will see a 2.8 percent increase in their Social Security and SSI benefits in 2019.

January 2019 marks other changes that will happen based on the increase in the national average wage index. For example, the maximum amount of earnings subject to Social Security payroll tax, as well as the retirement earnings test exempt amount, will change in 2019.

Want to know your new benefit amount as soon as possible? In December 2018, we will post Social Security COLA notices online for retirement, survivors, and disability beneficiaries who have a my Social Security account. You will be able to view and save these COLA notices securely via the Message Center inside my Social Security.

This year, you will still receive your COLA notice by mail. In the future, you will be able to choose whether you receive your notice online instead of on paper. Online notices will not be available to representative payees, individuals with foreign mailing addresses, or those who pay higher Medicare premiums due to their income. We plan to expand the availability of COLA notices to additional online customers in the future.

Prop Regs Explain De Minimis Error Safe Harbor for Info Returns and Payee Statements

IRS has issued proposed regs that explain the scope of a de minimis error safe harbor for information returns and payee statements created by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act, P.L. 114-113). The proposed regs also detail the payee's option to elect out of the safe harbor and when and how the election is made.

Background. In general, except where there is reasonable cause and no willful neglect, and subject to certain other exceptions, a penalty applies to a failure to include all the information required to be shown on an information return or a payee statement with respect to an information return, or any inclusion of incorrect information on an information return or payee statement. The amount of the penalty depends on various factors. (Code Sec. 6721; Code Sec. 6722)

Effective for returns and statements required to be filed after Dec. 31, 2016, the PATH Act established a de minimis error safe harbor from penalties for the failure to file correct information returns and for failure to furnish correct payee statements. Under the safe harbor, if the error is $100 or less ($25 or less in the case of errors involving tax withholding), the issuer of the information return is not required to file a corrected return, and no penalty is imposed. (Code Sec. 6721(c)(3)(A); Code Sec. 6722(c)(3)(A))

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would apply.

For example, a person would not be able to choose to forgo filing information returns or furnishing payee statements that the person is required to file or furnish under the Code and that report amounts less than $100 and tax withheld less than $25. To do so would be an intentional disregard of the filing requirement and result in higher penalties.

Payee election out. Reflecting Code Sec. 6721(c)(3)(B) and Code Sec. 6722(c)(3)(B), Prop Reg § 301.6721-1(e)(3) and Prop Reg § 301.6722-1(d)(3)(i) would allow a payeeto “elect out” of the safe harbor, i.e., elect to have the safeharbor exceptions for certain de minimis errors not apply tothe information reporting penalties. This election out wouldrequire the payor to issue a corrected payee statement. Apayee would be able to elect that the safe harbor exception toCode Sec. 6722 penalties not apply to a payee statement, andthat the election would also apply to the safe harbor exceptionto Code Sec. 6721 penalties with respect to correspondinginformation returns.

Under Prop Reg §301.6722-1(d)(3)(vi), the payee election would not be not available with respect to information that may not be altered under specific information reporting rules. For example, Prop Reg §1.6045-4(i)(5) provides special rules for defining gross proceeds in the context of multiple transfers for information reporting on real estate transactions and prohibits altering information after the due date for filing the Form 1099-S (Proceeds From Real Estate Transactions). IRS says allowing an election under Prop Reg § 301.6722-1(d)(3)(i) with respect to the Form 1099-S would suggest that a correction would or should be made. (Preamble to Prop Reg REG-118826-16)

Timing of payee election. Under Prop Reg § 301.6722-1(d)(3)(ii), a payee would have to make any election no later than the later of 30 days after the date on which the payee statement was required to be furnished to the payee, or October 15 of the calendar year, to receive a correct payee statement required to be furnished in that calendar year without having the safe harbor exceptions for certain de minimis errors apply.

The Preamble to the proposed regs explains that the allowance of an election after the due date for most payee statements and through October 15 would allow payees to inspect payee statements and make elections for purposes of timely filing their income tax returns. And the existence of an election cutoff date of October 15 in the case of most payee statements would reduce administrative burden on filers by eliminating elections after October 15. The 30-day rule would provide a deadline in cases of payee statements required to be furnished later in the calendar year, such as the Schedule K-1 (Form 1065) (Partner’s Share of Income, Deductions,Credits, etc.), required to be furnished to payees by fiscal yearpartnerships. (Preamble to Prop Reg REG-118826-16)

To reduce the administrative burden of yearly elections on both payees and filers, an election would remain in effect for all subsequent years until revoked under Prop Reg § 301.6722-

However, if any person receiving payee statements makes an election to request a corrected statement, the penalty for failure to file a correct information return and the penalty for failure to furnish a correct payee statement continue to apply in the case of de minimis errors on that statement. (Code Sec. 6721(c)(3)(B); Code Sec. 6722(c)(3)(B))

Later tax laws have also made changes with regard to the penalty amounts for information returns required to be filed and payee statements required to be furnished.

In 2017, IRS issued Notice 2017-9, 2017-4 IRB, explaining the scope of the safe harbor and indicated that proposed regs would be on the way.

New proposed regs. IRS has just issued proposed regs generally incorporating the rules contained in Notice 2017-9. Here’s a summary of the guidance in the proposed regs.

Safe harbor exception. Reflecting Code Sec. 6721(c)(3)(A) and Code Sec. 6722(c)(3)(A), Prop Reg § 301.6721-1 and Prop Reg § 301.6722-1 would provide for a safe harbor exception to the Code Sec. 6721 and Code Sec. 6722 penalties. In general, the safe harbor exception would apply in circumstances when an information return or payee statement is otherwise correct and is timely filed or furnished and includes a de minimis error in a dollar amount reported on the information return or payee statement.

When the safe harbor exception applies, no correction would be required and, for purposes of Code Sec. 6721 or Code Sec. 6722, respectively, the information return or payee statement would be treated as having been filed or furnished with all of the correct required information.

An error would be treated as de minimis if the difference between any single amount in error and the correct amount was not more than $100, or, if the difference is with respect to an amount of tax withheld, it was not more than $25. Prop Reg §301.6722-1(d)(2) would define tax withheld to include any amount required to be shown on an information return or payee statement (as defined in Code Sec. 6724(d)(1) and Code Sec. 6724(d)(2), respectively) withheld under Code Sec. 3402, as well as any such amount that is creditable under Code Sec. 27, Code Sec 31, Code Sec 33, or Code Sec 1474. The Preamble to the regs explains that this would not be an exclusive definition but is intended to ensure that all amounts giving rise to dollar-for-dollar reductions in tax, including foreign tax credits under Code Sec. 27, would be included as tax withheld. (Preamble to Prop Reg REG-118826-16)

Errors due to intentional disregard of information reporting rules. Reflecting Code Sec 6721(e) and Code Sec. 6722(e), Prop Reg § 301.6721-1(e)(1) and Prop Reg § 301.6722-1(d)(1) provide that the safe harbor exceptions for certain de minimis errors would not apply in cases of intentional disregard of the requirements to file correct information returns or furnish correct payee statements. In those cases, higher penalty amounts imposed by Code Sec 6721(e), Code Sec. 6722(e), Prop Reg § 301.6721-1(g) and Prop Reg § 301.6722-1(c)

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1(d)(3)(vii). The effect of a revocation of a prior election would be that the safe harbor exceptions for de minimis errors would apply. The revocation would be effective for payee statements furnished or due to be furnished after the revocation was received.

Under the proposed regs, the date of an election by the payee would be the date the election was received by the filer. For determining the “date of receipt” by the filer, the provisions of Code Sec. 7502 relating to timely mailing treated as timely delivery would apply in determining the date an election under Prop Reg § 301.6722-1(d)(3)(ii) or revocation under Prop Reg § 301.6722-1(d)(3)(vii) was considered to be received by thefiler. This rule would treats delivery to the filer as if the filer werean agency, officer, or office under Code Sec. 7502, so that thedate of mailing would control the timeliness of an election orrevocation. (Preamble to Prop Reg REG-118826-16)

How the payee election would be made. Under Prop Reg § 301.6722-1(d)(3)(iii), the default manner for an "election out" by the payee that the de minimis error safe harbor exceptions not apply would be by writing on paper, mailed to the address for the filer appearing on the payee statement the payee received from the filer with respect to which the election was being made, or as provided to them by the filer.

Prop Reg § 301.6722-1(d)(3)(iii)(A) through Prop Reg § 301.6722-1(d)(3)(iii)(D) would provide the requirements for what information would have to be included in the written election, such as the payee’s name, address, and taxpayer identification number (TIN).

The payee election could be made in a reasonable alternative manner if the filer provided a valid notification to the payee describing the reasonable alternative manner. This could include electronic elections by e-mail or telephonic elections. (Prop Reg § 301.6722-1(d)(3)(v))

To be a valid notification from the payor to the payee of reasonable alternative ways to make the payee election, the notification would have to be written (paper or electronic), and must:

• be timely under the provisions of Prop Reg § 301.6722-1(d)(3)(v)(D);

• explain to the payee the payee’s ability to make theelection under Prop Reg § 301.6722-1(d)(3)(i);

• provide an address to which the payee could send awritten election under Prop Reg § 301.6722-1(d)(3)(i) andProp Reg § 301.6722-1(d)(3)(iii); and

• describe the information required for making theelection as described by Prop Reg § 301.6722-1(d)(3)(iii)(A) through Prop Reg § 301.6722-1(d)(3)(iii)(D). (Prop Reg301.6722-1(d)(3)(v)(B))

To be timely under Prop Reg § 301.6722-1(d)(3)(v)(D), a notification would have to be provided to the payee with, or

at the time of, the furnishing of the payee statement, or have previously been timely provided (under the with, or at the time of, rule) to the payee with a payee statement associated with the relevant account.

Reasonable cause. When a payee makes a timely “election out” under Prop Reg § 301.6722-1(d)(3)(i), the safe harbor exceptions for de minimis errors would no longer apply with respect to the payee statement, and a corresponding information return would be required to be furnished and filed that year. If the payee statement was already furnished or the information return already filed, and they contained de minimis errors, the Code Sec. 6721 and Code Sec. 6722 penalties would apply absent the applicability of an exception other than the safe harbor exceptions for certain de minimis errors. Prop Reg § 301.6724-1(h) would provide special rules to determine whether the exception for reasonable cause applied in this situation.

Prop Reg § 301.6724-1(h) would only apply when the safe harbor for certain de minimis errors would have applied, but for the payee’s timely “election out” under Prop Reg § 301.6722-1(d)(3)(i). Under this provision, a filer would be able to establish that a failure caused by the presence of de minimis errors and an election under Prop Reg § 301.6722-1(d)(3)(i) was due to reasonable cause and not willful neglect, by filing a corrected information return or furnishing a corrected payee statement, or both, as applicable, within 30 days of the date of the election. Where specific rules provide for additional time in which to furnish a corrected payee statement and file a corrected information return, for example with Forms W-2C (Corrected Wage and Tax Statements), the 30-day rulewould not apply, and the specific rules would apply. In thecase of filing or furnishing outside of the 30-day period, thedetermination of reasonable cause would be made on a case-by-case basis. (Preamble to Prop Reg REG-118826-16)

Cost basis. To encourage correct reporting, and to facilitate brokers with the accurate maintenance of cost basis systems, Prop Reg § 1.6045-1(d)(6)(vii) would provide that voluntary corrections by brokers will result in updated adjusted basis under Code Sec. 6045, even when the incorrect dollar amounts were not “required to be corrected because of Code Sec. 721(c)(3) or Code Sec. 6722(c)(3).”

The Preamble to the proposed regs says this would allow brokers who identify a de minimis error in their cost basis systems to fix the mismatch between their systems and the previously-reported (incorrect) dollar amount through voluntary subsequent reporting. The updated adjusted basis under Code Sec. 6045 would have no effect on calculating basis under other basis determination sections, such as Code Sec. 1012. (Preamble to Prop Reg REG-118826-16)

Prospective effective date. The proposed regs would generally apply with respect to information returns required to be filed and payee statements required to be furnished on or after January 1 of the calendar year immediately following the date of publication of a Treasury decision adopting the proposed regs as final regs in the Federal Register. However, Prop

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Reg § 301.6724-1(h), would apply with respect to information returns required to be filed and payee statements required to be furnished on or after Jan. 1, 2017.

Simplified Per-diem Rates Increase for Post-Sept. 30, 2018 Business Travel

Notice 2018-77, 2018-42 IRB

IRS has issued a new notice carrying the “high-low” simplified per-diem rates for post-Sept. 30, 2018 travel. The high-cost area per-diem increases $3, and the low-cost area per-diem increases $4, from the prior simplified per-diems.

Background. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn't exceed IRS-approved maximums, and the employee provides simplified substantiation (time, place and business purpose), the reimbursement is treated as made under an accountable plan—it isn't subject to income- or payroll-tax withholding and isn't reported on the employee's Form W-2. Receipts of expenses aren't required.

In general, the IRS-approved per-diem maximum is the General Services Administration (GSA) per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. These rates in effect for the federal government's fiscal year period beginning Oct. 1, 2018, may be found at http://www.gsa.gov. However, in applying the per-diem, M&IE, and incidental-expenses-only allowances, an employer may continue using the CONUS (continental U.S.) rates that were in effect for the first nine months of 2018 for CONUS expenses in all of 2018, instead of using the GSA rates that are effective Oct. 1, 2018, provided that the employer consistently uses those prior rates for the last three months of 2018. (Rev Proc 2011-47, Sec. 4.06; Notice 2018-77, Sec. 6)

Definition of incidental expenses. Rev Proc 2011-47, Sec. 3.02(3) provided that the term “incidental expenses” has the same meaning as in the Federal Travel Regulations, 41 C.F.R. 300-3.1, and that future changes to the definition ofincidental expenses in the Federal Travel Regulations wouldbe announced in the annual per-diem notice. On Oct. 22,2012, the GSA published final regs revising the definition ofincidental expenses under the Federal Travel Regulations toinclude only fees and tips given to porters, baggage carriers,hotel staff, and staff on ships. Transportation between placesof lodging or business and places where meals are taken, andthe mailing cost of filing travel vouchers and paying employer-sponsored charge card billings, are no longer included inincidental expenses. Accordingly, taxpayers using per-diemrates may separately deduct, if permitted (see below), or bereimbursed for, transportation and mailing expenses. (Notice2018-77, Sec. 2)

Employee business expenses, such as unreimbursed transportation costs, are miscellaneous itemized deductions

that are disallowed for tax years 2018 through 2025.

High-low rates. A payor that pays a per-diem allowance in lieu of reimbursing actual expenses an employee pays or incurs or will pay or incur for travel away from home may use the high-low substantiation method in lieu of the per-diem substantiation method or the M&IE-only method. (Rev Proc 2011-47, Sec. 5.01)

Under the high-low substantiation method, there is one uniform per-diem rate for all “high-cost” areas within CONUS, and another per-diem rate for all other areas within CONUS. Under the optional high-low method for post-Sept. 30, 2018 travel, the high-cost-area per diem is $287 (up from $284), consisting of $216 for lodging and $71 for M&IE. The per-diem for all other localities is $195 (up from $191), consisting of $135 for lodging and $60 for M&IE. (Notice 2018-77, Sec. 5.01)

Changes in high-low per-diem localities. The following changes have been made to the list of high-cost localities:

• . . . The following localities have been added to thelist of high-cost localities: Sedona, Arizona; Los Angeles,California; San Diego, California; Vero Beach, Florida; JekyllIsland/Brunswick, Georgia; Duluth, Minnesota; Pecos, Texas;Moab, Utah; Cody, Wyoming. (Notice 2018-77, Sec. 5.03(a))

• . . . The following localities have changed the portionof the year in which they are high-cost localities: Oakland,California; Aspen, Colorado; Boca Raton/Delray Beach/Jupiter, Florida; Naples, Florida; Bar Harbor/Rockport,Maine; Boston/Cambridge, Massachusetts; Jamestown/Middletown/Newport, Rhode Island; Charleston, SouthCarolina; Vancouver, Washington; Jackson/Pinedale,Wyoming. (Notice 2018-77, Sec. 5.03(b))

• . . . The following localities have been removed from thelist of high-cost localities: Mill Valley/San Rafael/ Novato,California; Steamboat Springs, Colorado; Petoskey,Michigan; Saratoga Springs/Schenectady, New York.(Notice 2018-77, Sec. 5.03(c))

• . . . The following localities have been redefined:Traverse City, Michigan no longer includes Leland; BarHarbor, Maine now includes Rockport. (Notice 2018-77,Sec. 5.03(d))Limitation. A payor that uses the high-low substantiationmethod for an employee must use that method for allamounts paid to that employee for travel away from homewithin CONUS during the calendar year. The payor mayuse any permissible method (actual expenses, the per-diem substantiation method, or the M&IE-only per-diemsubstantiation method) to reimburse that employee for anyCONUS travel away from home. (Rev Proc 2011-47, Sec.5.03)

Transition rules. For travel in the last three months of a calendar year: (1) a payor must continue to use the same method (per-diem method, or high-low method) for an employee as

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the payor used during the first nine months of the calendar year; and (2) a payor may use either the rates and high-cost localities in effect for the first nine months of the calendar year or the updated rates and high-cost localities in effect for the last three months of the calendar year if the payor uses the same rates and localities consistently for all employees reimbursed under the high-low method. (Rev Proc 2011-47, Sec. 5.04; Notice 2018-77, Sec. 6)

Employer's deduction for high-low per-diem. A payor must treat M&IE allowances as a food and beverage expense that is subject to the 50% deduction limit on meal expenses. (Rev Proc 2011-47, Sec. 6.05) The percentage is 80% for food and beverage expenses of certain individuals (e.g., air transport workers, interstate truckers, bus drivers) during or incident to a period of duty subject to the hours-of-service limits of the Department of Transportation. (Code Sec. 274(n)(3))

Where the 50% deduction limit applies to food and beverages, an employer's deduction for a high-cost-area per-diem is equal to $251.50 ($216 for lodging plus $35.50 (half of $71 M&IE)). For non-high-cost areas, the payor deducts $165 ($135 for lodging, plus $30 (half of $60 M&IE)).

Optional method for incidental-expenses-only deduction. Instead of using actual expenses in computing deductions for ordinary and necessary incidental expenses of away-from-home business travel, employees and self-employed individuals who don't pay or incur meal expenses for a calendar day (or partial day) of travel away from home may, for post-Sept. 30, 2018 travel, deduct $5 per day (same as previous rate) for each calendar day (or partial day) the taxpayer is away from home. (Notice 2018-77, Sec. 4)This amount is deemed substantiated if the taxpayer substantiates the time, place, and business purpose of the travel for that day (or partial day). The incidental-expenses-only per-diem can't be used by payors that use a per-diem or M&IE-only per-diem method (see below), or by employees or self-employed individuals who use the M&IE-only per-diem method. The incidental-expenses-only per-diem is not subject to the 50% deduction limit on business meals. (Rev Proc 2011-47,Sec.4.05; Rev Proc 2011-47, Sec. 6.05(5))

M&IE-only per-diem. Under some circumstances, an employee may receive a per-diem reimbursement only for his or her M&IE for travel away from home. If simplified substantiation is supplied (time, place, business purpose), and one of several conditions is met (e.g., payor provides lodging in kind or pays the service provider directly for lodging), the amount paid is deemed paid under an accountable plan as long as the rate does not exceed the federal M&IE rate for the locality of travel for the period when the employee is away from home. Similar rules apply to self-employed individuals who pay or incur meal expenses. (Rev Proc 2011-47, Sec. 4.03)

Transportation industry per diem. Effective Oct. 1, 2018, taxpayers in the transportation industry paying (or deducting) a per-diem only for M&IE may treat $66 (up from $63) as the M&IE rate for all localities within CONUS and $71 (up from $68) as the M&IE rate for all localities outside of CONUS

(same as previously). (Notice 2018-77, Sec. 3) A transition rule provides that taxpayers that used the federal M&IE rates or the special transportation industry rates during the first nine months of 2018 for an individual can't switch to the other method for that individual until 2019. (Rev Proc 2011-47, Sec. 4.06(2))

IRS Considering Guidance on Section 355(b) Active Trade or Business Requirement

IRS has issued a statement indicating that it is contemplating issuing guidance on the active trade or business (ATB) requirement under Code Sec. 355(b). Specifically, IRS notes that certain entrepreneurial ventures whose activities consist of long period of research and development often collect little income (ordinarily a requirement in determining an ATB), yet nonetheless incur significant expenses and perform the day-to-day operational and managerial functions historically associated with an "active" business. IRS also requests comments and indicates that it will entertain requests for private letter rulings on these matters.

Background. Under Code Sec. 355(a), if certain requirements are satisfied, a distributing corporation may distribute the stock (or stock and securities) of a controlled corporation to its shareholders and security holders without the distributing corporation, its shareholders, or its security holders recognizing income, gain, or loss on the distribution. A "controlled corporation" is defined by reference to Code Sec. 368(c), which defines control as ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

One such requirement is the ATB requirement of Code Sec. 355(b), which requires that:

…each corporation is engaged, immediately after the distribution, in the active conduct of a trade or business;

…each trade or business was actively conducted throughout the 5-year period ending on the date of the distribution; and

…neither trade or business was acquired in a transaction in which gain or loss was recognized, in whole or in part, within the 5-year period.

A corporation is treated as engaged in a trade or business immediately after the distribution if a specific group of activities are being carried on by the corporation for the purpose of earning income or profit, and the activities included in such group include every operation that forms a part of, or a step in, the process of earning income or profit. Such group of activities ordinarily must include the collection of income and the payment of expenses. (Reg § 1.355-3(b)(2)(ii))

IRS statement. IRS has observed a significant rise in entrepreneurial ventures whose activities consist of research and development in lengthy phases. During these phases, the ventures often collect no income or negligible income

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but nonetheless incur significant financial expenditures and perform day-to-day operational and managerial functions that historically have evidenced an "active" business.

For instance, a venture in the pharmaceutical or technology field might engage in research to develop new products with the purpose of earning income in the future from sales or licenses. The venture might even forgo current income opportunities to obtain increased future income by developing products on its own. The nature and duration of the research phases is often dictated by regulatory agencies, which require complex review processes that can span multiple years and cost millions of dollars.

Due to the emergence of these ventures, IRS is considering guidance to address whether a business can qualify as an ATB if entrepreneurial activities, as opposed to investment or other non-business activities, take place with the purpose of earning income in the future, but no income has yet been collected.

IRS requests comments on all aspects of the requirement that an ATB ordinarily must include the collection of income, including:

1. the scope of the requirement under current law andadministrative guidance,

2. whether any applicable administrative guidance shouldbe withdrawn, revoked, modified, or declared obsolete, and

3. whether the requirement should be modified, forexample, whether an exception should apply to anyparticular business model due to its unique characteristics.

IRS states that it is not contemplating industry-specific guidance. Pending completion of its study, IRS will entertain requests for private letter rulings on the ATB qualification of corporations that have not collected income.

Taxpayers and their advisers are encouraged to request pre-submission conferences to discuss requests for rulings on these matters.

IRS Issues Procedures for Implementing Accounting Method Changes Related to ASC Topic 606

On May 10, 2018, the IRS issued Rev. Proc. 2018-29, which provides guidance for requesting an automatic change in method of accounting related to the adoption of revenue recognition standards under FASB Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts With Customers. Under the new procedures, taxpayers that implement Topic 606 for financial reporting purposes may change certain of their tax revenue recognition methods to conform to the new book methods, provided the new methods are otherwise permissible under current federal income tax law. This taxpayer may make the automatic change

only for the year the taxpayer adopts the new standard for financial accounting purposes and may make it either on a cutoff (prospective) basis or with a Sec. 481(a) (catch-up) adjustment. However, the automatic change does not apply to Sec. 451 revenue recognition changes provided in P.L. 115-97, the law known as the Tax Cuts and Jobs Act (TCJA)(the IRS will address those changes in future guidance). Thisdiscussion highlights some of the key provisions and potentialimplications of the new automatic method change procedures.

New financial accounting standard

On May 28, 2014, FASB issued new financial accounting standards for recognizing revenue from contracts with customers. For most taxpayers, the new standards are effective for annual reporting periods beginning after Dec. 15, 2018. However, publicly traded entities, certain not-for-profit entities, and certain employee benefit plans must implement the standards one year earlier (i.e., for annual reporting periods beginning after Dec. 15, 2017). The new financial reporting standards apply a five-step analysis to all contracts with customers to transfer goods and services (other than leases, insurance, financial instruments, guarantees, and nonmonetary exchanges between entities in the same line of business).

Under the new standards, revenue from contracts with customers generally is recognized using the following five-step process:

1. Identify the contract with a customer;

2. Identify the performance obligations in the contract;

3. Determine the transaction price;

4. Allocate the transaction price to the performanceobligations; and

5. Recognize revenue as the performance obligations aresatisfied.

Notice 2017-17 proposed automatic accounting method change procedures

On March 28, 2017, the IRS issued Notice 2017-17, which provides proposed procedures to request automatic consent to change a method of accounting for recognizing revenue related to the adoption of Topic 606 and requesting comments regarding various technical and implementation issues associated with adopting the new standards. Rev. Proc. 2018-29 provides revised final procedures incorporating some of the suggestions submitted by commenters in response to Notice 2017-17, such as permitting more book-tax conformity, providing simplified tax compliance procedures to reduce the administrative burden of implementing tax accounting method changes related to the new standards, and allowing taxpayers the option of making the accounting method change on either a cutoff basis or with a Sec. 481(a) adjustment. (For more on Notice 2017-17, see Meade, "Tax Clinic: Accounting Method

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Change Procedures Under the New Revenue Recognition Standards," (October 2017).)

Rev. Proc. 2018-29 final automatic accounting method change procedures

Rev. Proc. 2018-29 adds new Section 16.11 to the "List of Automatic Changes" contained in recently issued Rev. Procs. 2017-30 and 2018-31. Under the new procedures, changes to tax revenue recognition methods related to the adoption of Topic 606 are limited to changes for: (1) identifying performance obligations; (2) allocating transaction price to performance obligations; and/or (3) considering performance obligations satisfied (i.e., steps 2, 4, and 5 of the five-step process discussed above). For purposes of the second change (allocating transaction price to performance obligations), the new procedures indicate that taxpayers may generally follow the book-allocation method adopted under the new standards, thus adopting one of the suggestions in comment letters submitted in response to Notice 2017-17, to reduce complexity and the administrative burden associated with book/tax differences resulting from implementation of the new standards.

Conversely, provisions taxpayers are likely to view less favorably include:

Permissible tax method: The changes may be made only if the taxpayer's new tax method is otherwise permissible under Sec. 451 or other guidance, including amendments made to Sec. 451 under the TCJA. These amendments relate to the application of the all-events test and an elective method of accounting for certain advance payments. They contain many ambiguities and complexities requiring clarification and guidance from the tax authorities that they have not yet provided. Thus, taxpayers looking to follow the new standards for tax purposes must first determine whether their proposed tax revenue recognition method conforms to Sec. 451 (as amended) and may need to do so prior to the issuance of the forthcoming IRS guidance.

Limited time to file: As noted previously, changes may be made only for the year the taxpayer adopts the new standards for financial accounting purposes (i.e., the first, second, or third tax year ending on or after May 10, 2018). Presumably, taxpayers that fail to file otherwise automatic method changes within the prescribed time frame will be required to apply for consent under the more onerous and costly advance consent procedures.

Excluded changes: Several methods that are ineligible for the new automatic procedures are expected to affect a broad array of taxpayers in many industries. These taxpayers will likely have to either request consent under the generally less favorable nonautomatic method change procedures or establish processes to track and report any book/tax differences arising from adoption of the new standards. These excluded changes include those in the taxpayer's manner of:

• Identifying contracts or determining the transaction

price, including the treatment of variable consideration, under the new standards (i.e., steps 1 and 3 of the five-step process discussed above); and

• Accounting for income from long-term contractssubject to Sec. 460, except for contracts exempt from useof the percentage-of-completion method (i.e., certain homeconstruction contracts and small taxpayers described inSec. 460).

No ruling protection: IRS consent granted under the new procedures does not include rulings that the new method of accounting and/or new allocation method are permissible methods, nor that the amount of income determined using the new methods is correct for tax purposes. Thus, the IRS may challenge changes made under the new procedures on exam, and taxpayers should therefore be prepared to support their new methods of accounting with the appropriate legal authority, a task likely complicated for many by the current lack of guidance on complying with amended Sec. 451.

Reduced compliance burden

As noted, Rev. Proc. 2018-29 contains several favorable provisions intended to simplify and reduce the compliance burden of implementing tax changes related to the new book revenue recognition standards, including:

Elective cutoff method: Changes requested under the new procedures may be implemented with either a Sec. 481(a) adjustment or on a cutoff basis. For changes made on a cutoff basis, the taxpayer must allocate any payment allocations prior to the year of change using the taxpayer's former method of accounting and implement all changes made under the new procedures using the cutoff method. A member of a consolidated group must implement all such changes with respect to its intercompany transactions on a cutoff basis but may elect either the cutoff method or a Sec. 481(a) adjustment for other transactions.

Reduced filing requirements: Certain lines of Form 3115, Application for Change in Accounting Method, are not required to be completed, and the requirement to file a duplicate copy of Form 3115 with the IRS National Office is waived. A single Form 3115 may be filed for multiple changes requested under the new procedures, provided the Sec. 481(a) adjustment for each change is separately stated and not netted with the other adjustments.

"Same change" eligibility rule temporarily inapplicable: The rule prohibiting filing an automatic method change if the same item was changed within the past five tax years (including the year of change) is waived for changes filed for a taxpayer's first, second, or third tax year ending on or after May 10, 2018. This provision may be particularly useful for many taxpayers that might be required to make multiple changes for the same revenue item because, for example, they are subject to different effective dates for complying with amended Sec. 451 (i.e., 2018 tax year) and adopting the new standards under Topic 606 (i.e., 2019 tax year).

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In a Notice and accompanying information release, IRS has provided transitional guidance on the deductibility of expenses for business meals that are purchased in an entertainment context. The Notice also announces that IRS intends to publish proposed regs on the subject and that, until those proposed regs are effective, taxpayers may rely on the guidance in the Notice.

Background. Code Sec. 162(a) allows a deduction for ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business.

Before it was amended by the Tax Cuts and Jobs Act (TCJA; PL 115-97, 12/22/2017), Code Sec. 274(a)(1)(A) generally prohibited a deduction with respect to an activity of a type considered to constitute entertainment, amusement, or recreation ("entertainment expenses"). However, Code Sec. 274(a)(1)(A) provided exceptions to that prohibition.

Code Sec. 274(a)(1), as revised by the TCJA, generally disallows a deduction for any item with respect to an activity that is of a type generally considered to constitute entertainment, amusement, or recreation. The TCJA repealed the Code Sec. 274(a)(1) exceptions.

Code Sec. 274(k) generally provides that no deduction is allowed for the expense of any food or beverages unless (A) such expense is not lavish or extravagant under thecircumstances, and (B) the taxpayer (or an employee ofthe taxpayer) is present at the furnishing of such food orbeverages. Code Sec. 274(n) provides, subject to exceptions,that the amount allowable as a deduction for any expense forfood or beverages may not exceed 50% of the amount of theexpense that otherwise would be allowable.

Code Sec. 274(e) enumerates nine specific exceptions to Code Sec. 274(a). Expenses that are within one of the exceptions in Code Sec. 274(e), which may include certain meal expenses, are not disallowed under Code Sec. 274(a). However, those expenses may be subject to the 50% limit on deductibility under Code Sec. 274(n).

Reg. § 1.274-2(b)(1) provides rules that define the term "entertainment."

IRS sets out guidance on business meals purchased in an entertainment context. The Notice and information release provide transitional guidance on the deductibility of expenses for business meals that are purchased in an entertainment context.

The TCJA did not address the circumstances in which the provision of food and beverages might constitute entertainment. However, the legislative history of the TCJA clarifies that taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business. See H.R. Rep. No. 115-466, at 407 (2017) (Conf. Rep.).

The Notice provides that taxpayers may deduct 50% of an

Limited time to convert a nonautomatic Form 3115: Taxpayers that filed a nonautomatic Form 3115 requesting changes covered in the new procedures prior to May 10, 2018, that was still pending with the IRS as of that date may refile the application as an automatic change, provided they:

• Otherwise meet the automatic change eligibility rules;

• Notify the IRS before the later of June 11, 2018, or theissuance date of a ruling letter granting or denying consentfor the change (if any); and

• File the automatic Form 3115, along with a copy of theNational Office letter sent acknowledging the taxpayer'srequest to convert, by the earlier of 30 days after the dateof the National Office's letter acknowledging the conversionrequest or the due date of the original Form 3115.

Implications

The highly anticipated new procedures are welcome news in that they incorporate several of the more significant requests for simplification from the Notice 2017-17 comment letters, such as permitting otherwise nonautomatic changes to be made using favorable automatic change procedures, providing taxpayers the flexibility to implement changes using either a cutoff method or with a Sec. 481(a) adjustment, reducing compliance requirements and temporarily waiving the "same change" eligibility rule. However, significant complexity, uncertainty, and/or compliance requirements likely remain for many taxpayers implementing method changes related to the new revenue recognition standards, particularly for those awaiting guidance in applying newly amended Sec. 451 or needing to make method changes that are ineligible for the automatic change procedures, such as taxpayers that receive variable consideration as part of the transaction price or that report income from long-term contracts subject to the percentage-of-completion method under Sec. 460.

As noted, the IRS has stated its intention to issue guidance in complying with amended Sec. 451 and, as evidenced by the request for comments contained in Rev. Proc. 2018-29, is aware that taxpayers will encounter additional issues requiring implementation assistance as they begin to adopt the new standards. However, notwithstanding the current lack of guidance, taxpayers must act soon to complete all the tasks necessary to file Form 3115 within the limited period allowed under the new procedures (i.e., they must implement tax method changes in the same year they adopt the new standards). Therefore, taxpayers are advised to begin the process of assessing the impact of the new revenue standards and tax law on their current tax revenue recognition methods so they are prepared to implement any necessary accounting method changes within the time frame specified in the final procedures.

IRS Guidance on the Deductibility of Meals Purchased in an Entertainment Context

Notice 2018-76, 2018-42 IRB; IR 2018-195, 10/3/2018

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otherwise allowable business meal expense if:

1. The expense is an ordinary and necessary expenseunder Code Sec. 162(a) paid or incurred during the taxyear in carrying on any trade or business;

2. The expense is not lavish or extravagant under thecircumstances;3. The taxpayer, or an employee of the taxpayer, ispresent at the furnishing of the food or beverages;

4. The food and beverages are provided to a current orpotential business customer, client, consultant, or similarbusiness contact; and

5. In the case of food and beverages provided during orat an entertainment activity, the food and beverages arepurchased separately from the entertainment, or the costof the food and beverages is stated separately from thecost of the entertainment on one or more bills, invoices, orreceipts. The entertainment disallowance rule may not becircumvented through inflating the amount charged for foodand beverages.

Although the Notice doesn't directly say so, it seems clear that the above requirements are not intended to have any effect on the rules in Code Sec. 274(e). That is, an expense that meets one of the Code Sec. 274(e) rules will be 100% or 50% deductible whether or not it meets requirements set out above.

IRS also noted that because the TCJA did not change the definition of entertainment under Code Sec. 274(a)(1), the regs under Code Sec. 274(a)(1) that define entertainment continue to apply.

The Notice provides three examples. For each example, assume that the food and beverage expenses are ordinary and necessary expenses under Code Sec. 162(a) paid or incurred during the tax year in carrying on a trade or business and are not lavish or extravagant under the circumstances. Also assume that the taxpayer and the business contact are not engaged in a trade or business that has any relation to the entertainment activity.

Example 1. Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.

The baseball game is entertainment as defined in Reg. § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the Code Sec. 274(a)(1) disallowance.

Therefore, A may deduct 50% of the expenses associated with the hot dogs and drinks purchased at the game.

Example 2. Taxpayer C invites D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.

The basketball game is entertainment as defined in Reg. § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets isan entertainment expense and is not deductible by C. Thecost of the food and beverages, which are not purchasedseparately from the game tickets, is not stated separately onthe invoice. Thus, the cost of the food and beverages also isan entertainment expense that is subject to the Code Sec.274(a)(1) disallowance.

Therefore, C may not deduct any of the expenses associated with the basketball game.

Example 3. Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.

As in Example 2, the basketball game is entertainment as defined in Reg. § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by C. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the Code Sec. 274(a)(1) disallowance.

Therefore, C may deduct 50% of the expenses associated with the food and beverages provided at the game.

Additional future guidance. IRS intends to publish proposed regs under Code Sec. 274 clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50% deductible expenses. Until the proposed regs are effective, taxpayers may rely on the guidance in the Notice for the treatment under Code Sec. 274 of expenses for the business meals described in the Notice.

IRS intends to issue separate guidance addressing the treatment under Code Sec. 274(e)(1) and Code Sec. 274(n) of expenses for food and beverages furnished primarily to employees on the employer's business premises.

IRS Clarifies: Safe Harbor for Concrete Foundation Repairs Unaffected by TCJA's Loss Limitations

In a letter to Rep. Joe Courtney (D-CT), IRS Commissioner Charles Rettig clarified that changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017) to the treatment of casualty losses and net operating losses (NOLs) do not affect safe harbor relief granted by IRS that allows certain taxpayers to treat costs of repairing home foundations damaged by pyrrhotite as casualty losses.

Background—pyrrhotite damage and safe harbor. Residents in the northeastern part of the U.S. have experienced

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The letter clarified that NOLs from casualty losses meeting the requirements of Rev Proc 2017-60 and Rev Proc 2018-14 are treated as arising either in or before the 2017 tax year and are thus unaffected by the TCJA's limitations on casualty losses and NOLs starting in the 2018 tax year.

Treasury, IRS Issue Proposed Regulations On New Opportunity Zone Tax Incentive

The Treasury Department and the Internal Revenue Service issued proposed regulations and other published guidance for the new Opportunity Zone tax incentive.

Opportunity Zones, created by the 2017 Tax Cuts and Jobs Act, were designed to spur investment in distressed communities throughout the country through tax benefits. Under a nomination process completed in June, 8,761 communities in all 50 states, the District of Columbia and five U.S. territories were designated as qualified Opportunity Zones. Opportunity Zones retain their designation for 10 years. Investors may defer tax on almost any capital gain up to Dec. 31, 2026 by making an appropriate investment in a zone, making an election after December 21, 2017, and meeting other requirements.

The proposed regulations clarify that almost all capital gains qualify for deferral. In the case of a capital gain experienced by a partnership, the rules allow either a partnership or its partners to elect deferral. Similar rules apply to other pass-through entities, such as S corporations and their shareholders, and estates and trusts and their beneficiaries.

Generally, to qualify for deferral, the amount of a capital gain to be deferred must be invested in a Qualified Opportunity Fund (QOF), which must be an entity treated as a partnership or corporation for Federal tax purposes and organized in any of the 50 states, D.C. or five U.S. territories for the purpose of investing in qualified opportunity zone property.

The QOF must hold at least 90 percent of its assets in qualified Opportunity Zone property (investment standard). Investors who hold their QOF investment for at least 10 years may qualify to increase their basis to the fair market value of the investment on the date it is sold.

The proposed regulations also provide that if at least 70 percent of the tangible business property owned or leased by a trade or business is qualified opportunity zone business property, the requirement that “substantially all” of such tangible business property is qualified opportunity zone business property can be satisfied if other requirements are met. If the tangible property is a building, the proposed regulations provide that “substantial improvement” is measured based only on the basis of the building (not of the underlying land).

In addition to the proposed regulations, Treasury and the IRS issued an additional piece of guidance to aid taxpayers in participating in the qualified Opportunity Zone incentive. Rev. Rul. 2018-29 provides guidance for taxpayers on the “original use” requirement for land purchased after 2017 in qualified opportunity zones. They also released Form 8996, which

problems with certain residential concrete foundations that contain pyrrhotite, which can cause concrete to deteriorate prematurely.

In 2017, IRS provided a safe harbor that allowed taxpayers to treat the costs of repairing such damage as a casualty loss and contained a formula for determining the amount of the loss. (Rev Proc 2017-60, 2017-50 IRB 559; see "Mineral pyrrhotite damage to home's concrete foundation treated as deductible casualty") To claim a casualty loss under the safe harbor in Rev Proc 2017-60, a taxpayer was generally required to have paid to repair damage caused by a deteriorating concrete foundation before Jan. 1, 2018.

In 2018, IRS modified Rev Proc 2017-60 to extend the time for individual taxpayers to pay to repair the damage to their personal residences. (Rev Proc 2018-14, 2018-9 IRB 378; see "IRS extends safe harbor for taxpayers with pyrrhotite damage to home foundations") As modified, a taxpayer could qualify for the safe harbor and take a 2017 casualty loss if, for damage occurring prior to 2018, he or she pays to repair the damage prior to the last day for filing a timely amended return for the 2017 tax year.

Background—casualty losses and NOLs. Under pre-TCJA law, individuals could claim as itemized deductions certain personal casualty losses, not compensated by insurance or otherwise, including losses arising from fire, storm, shipwreck, or other casualty, or from theft. There were two limitations to qualify for a deduction: (1) a loss had to exceed $100, and (2) aggregate losses could be deducted only to the extent they exceeded 10% of adjusted gross income.

For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the TCJA suspended the personal casualty loss deduction, except for personal casualty losses incurred in a Federally-declared disaster. (Code Sec. 165(h))

Under pre-TCJA law, NOLs could be carried back two years and forward 20 years and could offset 100% of a taxpayer's taxable income in the carryback or carryover years.

For tax years beginning after Dec. 31, 2017, the 2-year carryback provision is repealed, NOLs can be carried forward indefinitely, and the NOL deduction is generally limited to 80% of taxable income (determined without regard to the NOL deduction, itself). (Code Sec. 172(a), Code Sec. 172(b))

Request for clarification. Rep. Courtney requested clarification as to (i) how the TCJA changes impact casualty loss deductions under Rev Proc 2017-60 and Rev Proc 2018-14, and (ii) whether the deductions can generate or increase an NOL.

No effect. In his letter, IRS Commissioner Rettig stated that casualty loss deductions that qualify for the safe harbor under Rev Proc 2017-60 and Rev Proc 2018-14 are treated as trade or business deductions and can create or increase a taxpayer's NOL. A taxpayer can carry these NOLs back two years and forward 20 years, and the NOLs can offset 100% of the taxpayer's taxable income in those years.

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investment vehicles will use to self-certify as QOFs.

The Opportunity of Opportunity Zones: Eye-Catching Tax Benefits On Your Capital Gains

In 1789, Benjamin Franklin penned the now famous words, “In this world nothing can be said to be certain, except death and taxes.” Indeed, most of us would have a difficult time arguing to the contrary. However, a recent change in U.S. Federal tax law as part of the Trump administration’s 2017 tax reform may call the latter part of Mr. Franklin’s statement into question, at least for some investors.

As part of the tax law changes that went into effect with the passage of the Tax Cuts and Jobs Act of 2017, a new classification of investments was created which may allow investors to defer or even eliminate some capital gains taxes if certain conditions are met. This new type of investment is called an “Opportunity Fund,” and it may be an attractive way for investors to create positive impacts with their capital while decreasing the burden of taxes.

An Opportunity Fund is a private sector investment vehicle that invests at least 90% of its capital in newly created “Opportunity Zones.” These zones are low-income census tracts that are nominated for such status by state governors and then certified by the U.S. Department of the Treasury.

The creation of Opportunity Funds and granting of favorable tax treatment on the funds encourages long-term capital investment into economically disadvantaged communities that have historically been starved of such investment. Opportunity Fund investments may include affordable housing, infrastructure, and small business investments, among others.

Currently there are over 8,700 certified Opportunity Zones in the U.S., with zones in every state and territory. This number is expected to continue growing, along with the number of Opportunity Funds that will provide the mechanism for investment in these communities.

So how do Opportunity Fund investments work, and what tax advantages can Opportunity Fund investors enjoy? The

best way to understand how Opportunity Funds work is to walk through an example. Let’s start by assuming that you have a taxable investment that you’ve held for a period of time and which has increased in value. You paid $100 for the investment, and now it is worth $200.

You would like to sell this investment and redeploy your capital elsewhere, but you are hesitant to do so because the sale of the asset would result in a taxable capital gain that would effectively lower your return on the investment by your capital gains tax rate (we will assume you are subject to the maximum capital gains tax rate of 23.6%).

This is where Opportunity Funds enter the picture. Let’s assume that you go ahead and sell the asset and realize a $100 capital gain. This would normally result in a tax burden of $23.60. However, instead of reinvesting your $200 of proceeds into a stock or bond, you invest $200 in an Opportunity Fund.

When you file your taxes for the year in which these transactions took place, you will NOT pay any capital gains tax on the $100 gain that you realized. Instead that tax is deferred until some future date, and it may even be decreased if certain conditions are met (our example will illustrate this).

As it turns out, you are a patient, long-term investor, and you decide to leave your capital invested in the Opportunity Fund for five years. If we assume you earn an annual return of 5% on your investment, your initial $200 investment will have grown to $255. But something interesting happens after your money has been invested in an Opportunity Fund for five years.

Your initial cost basis from your original investment ($100, remember?) gets “stepped up” by 10%. This means that your cost basis on your original investment is now $110 instead of $100, effectively reducing your tax burden by 10%. If you were to go ahead and sell your Opportunity Fund investment at that point, you would then owe capital gains tax on your entire gain, less the adjustment for the cost basis step-up.

So you would be realizing a taxable gain of $145 ($255 current value minus $110 adjusted cost basis), while your actual gain would be $155 ($255 current value minus $100 original investment). At your 23.6% capital gains tax rate, this works out to an effective rate of 22.1%.

By investing in an Opportunity Fund and holding it for five years, you have reduced your effective tax rate by 1.5%. Maybe nothing to write home about, but a nice perk nonetheless.

However, there’s more.

Let’s say that you don’t need the money that you’ve invested in the Opportunity Fund anytime soon and leave it invested for seven years rather than five. At seven years, your initial cost basis on your original investment gets stepped up by another 5% (from $110 to $115 in our example). If you were to sell your Opportunity Fund investment at that point, you would realize a gain of $181, but only $166 would be taxable.

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With a QCD, you can give up to $100,000 annually from your IRA to charity and have that count as your RMD. The distribution isn’t included in your adjusted gross income, so it’s tax free. Now that the standard deduction has more than doubled and fewer people will be itemizing their deductions (and, as a result, fewer people will be taking a charitable deduction), a tax-free transfer from an IRA to charity is gaining popularity.

Mari Adam, a certified financial planner in Boca Raton, Fla., says many of her clients are interested in QCDs, especially this year. She’s talking with them about QCDs in October, so they have plenty of time to decide whether or not to take their RMD themselves or give all or some of the money to a charity. “We want to make sure we ask if they want to do a QCD before we process their RMD,” she says. “Once the RMD is processed, it’s too late.” After you withdraw the required minimum distribution, you can’t use it for a QCD for the year.

She also allows more time because she and her clients take extra steps to make it clear where the contribution came from. Otherwise, the charity may receive a check from the IRA administrator but may not have information about the donor. For example, for her clients with IRAs at Charles Schwab, Adam has Schwab make out a check to the charity but then send the check to the clients—not directly to the charity. The clients then send the check with a memo that includes their name, the charity’s name and an explanation that the donation is a QCD from their IRA. They also include a gift acknowledgment form they ask the charity to sign and return, so they have additional proof of the gift for their tax records.

There’s generally no limit to the number of QCDs you can make—as long as the total doesn’t exceed $100,000 for the year—but ask your IRA administrator if there’s a minimum gift size. Many of Adam’s clients make several QCDs each year, but she discourages them from making small gifts that way because the process can be time-consuming. “I would try to avoid the $50 gift and just make those out of your personal account,” she says.

Before you decide which charities to support, make sure they’re eligible to receive a QCD. “The list of entities eligible for a QCD is not the same as the entities eligible for a typical

This results in an effective tax rate of 21.6%, meaning you’ve now lowered your capital gains tax rate by 2.0%. This is getting interesting.

Now, we’re going to assume that you’re an especially patient investor with a long time horizon, so you leave your money invested in the Opportunity Fund for a full 10 years. At that point, your investment will have grown to $326. Your cost basis on your original investment has already been stepped-up to $115, so your tax burden has been reduced by 15%.

But something really special happens after you have held an Opportunity Fund investment for 10 years. At that point, any gain that you have enjoyed on your Opportunity Fund investment becomes completely tax free. Even though your investment has grown from $200 to $326, you do not owe any tax whatsoever on this gain.

So in total, you have generated a capital gain of $226 ($326 current value minus $100 initial investment), but only $85 of this gain is taxable ($200 minus $115 adjusted cost basis). This means that the effective tax rate on your $226 gain is a measly 8.9%!

By investing your proceeds from your initial investment in an Opportunity Fund and leaving that capital invested for 10 years, you have succeeded in reducing your capital gains tax rate by 14.7%, all while providing capital to communities where it is most needed.

Now that is worth writing home about.

The potential tax savings that Opportunity Funds may offer are eye-catching. Add in the fact that such investments can make a real difference in lower income communities and you have a potentially game-changing investment strategy. However, it is important to note that this is a very new area of investment, and the number and quality of Opportunity Fund investments is still quite low.

While the tax advantages are attractive, Opportunity Fund investments need to generate competitive risk-adjusted returns in order to compete with other investment options. The beneficial tax treatment of Opportunity Funds doesn’t count for much if the investments lose money.

The Rules for Making a Tax-Free Donation from an IRA

Making tax-free gifts to charity from an IRA is gaining in popularity among older investors, thanks to changes under the new tax law. Here’s what you need to know to make a qualified charitable distribution.

It’s a good idea to start the process well before the end of the year. “It’s important do this ahead of time because the money has to come out of your account,” says Keith Bernhardt, vice president of retirement income at Fidelity. “Make sure the charity cashes the check before the end of the year.”

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charitable deductible donation,” says Adam. The organization must be a 501(c)(3) charity, but you cannot make a QCD to a donor-advised fund.

Scott Olson/Getty Images

Tax Law May Prompt Look at Farm Structures

Some farmers who have kept their income low could actually see a tax increase because of the new law.

Despite a common misconception that seems to be repeated at cocktail parties and environmental activist meetings all over the country, most American farms are not controlled by giant corporations.

And, while the reverse of that is true, the underlying situation may have implications for growers and their tax advisors, according to Kristine Tidgren, an attorney and director of the Center for Agricultural Law and Taxation at Iowa State University.

We have a number of C corporations out there in the agricultural world, and one of the largest changes made by the Tax Cuts and Jobs Act of 2017 was to permanently lower the maximum corporate tax rate from 35 percent to 21 percent.

“But, again, this particular change only applies to C corporations. And, overwhelmingly, most of our agricultural businesses are not C corporations, although we do have some. And to those that we do have,

I want to point out this was not a rate cut for everybody.”

Tidgren, who received her Juris Doctorate degree from the University of Texas, said some farmers who have kept their income low could actually see a tax increase because of the new law. That’s because the old tax law, even though the top rate was 35 percent, provided a graduated tax rate structure.“If your income was below $50,000, you were only taxed at a rate of 15 percent. The new law says that from zero up, it’s 21 percent. So, if you’re in that situation where you have a C corporation, and your income is typically below, let’s say $80,000, it’s really important for you to assess with your tax advisor if there may be another option for you.”

Converting to S Corporation

That could be converting to an S Corporation, although such a conversion doesn’t come without tax ramifications of its own, she says.

“One thing about conversion to an S Corporation, we often worry about the ‘big’ tax, the built-in capital gains tax, because we have a look back period under the federal system of five years. After you’ve converted from a C to an S corporation, during that five-year period, if you sell property that has built-in gains, you have to pay tax on that.”

In 2017, that was at the then highest corporate tax rate of 35 percent. “In 2018, what we called the big tax back isn’t quite so big anymore because it’s 21 percent,” she noted. “It’s the top corporate tax rate. So again, just something to consider, things to talk through with your tax advisors.”

As noted at the beginning of this article, most agricultural producers are not operated as C corporations. Most are partnerships, sole proprietorships, S corporations or some other business structure.

“Perhaps you have an S corporation. So, you have an LLC but most LLCs are taxed as partnerships,” she said. “If you’re in a pass-through structure, the lowering of the corporate tax rate doesn’t help you at all, right?”

Since the majority of businesses in the U.S. are not corporations, congressional leaders had to try to figure out how to help those constituents; that is, business owners taxed on individual tax returns.

Different income situations

“They all have different income situations,” Tidgren said. “You can’t just give them a simple new rate. What they came up with was a deduction that you’ve likely heard of — the Section 199A deduction. It is designed to allow you to take a 20 percent deduction against your taxable income for the business income that you generate.

“It applies to what we call qualified business income, and that is income you receive in the business from your LLC, if you’re taxed as a partnership, your S Corporation, if you get it from your partnership or a sole proprietorship.”

Basically, the new 199A deduction is intended to lower the effective tax rate for pass-through businesses. For an individual in the highest tax bracket of 37 percent, the 20 percent deduction would mean that qualified business income would effectively be taxed at a 29.6 percent rate.

Unlike the change in the corporate tax rate, which is permanent until Congress changes it, the new 199A deduction is scheduled to expire or “sunset” in 2026. “We kind of joke that just as soon as we sort of get it all figured out, it’s scheduled to go away,” says Tidgren.

Any explanation of the new QBI deduction has to start with it only applies to qualified business income. That is defined

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Inspector General Warns Public About Caller-ID “Spoofing” Scheme Misusing SSA Customer Service Number

The Acting Inspector General of Social Security, Gale Stallworth Stone, is warning citizens about an ongoing caller-ID “spoofing” scheme misusing the Social Security Administration’s (SSA) national customer service phone number. SSA has received numerous reports of questionable phone calls displaying SSA’s 1-800 number on a caller-ID screen. This is a scam; citizens should not engage with those calls or provide any personal information.

These reports indicate the calls display the 1-800-772-1213, SSA’s national customer service number, as the incoming number on caller ID. People who have accepted the calls said the caller identifies as an SSA employee. In some cases, the caller states that SSA does not have all of the person’s personal information, such as their Social Security number (SSN), on file. Other callers claim SSA needs additional information so the agency can increase the person’s benefit payment, or that SSA will terminate the person’s benefits if they do not confirm their information. This appears to be a widespread issue, as reports have come from citizens across the country.

SSA employees do not contact citizens by telephone for customer-service purposes, and in some situations, an SSA employee may request the citizen confirm personal information over the phone. However, SSA employees will never threaten you for information or promise a Social Security benefit approval or increase in exchange for information. In those cases, the call is fraudulent, and you should just hang up.

“This caller-ID spoofing scheme exploits SSA’s trusted reputation, and it shows that scammers will try anything to mislead and harm innocent people,” Stone said. “I encourage everyone to remain watchful of these schemes and to alert family members and friends of their prevalence. We will continue to track these scams and warn citizens, so that they can stay several steps ahead of these thieves.”

The Acting Inspector General urges citizens to be extremely

as the net amount of income gain, deduction and loss with respect to any qualified trade or business.

“Qualified trade or business has meaning, and it has a pretty significant meaning,” she said. “It doesn’t include wages; so, you don’t get to take this deduction against money that you earn as an employee. You don’t get to take it for reasonable compensation as a S corporation shareholder or for the guaranteed payments you get as a partner in a partnership.

Significant exclusion

“It doesn’t apply to interest income, annuity income, dividend income or capital gains. And it also doesn’t include any Section 1231 gain or loss that’s taxed using capital gains rates. So, that’s a pretty significant exclusion. The other significant thing that has a lot of uncertainty is the fact that the income has to be earned in a trade or business.”

The problem is that tax specialists don’t have a really good definition of that. “Where we have the most uncertainty with respect to whether something is a trade or business is with respect to rental income right,” says Tidgren. “So, if I own property and I rent it out to somebody, is that a trade or business, or is that a personal investment? If it’s considered just an investment, then I don’t get the 199A deduction. If it’s considered a trade or business, I get the deduction against my rental income.”

In August, the IRS said it would use the IRC Section 162 definition of what is a trade or business. That left tax specialists “reeling” because there is no concrete definition of what a 162 trade or business is. “By definition courts make these determinations on a case-by-case basis after a highly factual inquiry,” she said.

The IRS did help in one area and that is with self-rentals — you own an agricultural business and you rent your property to your agricultural business that is “commonly controlled,” meaning 50 percent or more of the owners are the same. In that case, you will get to take the Section 199 deduction.

“That is a really helpful bit of clarity because in the agricultural context a lot of times we’re dealing with parents, grandparents and children renting property to the farming operation, and all of those people, parents, grandparents, children are considered to be the same person in that context,” she said.

“So that’s one area the IRS provided clarity. Where they didn’t provide clarity was with rentals to unrelated parties. I cash rent my farm ground. Is that a trade or business? If I crop share my farm ground, maybe, maybe not? Again, the key definition we have from the Supreme Court is to be engaged in a trade or business the taxpayer has to be involved in the activity with continuity and regularity. A sporadic activity, a hobby, an amusement or diversion will not qualify.”

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• The farmer or rancher must be in an applicable region.An applicable region is a county designated as eligible forfederal assistance, as well as counties contiguous to thatcounty.

• The farmer’s county, parish, city or district included inthe applicable region must be listed as suffering exceptional,extreme or severe drought conditions by the NationalDrought Mitigation Center. All or part of 41 states, plusthe District of Columbia, are listed. The list of applicableregions is in Notice 2018-79 on IRS.gov.

• The relief applies to farmers who were affected bydrought that happened between Sept. 1, 2017, and Aug.31, 2018.

• This relief generally applies to capital gains realized byeligible farmers and ranchers on sales of livestock held fordraft, dairy or breeding purposes. Sales of other livestock,such as those raised for slaughter or held for sportingpurposes, or poultry are not eligible.

• To qualify, the sales must be solely due to drought,flooding or other severe weather causing the region to bedesignated as eligible for federal assistance.

• The farmers generally must replace the livestock withina four-year period, instead of the usual two-year period.

• Because the normal drought sale replacement periodis four years, this extension immediately impacts droughtsales that occurred during 2014. But because of previousdrought-related extensions affecting some of these areas,the replacement periods for some drought sales before2014 are also affected.

Investors Can Get Tax Savings on Advisor Fees by Using This Strategy

When investors sit down with their tax professional to prepare their tax returns next year, they'll be confronted with new rules that for many mean an increase in the cost of having an advisor.The new tax law passed by Congress last year ends deductions on some types of advisory fees, including those based on the value of assets under management (AUM), a common way advisors charge clients.

For both the client and advisor, this change is causing quite a bit of angst. Yet much of this worry is needless because many clients can still get a tax savings on some fees by using an equivalent strategy.

The IRS has long held that qualified retirement accounts, such as traditional and other types of individual retirement accounts, can pay their own expenses. As funds in these accounts are tax-deferred, there are no tax consequences to using this money to pay advisory fees related to the management of these accounts.

cautious, and to avoid providing information such as your SSN or bank account numbers to unknown persons over the phone or internet unless you are certain of who is receiving it. If you receive a suspicious call from someone alleging to be from SSA, you should report that information to the OIG at 1-800-269-0271 or online at https://oig.ssa.gov/report

New 100-percent Depreciation Deduction Benefits Business Taxpayers

Tax reform legislation passed in December 2017 includes changes that affect businesses. One of these changes allows businesses to write off most depreciable business assets in the year they place them in service.

Here are some facts about this deduction to help businesses better understand how to claim it:

• The 100-percent depreciation deduction generallyapplies to depreciable business assets with a recoveryperiod of 20 years or less and certain other property.

• Machinery, equipment, computers, appliances andfurniture generally qualify.

• The 100-percent depreciation deduction applies toqualifying property acquired and placed in service afterSept. 27, 2017.

• Taxpayers who elect out of the 100-percent depreciationdeduction for a class of property must do so on a timelyfiled return. Those who have already timely filed their 2017return and did not elect out can still do so. These taxpayershave six months from the original filing deadline, to filean amended return. For calendar-year corporations, thismeans Oct. 15, 2018.

• The IRS issued proposed regulations with guidance onwhat property qualifies and rules for qualified film, televisionand live theatrical productions, and certain plants.

• For details on claiming the 100-percent depreciationdeduction or electing out of claiming it, taxpayers shouldrefer to the proposed regulations or the instructions to Form4562, Depreciation and Amortization.

Drought-stricken Farmers and Ranchers Have More Time to Replace Livestock

Farmers and ranchers who were forced to sell livestock due to drought may get extra time to replace the livestock and defer tax on any gains from the forced sales. Here are some facts about this to help farmers understand how the deferral works and if they are eligible.

• The one-year extension gives eligible farmers andranchers until the end of the tax year after the first drought-free year to replace the sold livestock.

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Amid heightened equity volatility, what's an investor to do?

Think before following a broker who leaves their firm

Keep emotions under control when investing

(Money taken out of these accounts usually triggers ordinary income tax and, for those under age 59½, a hurtful 10 percent penalty — but not in this case, because the IRS doesn't consider these payments to be distributions.)

To the extent that an individual's assets are in a traditional IRA, IRA rollover or other tax-deferred account (including Simplified Employee Pension IRAs or pension plans) and are under an advisor's care, you can pay the advisor the proportionate amount of fees directly out of these accounts with pretax dollars.

This strategy serves as an effective tax deduction. Roth IRAs are funded with post-tax income, so there's no tax advantage to paying advisory fees out of these accounts. This merely diminishes retirement assets, so it's usually best to pay Roth fees out of a taxable account.

This alternative strategy has long been available, but many weren't aware of it because advisory clients were happy to get the deduction on AUM fees, often about 1 percent annually. Now that this straight-out deduction is gone, advisors are receiving calls from nervous clients who say they can no longer afford their services, and advisors are alerting them to the alternative strategy. Investors who want to take this route should talk to their advisors about it.

Many Americans have a significant portion of their assets in tax-deferred, employer-sponsored retirement plans, including 401(k) plans, 403(b) plans for teachers and pension plans. Their portion of advisory fees and other expenses is often taken directly from their accounts, so these account holders are already getting the effective deduction.

Question of the Month

How and When Does a Taxpayer Make a §871 Election

By default a nonresident investor is taxed harshly on rental income from U.S. real estate holdings: 30% of gross rent is the Federal income tax, with no offset for operating expenses.

If you are collecting $1,000 per month in rent, this means your monthly income tax is $300, leaving $700 to pay the mortgage, property taxes, and other operating expenses. My experience is that this is a sure way to run a monthly cash flow loss.

You’d rather pay income taxes only on your net income: the rent you collect minus your tax-deductible operating expenses.

These expenses include property taxes, mortgage interest, cost of repairs, depreciation, and other normal expenses associated with owning and operating real estate. Frequently these tax-deductible costs exceed the rent you collect, meaning that your taxable income is zero. Which of course means you pay no tax.

In order to get to this point, you need to make a special election on a U.S. income tax return. Use Form 1040-NR if you are a person, and Form 1120-F if the real estate is owned by a non-U.S. corporation. Write up a statement on a piece of paper and attach it to the back of the tax return. Your statement should consist of the following information:

• a schedule of all U.S. real property (or an interesttherein) in which the taxpayer owns a beneficial interest;

• the extent of the taxpayer’s direct and beneficial interestin each item of U.S. real property;

• the location of each item of U.S. real property;

• a description of any substantial improvements on eachitem of U.S. real property; and

• an identification of the taxable year(s) in which arevocation or new net election has previously occurred.

For your reading pleasure, here are the Treasury Regulations:1.871-10(d)(1) Election, Or Revocation, Without Consent Of Commissioner–

1.871-10(d)(1)(i) In General.

A nonresident alien individual or foreign corporation may, for the first taxable year for which the election under this section is to apply, make the initial election at any time before the expiration of the period prescribed by section 6511(a), or by section 6511(c) if the period for assessment is extended by agreement, for filing a claim for credit or refund of the tax imposed by Chapter 1 of the Code for such taxable year. This election may be made without the consent of the Commissioner. Having made the initial election, the taxpayer may, within the time prescribed for making the election for such taxable year, revoke the election without the consent of the Commissioner. If the revocation is timely and properly made, the taxpayer may make his initial election under this section for a later taxable year without the consent of the Commissioner. If the taxpayer revokes the initial election without the consent of the Commissioner he must file amended income tax returns, or claims for credit or refund, where applicable, for the taxable years to which the revocation applies.

1.871-10(d)(1)(ii) Statement To Be Filed With Return.

An election made under this section without the consent of the Commissioner shall be made for a taxable year by filing with the income tax return required under section 6012 and the regulations thereunder for such taxable year a statement to the effect that the election is being made. This statement

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to report data security incidents at the state level, the Federation of Tax Administrators has created a special page with state-by-state listings.

• The preparer should contact the State AttorneysGeneral for each state in which the tax professionalprepares returns.

Contact experts:

• Security expert – Tax preparers should consult anexpert who can help determine the cause and scope of thebreach, to stop the breach, and to prevent further breachesfrom occurring.

• Insurance company – The preparer should report thebreach to their insurance company and to check if theinsurance policy covers data breach mitigation expenses.

• Federal Trade Commission – Preparers and otherbusinesses can go to the FTC for guidance. For moreindividualized guidance, preparers can contact the FTC atidt-brt@ftc.gov.

• Credit and identity theft protection agency – Certainstates require that preparers offer credit monitoring and IDtheft protection to victims of ID theft.

• Credit bureaus – Preparers should notify them if thereis a compromise and clients may seek their services.

Contact clients:

• Clients – Preparers should send an individual letter toall victims to inform them of the breach, but they shouldwork with law enforcement on when to send the letter.

Estate and Gift Taxes

How You Can Give Away Up to $11.2 Million and Slash Your Taxes

Make plans to gift or transfer your assets and get them out of your estate to help trim your estate tax bill.

If you want to shave down your estate tax bill in the future,

shall include (a) a complete schedule of all real property, or any interest in real property, of which the taxpayer is titular or beneficial owner, which is located in the United States, (b) an indication of the extent to which the taxpayer has direct or beneficial ownership in each such item of real property, or interest in real property, (c) the location of the real property or interest therein, (d) a description of any substantial improvements on any such property, and (e) an identification of any taxable year or years in respect of which a revocation or new election under this section has previously occurred. This statement may not be filed with any return under section 6851 and the regulations thereunder.

1.871-10(d)(1)(iii) Exemption From Withholding Of Tax.

For statement to be filed with a withholding agent at the beginning of a taxable year in respect of which an election under this section is to be made, see paragraph (a) of § 1.1441-4.

Tax Practice Management

After A Data Theft, Preparers Should Take These Steps

Tax preparers who experience a data theft should report it immediately and should also follow an established process to protect their clients. If notified timely, the IRS can help stop fraudulent tax returns from being filed in taxpayers’ names.

When a tax professional experiences a data compromise, there are certain basic steps they should take. They should take these steps whether the compromise is caused by cybercriminals, theft or accident. These steps include:

Contact the IRS and law enforcement:

• Internal Revenue Service – The tax preparer shouldreport client data theft to local stakeholder liaisons. Liaisonswill notify IRS Criminal Investigation and others within theagency on the tax professional’s behalf. Speed is critical. Ifreported quickly, the IRS can take steps to block fraudulentreturns in clients’ names.

• Federal Bureau of Investigation and Secret Service –the preparer should contact these local offices.

• Local police – The taxpayer should contact police tofile a report on the data breach.

Contact states in which the tax professional prepares state returns:

• Any breach of personal information could have anadverse effect on the victim’s tax accounts with the statesas well as the IRS. To help tax professionals find where

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consider giving away some of your fortune.This means you can transfer more than $11 million, either as a gift while you're alive or as a bequest after death, without having the amount subjected to a 40 percent tax.

Be aware that, at least for now, the tax code's generosity is a limited-time deal. The $11.2 million estate and gift tax exemption is set to expire after the end of 2025, at which point it will revert to $5.49 million – unless Congress acts.

That means that, if you want to give away large sums of your wealth so that you shrink your estate and your tax bill, now is the time to do it.

To put things into perspective, the IRS received 12,711 estate tax returns in 2017. Of these, 4,191 were submitted for gross estates valued at more than $10 million.

Estate plans are not just for the rich and famous. Anyone with assets, including a home, 401(k) plan or savings account, should think about how those possessions will be distributed one day.

Aside from gifting, a trust can be a good way to hand money down. It has the added benefit of giving you more control over how your assets are made available to the next generation.

Others may opt to give the bulk of their estate away. In that case, consider setting up a charitable remainder trust, using a donor-advised fund or simply leaving a portion of your assets to a specified charity in your will.

How Does the New Tax Law Affect Your Estate Plan?

In December 2017, President Donald Trump signed a new tax bill into law. Known previously as the "Tax Cuts and Jobs Act," the reform will begin to have far-reaching impacts on many areas of tax and financial planning. One significant area of impact is estate planning.

Changes Under Tax Reform

The tax reform legislation raised the estate tax exemption to $11.18 million per person, or $23.36 million for a married couple, a significant increase over prior limits. This eliminates

any federal estate taxes on amounts under those limits gifted to heirs during your lifetime or left to them upon your death.

The new legislation effectively eliminates the federal estate tax for all but the wealthiest individuals. One caveat is worth noting: as with most of the provisions of the Act, these rules are set to expire at the end of 2025. At that time, the exemption amounts will revert back to previous levels, adjusted for inflation.

The generation-skipping tax (GST) rate exemption also increased to the same amount as above for individuals and married couples. This increase also expires at the end of 2025.Finally, the method used to calculate inflation on these exemptions and other related areas has been changed. Now, instead of the traditional Consumer Price Index, which was previously used, inflation and exemptions will be calculated based on the Chained-CPI, a modified measure of inflation that adjusts for "situation bias," or accounts for the shifting purchasing behaviors of consumers. The Chained-CPI generally yields a lower rate of inflation.

What Does this Mean for Me?

The temporary increase in the exemptions for the federal estate tax and the GST means that until the end of 2025 (unless Congress repeals or extends these rules), many will be able to give away more of their estate to their heirs without paying estate taxes. For beneficiaries, the new law has obvious benefits, but its introduction doesn't eliminate the need for estate and tax planning.

Consider These Issues

The most recent tax reform did not repeal the estate tax for those states that assess one. If you live in one of the following states, your assets will still be subject to the appropriate level of state estate tax:

• Connecticut• Delaware• District of Columbia• Hawaii• Illinois• Maine• Maryland• Massachusetts• Minnesota• New York• Oregon• Rhode Island• Vermont• Washington

Additionally, with many states facing substantial fiscal challenges, it’s not beyond the realm of possibility that some states that currently don’t have an inheritance tax might consider enacting one in the future.

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Individuals facing state-level estate taxes should consider tactics such as a disclaimer and a bypass trust, or a Qualified Terminable Interest Property (QTIP) trust, both of which allow a degree of flexibility in the allocation of the assets in your estate, in order to minimize the impact taxes on their estate.

With the increased exemption limits, lifetime gifts of estate assets can be made without concern of trigging federal gift and estate taxes, except for those with estates in excess of the exemption amounts. Gifting can also be done with an eye toward shifting assets likely to experience high levels of appreciation. This can shield the appreciation of those assets from future estate taxation in your estate once the current exemption limits expire after 2025.

It's worth noting that lifetime gifts are not entitled to a step-up in cost basis as with assets transferred to heirs upon your death. This means that before gifting appreciated assets like shares of stock, be sure to consider the tax impact upon the recipient of the gift.

Spousal Lifetime Access Trust (SLAT)

One tactic to consider in some cases is the spousal lifetime access trust (SLAT). The SLAT is an irrevocable trust that removes the assets from an individual’s estate but transfers the assets to an irrevocable trust for the benefit of his or her spouse. The benefit is that that assets are out of the individual’s estate, allowing them to take advantage of the increased estate tax exemption prior to the 2025 deadline, while still retaining a degree of control over those assets via their spouse during their lifetime.

SLATs do have downsides. Should the couple divorce, the grantee has no claim to the assets in the SLAT. It is also critical to ensure that, should both spouses use a SLAT, the trusts are not identical. This helps to avoid the risk that the trusts will be deemed to be substantially identical, in violation the “reciprocal trust doctrine” which could invalidate the trust.

Accidental Disinheritance

One potential unintended consequence of the higher exemption limits is that some heirs may unintentionally be disinherited. Many estate plans are set up to use a bypass trust, which directs a trustee to use any remaining estate tax exemption amount to fund the bypass trust. This would be done before distributing remaining assets in the estate to the intended heirs. The size of the bypass trust in a case like this could cause some heirs to be unintentionally disinherited. Those with this type of provision should review their restate planning documents.

Life Insurance

Life insurance policies have been a popular way to help heirs cover any estate taxes that might be due in conjunction with a large estate in excess of the exemption limits. With the increase in the exemption, the prevalence of these exemptions may wane. These policies can now serve as a backstop for

the estate, allowing grantors to pass assets in a tax-efficient manner and providing liquidity in cases where some of the estate assets are illiquid, such as real estate or an interest in a business.

The Bottom Line

Tax reform has resulted in many changes for tax payers beginning with the 2018 tax season. Estate planning is one area that has been impacted but, like most of the tax reform legislation, the impact is temporary and will largely revert to the prior rules after 2025.

Especially for those with larger estates, it is wise to review your current estate planning documents to ensure that they still due what you intended for them to do and to ensure that you are taking full advantage of any opportunities under tax reform.

Military Taxes

How to Get Tax Credits for Hiring Veterans

In addition to the skills and talents military veterans can bring to a company, did you know that they can also help your business earn tax credits?

Businesses that hire eligible unemployed veterans can take advantage of a Work Opportunity Tax Credit (WOTC). (This credit is also available to certain tax-exempt organizations.) After recent changes, The Returning Heroes Tax Credit now provides incentives of up to $5,600 for hiring unemployed veterans, and the Wounded Warriors Tax Credit doubles the existing Work Opportunity Tax Credit for long-term

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made.

• Complete ETA Form 9061, or complete ETA Form9062 if the employee has been conditionally certified asbelonging to a WOTC target group by a State WorkforceAgency, Vocational Rehabilitation agency, or anotherparticipating agency.

• Submit the completed and signed IRS and ETA formsto your State Workforce Agency. Forms must be submittedwithin 28 calendar days of the employee's start date.

• Wait for a final determination from your State WorkforceAgency. The determination will indicate whether theemployee is certified as meeting the eligibility for one of theWOTC target groups.

• After the target group employee is certified by the StateWorkforce Agency, file for the tax credit with the InternalRevenue Service.

News from Capitol Hill

Tax Reform 2.0 Is Done: Passed by House, Likely Going Nowhere in Senate

The House has passed a bill to make permanent the individual and small business tax cuts that had been set to expire after 2025 as part of the overhaul enacted late last year.

The bill, passed by a 220-191 vote, was the final piece of a three-bill package the Republicans labeled Tax Reform 2.0. The first two pieces, providing additional incentives for Americans to boost retirement savings and more tax breaks for startup businesses.

The bill approved would extend the lower individual tax rates enacted last year as well as the larger standard deduction and child tax credit, a 20 percent deduction for pass-through income and a doubling of the estate-tax exemption. It also would lock in limits on the deductibility of state and local taxes.

Unlike last year’s tax law, some Democrats supported the two bills passed, and three — Reps. Conor Lamb of Pennsylvania, Jacky Rosen of Nevada and Kyrsten Sinema of Arizona — joined nearly all Republicans on Friday in voting for the extension of the cuts. Sinema and Rosen are both running for Senate. Other Democrats, opposed to the legislation, warned that Republicans would use the deficit-increasing effects of their tax law as an excuse to cut Medicare and Social Security benefits in the future.

Ten Republicans from high-tax states voted against the extension because of the cap on state-and-local deductions.

The second round of tax cuts would cost $631 billion through

unemployed veterans with service-connected disabilities, to up to $9,600.

Here's the various veteran-related tax credits your company could qualify for: Unemployment Tax Credits:

• Qualified Long-term Unemployment: This is a creditfor new hires that begin work on or after January 1, 2016through December 31, 2019, during which the individualis employed no less than 27 consecutive weeks, andincludes a period in which the individual was receivingunemployment compensation under State or Federal law.For WOTC-certified new hires working at least 120 hours,employers can claim 25% of the first year wages paid up to$6,000, for a maximum income tax credit of up to $1,500.For WOTC-certified new hires working 400 hours or more,employers can claim 40% of the first year wages up to$6,000, for a maximum income tax credit of up to $2,400.

• Short-term Unemployment: A credit of 40% of thefirst $6,000 of wages (up to $2,400) for employers whohire veterans who have been in receipt of unemploymentcompensation for at least 4 weeks.

• Long-term Unemployment: A credit of 40% of thefirst $14,000 of wages (up to $5,600) for employers whohire veterans who have been in receipt of unemploymentcompensation for longer than 6 months.

Wounded Warrior Tax Credits:

• Veterans with Services-Connected Disabilities:Maintains the existing Work Opportunity Tax Credit forveterans with service-connected disabilities hired withinone year of being discharged from the military. The credit is40% of the first $12,000 of wages (up to $4,800).

• Long-Term Unemployed Veterans with Services-Connected Disabilities: A new credit of 40% of the first$24,000 of wages (up to $9,600) for firms that hire veteranswith service-connected disabilities who have been in receiptof unemployment compensation for longer than 6 months.The credit can be as high as $9,600 per veteran for for-profitemployers or up to $6,240 for tax-exempt organizations.

• Certain tax-exempt organizations can take advantageof WOTC by hiring eligible veterans and receiving a creditagainst the employer's share of Social Security taxes.

For more details on these credits, see the PATH Act – WOTC Interim Instructions on the Department of Labor website. Further information can be found in IRS Notice 2016-22.

To see how much your business can earn in tax credits, see the WOTC Calculator.

To collect on these credits, your company must do the following:

• Complete IRS Form 8850 by the day the job offer is

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Universal Savings Accounts

The bill also proposes universal savings accounts, which would be similar to Roth IRAs: People would be allowed to save and invest up to $2,500 per year with after-tax money, and withdrawals of contributions and investment gains could be made tax-free for virtually any reason. This is a pretty sensible idea, in theory, to help America’s savings deficit and reduce reliance on 401(k) loans, which come with hefty fines.

One thing to keep in mind, as Mark Iwry notes in The Hill, is that “high-income people would universally take advantage of this new tax break—mostly without saving more—by shifting taxable savings into the new vehicle.” Meanwhile, lower income people will have a more difficult time saving in the universal savings account in addition to a retirement account, though they would certainly benefit them as well.

There are a few other things that the bills do for small businesses (such as making it easier for small businesses in different industries to partner in a single retirement plan to lower fees), but the simplifying of deferred-retirement accounts and the addition of the universal savings accounts are the headlines for most individuals. Now it’s on to the Senate.

Businesses, Trade Groups Urge IRS to Clarify Guidance on Key Part of GOP Tax Law

Businesses and trade groups urged the IRS to make clarifications and changes to its proposed rules on a new deduction created by 's tax law, so that more taxpayers can have certainty that they can use the tax break.

The tax-cut law Republicans enacted last year created a new 20-percent deduction for businesses known as "pass-throughs," which are non-corporate businesses taxed through the individual tax code on their owners' returns. In August, the Treasury Department and IRS released proposed rules that provided information about how to calculate the deduction and what businesses qualify for it.

At a three-and-a-half hour public hearing at the IRS, stakeholders provided government officials feedback on the guidance.

A number of speakers said that the guidance is unclear about whether rental real-estate activity constitutes a trade or

2028, according to Congress’ nonpartisan Joint Committee on Taxation, or $545 billion once economic feedback effects are factored in — and trillions more after that. The JCT analysis also found that, while making the tax cuts permanent would provide a modest boost to the economy after 2025, it would slow economic growth over the longer term.

Why it matters: The Senate has no plans to vote on the Tax Reform 2.0 package, meaning that the House votes are mostly about pre-election messaging — and after the tax bill was passed, House Republicans canceled October votes and went into recess until November 13, allowing candidates more time to campaign. Election season is in full swing now. Still, Democratic support for the retirement savings and startup bills suggest that there’s room for lawmakers to advance those pieces of legislation in the future. “We’ve always looked at it as part of a longer game,” Brad Close, senior vice president of public policy and advocacy for the National Federation of Independent Business, told Politico. “Let’s see where the lame duck goes.

What's in the Tax Bill That Just Passed the House?

The House recently passed a package of legislation that could change the way people save for retirement. That is, of course, if the Senate passes the new tax changes as is, which experts say isn’t likely.

The biggest changes include making the tax cuts passed last year permanent for individuals (they currently sunset in 2025), expanding retirement and education accounts, and creating tax-advantaged Universal Savings Accounts to accompany retirement accounts.

Individual Tax Cuts

The Protecting Family and Small Business Tax Cuts Act of 2018 would ensure that the doubled standard deduction and increased child tax credit that were part of the original Tax Cuts and Jobs Act passed last year are permanent. The original tax bill didn’t make the individual tax cuts permanent in order to pass the Senate’s budget reconciliation rules (the business cuts were made permanent in the original bill); this would aim to correct that.

Retirement Simplification

The Family Savings Act is where things get interesting. This bill would remove the 70 1/2 age limit on IRA contributions and exempt those who have less than $50,000 in their accounts from taking required minimum distributions (RMDs) which start at 70 1/2 (again, this is for IRAs and 401(k)s—Roths don’t have these requirements currently), and decrease RMDs for those with larger balances.

Additionally, families would be allowed to withdraw up to $7,500 penalty-free from retirement accounts if it’s used to pay for things for a new child (including adopted children).

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People in the Tax News

Prominent Tax Dodger Winston Shrout Sent to Prison for 10 Years

A federal judge sent tax dodger Winston Shrout, a prominent sovereign citizen with an international following, to prison for 10 years for issuing fake financial documents to banks and the U.S Treasury and failing to file tax returns from 2009 to 2014.

"You're 70 years old. This may well be a life sentence,'' U.S. District Judge Robert E. Jones said. "I'm well aware of that.''The sentence was half the 20-year term that a prosecutor sought, but far more severe than the probation that Shrout's defense lawyer urged.

Shrout aimed to cheat the Treasury and banks and preached his illegal schemes to hundreds of others in paid seminars across the country and abroad, including about a dozen people who were convicted of fraud themselves for following Shrout's teachings, according to the prosecutor.

Shrout, of Hillsboro, testified at his trial that he hadn't filed a federal tax return for at least 20 years.

"He's not just trying to rob a bank. He's actually and consistently advocating for others to rob a bank,'' said Scott Wexler, the U.S. Tax Division trial lawyer who prosecuted Shrout. "Defendant is a tax cheat and convinced others to scheme against the government and perform their own fraud.''

Wexler asked the judge to send Shrout to prison for two decades to send a strong message to his fervent followers that their actions are illegal and they must "choose a different path.'' If the court were to allow Shrout to walk out of the courtroom with no prison time, it would only embolden his supporters to continue to flout the law, Wexler argued.

"People are paying attention,'' Wexler said.

Defense lawyer Ruben Iniguez said the court must consider Shrout's personal circumstances, noting Shrout has no prior criminal record and the offense wasn't a violent crime. He also described some of Shrout's ailments, including hernias, hip replacements, back pain and cataracts.

Iniguez further argued that the Shrout never intentionally set out to defraud the government but had delusional thoughts that clouded his judgment.

Shrout didn't invent the fraudulent financial documents he used but learned from others and was "gullible'' and "delusional enough to believe them and spew them out,'' Iniguez said."To send this man to prison, in my humble opinion, would be a travesty,'' Iniguez said.

None of the financial documents Shrout sent to banks or the

businesses that is eligible for the deduction. Some speakers, including representatives from the American Institute of CPAs and the National Association of Realtors, said that rental real-estate activity should generally be treated as a trade or business. Others suggested that the regulators create a safe harbor that allows low- and middle-income taxpayers with rental income to take the deduction if they meet certain conditions.

Iona Harrison, who testified on behalf of the National Association of Realtors, said that deeming all rental real estate a trade or business for purposes of the deduction would "vastly simplify the deduction for millions of owners of rental property" and would "greatly simplify the administration of this part of the law for the IRS."

Banks organized as pass-throughs urged Treasury and the IRS to clarify that these types of banks have full eligibility for the deduction.

Under the tax law, married couples who make more than $415,000 are ineligible to use the pass-through deduction if they have income from a specified service business, such as businesses involved in health or law. The IRS guidance says that businesses involved in taking deposits and making loans aren't specified businesses ineligible for the deduction. However, community banks are concerned that they will be ineligible for the deduction absent clarifications because some of their business comes from other activities such as loan sales and trust and investment-management services.

"If we are not able to include revenue from these types of core banking services in [the] qualified business income deduction, it would clearly place our bank and our holding company at a disadvantage to those C-corporation banks that are taxed at a 21-percent corporate tax rate," said Steve Lewis, chairman ofthe board of Jefferson Bank in San Antonio, Texas.

Other speakers at the hearing asked the IRS to ensure that certain types of businesses are eligible for the deduction, or to alter the proposed rules so that their business category qualifies.

For example, two speakers said that they believe the rules allow staffing businesses to qualify for the deduction, and they wanted the IRS to ensure this is the case.

Additionally, the American Veterinary Medical Association (AVMA) argued that high-earning owners of veterinary practices should be eligible for the deduction, though the proposed rules stipulate that they are ineligible. Under the tax law, high-earning owners of health firms are ineligible for the deduction, but AVMA Assistant Director of Government Relations Alex Sands said that veterinary practices shouldn't be treated the same way as medical practices for humans for purposes of the deduction because the practices have significant differences.

Treasury and the IRS will take the comments into consideration as they work to finalize the rules on the pass-through deduction.

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Editor's Note: If you are asking, "what is a sovereign citizen"Sovereign citizen movement

The sovereign citizen movement is a loose grouping of American and Commonwealth litigants, commentators, tax protesters, and financial-scheme promoters. Self-described "sovereign citizens" see themselves as answerable only to their particular interpretation of the common law and as not subject to any government statutes or proceedings. In the United States they do not recognize United States currency and maintain that they are "free of any legal constraints".

They especially reject most forms of taxation as illegitimate. Participants in the movement argue this concept in opposition to the idea of "federal citizens", who, they say, have unknowingly forfeited their rights by accepting some aspect of federal law. The doctrines of the movement resemble those of the freemen on the land movement more commonly found in the Commonwealth, such as in Britain and in Canada.

Former Texas Company CFO Pleads Guilty to Employment Tax Fraud

The former Chief Financial Officer of an Austin, Texas based company pleaded guilty to willfully failing to pay over employment taxes to the Internal Revenue Service (IRS), announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division.

According to court documents, from 2010 to 2016, John Herzer was the CFO of AXO Staff Leasing (AXO), a professional employer organization. Herzer handled all of the company’s finances and had final authority over which creditors to pay and when to pay them. Herzer was also responsible for collecting and paying to the IRS taxes withheld from AXO’s employees’ wages. Despite this obligation, Herzer did not pay to the IRS AXO’s employment tax withholdings and instead used more than $4.9 million of those funds for his own benefit including paying personal expenses and transferring millions of dollars to his own bank accounts. In total, Herzer’s fraudulent conduct caused a tax loss to the IRS of more than $13 million.

A sentencing date has not yet been scheduled. Herzer faces a statutory maximum sentence of five years imprisonment, as well as a term of supervised release, restitution and monetary penalties.

Owner of Pharmacies Charged with Conspiracy to Defraud IRS

The owner of a pharmacy in Piscataway, New Jersey, was arraigned on charges he conspired to defraud the IRS, U.S. Attorney Craig Carpenito announced.

Rao Desu, 51, of Warren, New Jersey, was charged by indictment with two counts of conspiracy to defraud the IRS and four counts of aiding and assisting in subscribing to false tax returns. Desu was arraigned before U.S. District Judge

U.S. Treasury were honored because they were so outlandish, his lawyer said. The only actual losses to the government were from his failure to pay taxes, Iniguez said.

But Wexler said Shrout knew exactly what he was doing, and he should also be held responsible for the amount of money he intended the government to lose.

Shrout made and issued more than 300 fake "International Bills of Exchange'' on his own behalf and for credit to third parties. The government said Shrout falsely claimed the bills had value and purported them to be worth more than $100 trillion.

The government proved at trial that from 2009 through 2014, Shrout received over $500,000 in gross income through pension payments, speaking fees at seminars where he espoused his theories abroad, as royalty payments for the sale of DVDs and other products he sold, and for private client consultations through his business Winston Shrout Solutions in Commerce, yet never filed a single tax return.

Shrout admitted further on the witness stand, "So I stopped paying income tax, and I stopped filing for income tax returns. That's been well over 20 years ago."

Wexler noted that neither Shrout's indictment nor his conviction deterred his activity as he continued to promote the fake financial documents in weekly video podcasts.

Iniguez said Shrout took down his website recently.

"He now understands fully this is over. He is done," Iniguez said.

Shrout, wearing a blue plaid shirt and khaki pants, stood and told the judge, "I'm very sorry this whole thing happened. ... At trial, I took full responsibility for everything I've done. I certainly have no intention in continuing on in the matters that seem objectionable to the court. If I have offended anyone in any matter, then I ask for your forgiveness."

Shrout stood before about 20 supporters, including his common law wife, and members of his large family, confirming to the court that he has 18 children -- 12 sons and six daughters.

The judge found Shrout mentally competent to aid in his own defense before his sentencing. But the judge said it was clear Shrout holds grandiose ideas about who he is and what he can do and had advocated for hundreds of people, if not thousands, to not pay their taxes.

"There's no question your intention was to sign these documents and have these be effective for trillions of dollars," whether or not "anybody was a damn fool to follow them," Jones said.

The judge ordered Shrout to surrender to the Bureau of Prisons on Nov. 25 and pay $191, 226 in restitution to the IRS.

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The government is represented by Assistant U.S. Attorneys Jacques S. Pierre and Karen D. Stringer of the Special Prosecutions Division.

The allegations and charges in the Indictment are only accusations and the defendant is considered innocent unless and until proven guilty.

Ohio Businessman Sentenced to Prison for Tax Fraud

A Germantown, Ohio businessman who controlled the operation of an anti-aging skincare business in Dayton, Ohio was sentenced to 33 months in prison today following his November 2017 conviction by a federal jury on seven counts of filing false corporate, individual, and private foundation tax returns, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division.

According to court documents and evidence presented at trial, James Wright, 63, ran the day-to-day operations of B&P Company, Inc. (B&P), which manufactured and sold an array of skincare products, including Frownies, a wrinkle reduction product endorsed by celebrities. Wright’s great-grandmother invented Frownies in 1889 and the product has been sold by his family ever since. Beginning in the late 1990s, Wright formed a series of entities that he used to divert money from B&P to himself and members of his family. Instead of receiving a salary from B&P, Wright incorporated a company called The Remnant, Inc., to which B&P paid “management fees.” Wright caused the preparation of false corporate tax returns for The Remnant on which he fraudulently deducted personal expenses, including rent, utilities, and pool and lawn care for his residence. Wright also used funds from The Remnant’s bank accounts to pay rent for one of his daughters in New York and California. Wright paid personal expenses directly out of B&P’s bank accounts as well. He directed employees of B&P to use corporate funds to pay for the rent and utilities at an apartment rented by his mother as well as rent for his daughter in New York.

In 2004, Wright applied to the IRS for non-profit status for a private foundation called Fore Fathers Foundation. Wright caused B&P to make donations to the foundation and then used more than $170,000 of the foundation’s funds over a seven-year period to pay for high school and college tuition for all five of his children. According to the testimony at trial, these payments constituted acts of self-dealing that Wright was required to disclose on the foundation’s tax returns and pay excise taxes on. When Wright filed the foundation’s 2003 through 2009 returns however, he falsely reported that he had not engaged in acts of self-dealing and failed to pay the excise taxes due on the distributions.

The evidence at trial established that Wright had a long history of interactions with the IRS. In 1998, Wright pleaded guilty to tax evasion for using trusts to conceal income from the IRS.

In addition to the term of imprisonment, U.S. District Judge

Michael A. Shipp in Trenton federal court and pleaded not guilty.

According to documents filed in this case and statements made in court:

Rao Desu was a 50 percent owner in DVS Pharma Inc., (d/b/a Heights Pharmacy), a retail pharmacy in Piscataway. Darshna Desai was the other 50 percent owner and worked as the lead pharmacist. From April 2004 through November 2013, Desu conspired with Desai to conceal from the IRS the cash income that was earned by the pharmacy as part of a cash-skimming scheme. In particular, Desu’s relative, who assisted at times in the operation of several of Desu’s businesses, instructed Desai to separate the cash earned by Heights Pharmacy from other income received, remove a portion of the cash that was paid to Desai as cash salary, and then split the remainder in two, with one portion given to Desu and the other portion given to Desai.

Desu was also a 50 percent owner of Manvihar Pharmacy (d/b/a Arthur Avenue Pharmacy) in Bronx, New York. The other 50 percent owner in Arthur Avenue Pharmacy worked at Arthur Avenue Pharmacy as the lead pharmacist. From June 2005 through November 2013, Desu conspired with the co-owner to conceal from the IRS the cash income that was earned by the pharmacy as part of a separate cash-skimming scheme. Specifically, Desu instructed the co-owner to separate the cash earned by Arthur Avenue Pharmacy from other income received, and to split the cash in two, giving half to Desu and giving half to the co-owner.

For tax years 2004 through 2012 Desu and Desai filed false corporate income tax returns, IRS Forms 1120S, for Heights Pharmacy, which failed to disclose the cash that Desai received in salary and that was split between Desu and Desai. From tax year 2005 through 2012, Desu and the co-owner filed false IRS Forms 1120S for Arthur Avenue Pharmacy, which failed to disclose the cash that was split between Desu and co-owner. Accordingly, for tax years 2004 through 2012, Desu filed false personal income tax returns, IRS Forms 1040, which failed to disclose the cash that Desu received from both Heights Pharmacy and Arthur Avenue Pharmacy.

Desai pleaded guilty to conspiracy to defraud the IRS in 2014. Her sentencing is pending.

Conspiracy to defraud the IRS carries a maximum potential penalty of five years in prison and a $250,000 fine. Assisting and aiding in subscribing to false tax returns carries a maximum potential penalty of three years in prison and a $100,000 fine.

U.S. Attorney Carpenito credited special agents of IRS-Criminal Investigation, under the direction of Special Agent in Charge John R. Tafur, with for the investigation leading to today’s charge. Carpenito also thanked special agents of the U.S. Department of Justice, Office of Inspector General, under the direction of Acting Special Agent in Charge Ron G. Gardella for their role in the investigation.

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The Situation declined to comment while leaving the courthouse with his fiancée, whom he is scheduled to marry next month, his attorney said. Other "Jersey Shore" cast members who attended the sentencing also didn't comment afterward.

In a statement to the judge before sentencing, Sorrentino apologized for his conduct and said he is "overcoming my demons and putting my life back together" after years of alcohol and drug use.

"Today I'm a man that I should have been years ago," he told U.S. District Judge Susan Wigenton.

Attorney Henry Klingeman portrayed Sorrentino as the son of an abusive father who suffered from substance use problems and low self-esteem before he "rocketed to celebrity and riches" on the MTV reality show that followed a group of boozing, rowdy housemates at the New Jersey shore.

Prosecutors painted a contrasting picture. While conceding The Situation may have played a lesser role in the tax scheme than his brother or accountant Gregg Mark — who also has pleaded guilty and awaits sentencing — they noted he had the presence of mind to split up bank deposits into amounts lower than $10,000 so as not to trigger federal reporting requirements.

"This was a deliberate course of criminal conduct with a blatant disregard for the law," Assistant U.S. Attorney Yael Epstein told the court.

Michael Sorrentino pleaded guilty to one count of tax evasion and admitted concealing his income in 2011 by making cash deposits in amounts that wouldn't trigger federal reporting requirements. Marc Sorrentino pleaded guilty to one count of assisting in the preparation of a false return.

In pronouncing sentence, Wigenton commended Michael Sorrentino for his progress in overcoming substance abuse but stressed that his actions in the conspiracy were made knowingly.

"With celebrity comes responsibility," she told him. "Part of the cost of making money is you have to pay taxes. We all have to."

John Tafur, head of IRS criminal investigations in Newark, called the brothers' crimes "an outright theft from the hardworking American public."

The Situation appeared on all six seasons of the reality show that ran from 2009 to 2012. The cast members were known for their drunken antics and the phrase they used to describe their lifestyle: "gym, tan, laundry."

Republican former Gov. Chris Christie criticized the show for promoting stereotypes. Last year, he signed a bill capping the amount of state money universities can pay for speakers, because Rutgers University paid "Jersey Shore" cast member Nicole "Snooki" Polizzi $32,000 in 2011.

Walter H. Rice ordered Wright to serve one year of supervised release and pay $146,404 in restitution to the IRS.

Principal Deputy Assistant Attorney General Zuckerman thanked special agents of IRS Criminal Investigation, who conducted the investigation, and Trial Attorneys Melissa S. Siskind and Thomas F. Koelbl of the Tax Division, whoprosecuted the case. Principal Deputy Assistant AttorneyGeneral Zuckerman also thanked the U.S. Attorney’s Officefor the Southern District of Ohio for their support during theinvestigation and prosecution of this case.

The Situation Gets 8-month Sentence in Federal Tax Case

In this March 29, 2018 file photo, Mike "The Situation" Sorrentino arrives at the "Jersey Shore Family Vacation" premiere in Los Angeles. Sorrentino is seeking probation when he’s sentenced on tax charges, while prosecutors want a sentence of 14 months. Sorrentino pleaded guilty in January to concealing his income in 2011 by making cash deposits that wouldn't trigger federal reporting requirements. He and his brother were charged in 2014 with multiple tax offenses related to nearly $9 million in income

Michael "The Situation" Sorrentino, whose abs became famous on the hit reality show "Jersey Shore," was sentenced Friday to eight months in prison for cheating on his taxes.

A federal judge sentenced the star shortly after his brother, Marc Sorrentino, received a two-year sentence on a similar charge.

Both brothers pleaded guilty in January. They were charged in 2014 with tax offenses related to nearly $9 million in income.

Michael Sorrentino's attorneys had sought probation, while prosecutors wanted a sentence of 14 months. He is free on bail until he has to report; it's not been determined where he'll be incarcerated or when the term begins.

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IRS News

IRS Commissioner Rettig Seeks ‘Rebuilding Trust’ with Taxpayers

Faced with budget cuts, a reduced workforce and aging computer systems, IRS Commissioner Charles Rettig has outlined his strategy for leading the agency in an all-hands email to employees.

Following a swearing-in ceremony with Treasury Secretary Steve Mnchuin, Rettig told agency employees that the IRS needs to step up its efforts to implement the tax reform law President Donald Trump signed last year.

“I know the service has many challenges; I’ve seen them firsthand through the years and I know those are sources of frustration for taxpayers and for you as IRS employees,” Rettig wrote in the email obtained by Federal News Radio. “I also know we must continue rebuilding trust with taxpayers while implementing the once-in-a-generation tax reform bill passed by Congress in December.”

Rettig also stressed the need for IRS to modernize its IT infrastructure.

Honored to swear in Chuck Rettig as the 49th Commissioner of the IRS. Chuck’s commitment to fairness and taxpayer service will make a tremendous impact in the lives of millions of Americans.

Steven Miller, a former acting IRS commissioner under the Obama administration, told Federal News Radio that legacy IT stands out as the agency’s number-one risk. Years of budget cuts, he added, have only exacerbated the problem.

“Some of it is visible to people, and some of it isn’t. If you look at the IRS, you know that they are doing fewer examinations. What you don’t know is what the cuts have done to the information systems. That’s going to be a fascinating sort of challenge, in terms of getting themselves up and running for the coming filing season,” Miller said. “You don’t know just how cut to the bone they are.”

Due to the change in law, the IRS expects it will have to update 140 computer systems and more than 450 tax forms by next year’s filing season.

“Because of the level of change from last year’s tax bill, there’s got to be an amazing amount of work to be done,” Miller said. “It’s impossible to succeed as a commissioner if you fail at a filing season, it’s as simple as that.”

Tony Reardon, president of the National Treasury Employees Union, agreed that diminished resources have increased the difficulty of implementing the new tax law.

"Due to the lack of funding and insufficient staffing levels

— and really, a crushing workload — there was already a tremendous strain on front-line employees,” Reardon said. “Add to that the outdated technology, the tax law changes and the need to deliver a successful filing season, and I really believe you have a serious set of challenges confronting the agency.”

Since 2010, Congress has cut the IRS budget by nearly $1 billion, and more than 17,000 employees.

While Republican members of Congress approve of giving the IRS support it needs to carry out the new tax law, Miller said Rettig will need to make inroads with lawmakers to ensure the agency continues to get the funding it needs.

“There’s no surprise that with the congressional climate in the last couple of years that the morale at the Internal Revenue Service and the budget of the service has suffered,” Miller said. “He’s going to have to work on those. Part of that is going to have to be rebuilding some relationships with the Congress as well.”

Rettig will also help the IRS oversee its five-year strategy to broaden the range of services it offers online and enhance the IRS.gov interface to make it more user-friendly.

“The IRS must continue to balance service to the taxpayer community with an appropriate degree of enforcement of our nation’s tax laws,” Rettig wrote. “Overall, the integrity of the nation’s tax system will be strengthened through enhanced taxpayer services as well as enhanced enforcement activities — to be successful, we need both.”

However, NTEU reports a sharp decline in IRS employees tasked with meeting both of those missions.

Reardon said that in 2010, the agency had more than 21,000 customer service representatives, but in 2017, that number shrank to about 9,200 employees.

“Clearly, the impact, then, is there aren’t enough customer service representatives to go around and effectively respond to caller’s questions,” he said.

In 2007, the agency had more than 20,000 revenue officers and agents, which brought in nearly $57 billion. However, Reardon said that enforcement revenue decreased by more than $2 billion in 2017, when it had an enforcement staff of less than 13,000.

Rettig also urged employees to provide “high-quality, personalized service” to taxpayers, but Reardon said the closure of 30 Taxpayer Assistance Centers (TACs) in the last seven years has limited the public’s ability to get face-to-face tax help.

“That makes it that much more difficult to help provide service to the taxpaying public,” Reardon said.

TIGTA reports that visits to TACs have decreased since the

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than it did less than 10 years ago. Provided you’re not a close associate of President Trump, there may never be a better time to be a tax cheat.

Last year, the IRS’s criminal division brought 795 cases in which tax fraud was the primary crime, a decline of almost a quarter since 2010. “That is a startling number,” Don Fort, the chief of criminal investigations for the IRS, acknowledged at a New York University tax conference in June.

Bringing cases against people who evade taxes on legal income is central to the revenue service’s mission. In addition to recouping lost revenue, such cases are supposed “to influence taxpayer behavior for the hundreds of millions of American citizens filing tax returns,” Mr. Fort said. With fewer cases, experts fear, Americans will get the message that it’s all right to break the law.

Starting in 2011, Republicans in Congress repeatedly cut the IRS’s budget, forcing the agency to reduce its enforcement staff by a third. But that drop doesn’t entirely explain the reduction in tax fraud cases.

Over time, crimes only tangentially related to taxes, such as drug trafficking and money laundering, have come to account for most of the agency’s cases.

“Due to budget cuts, attrition and a shift in focus, there’s been a collapse in the commitment to take on tax fraud,” said Chuck Pine, who used to be the third-ranking criminal enforcement officer at the I.R.S. and is now a managing director at BDO Consulting. “I believe there are thousands of individuals who have U.S. tax obligations and are not complying with U.S. tax laws.”

The result is huge losses for the government. Business owners don’t pay $125 billion in taxes each year that they owe, according to IRS estimates. That’s enough to fund the Departments of State, Energy and Homeland Security, with the National Aeronautics and Space Administration tossed in for good measure. Unlike wage earners who have their income separately reported to the IRS, business owners are often on the honor system.

The IRS declined to comment on its enforcement efforts.

Mr. Cohen’s and Mr. Manafort’s cases illustrate different but common types of tax cheating, and how the IRS has struggled to enforce the law.

Mr. Cohen failed to report income from domestic businesses. Mr. Manafort used foreign locales and shell corporations to hide his money.

Mr. Cohen’s tax evasion schemes were straightforward. Besides paying off a pornographic movie star and a former Playboy model in violation of campaign finance laws, he pleaded guilty to lying on his tax return. Whether it was income from his business owning taxi medallions, millions of dollars in interest payments on a loan he had made to another taxi

IRS required visitors to schedule appointments in 2016 — from 1.3 million visits in 2017 to 1 million visits in 2018.

IRS "Future State" Bad Idea

IRS has started the process of phasing out the use of the term "Future State" to describe its vision for the agency's agenda and the ideas and concepts contained in the term "are now being pursued as part of IRS's strategic plan for fiscal years 2018 to 2022," the Government Accountability Office (GAO) said in a report published on Oct. 3. (GAO-19-108R)

Talk of an IRS Future State began in 2014 and evolved into a narrowing of 19 objectives from its strategic plan to a core set of six objectives. As things now stand, the six strategic plan goals "closely resemble" the six Future State themes, it said. According to GAO, "IRS officials characterized this shift as more of a rebranding than a policy change" since work undertaken in the development of the Future State vision will continue.

"IRS officials said it made sense to merge the Future State vision with the new strategic plan to create a single consistent IRS vision," GAO said, adding that "in August 2018, IRS officials stated that they were preparing public communications about the transition from the Future State to the new strategic plan and its implementation."

IRS Tax Fraud Cases Plummet After Budget Cuts

The Internal Revenue Service headquarters in Washington.

The agency’s budget has been repeatedly cut since 2011, forcing it to reduce its enforcement staff by a third.

Tax evasion is at the center of the criminal cases against two associates of the president, Paul Manafort and Michael D. Cohen. The sheer scale of their efforts to avoid paying the government has given rise to a head-scratching question: How were they able to cheat the Internal Revenue Service for so many years?

The answer, researchers and former government auditors say, is simple. The IRS pursues fewer cases of tax evasion

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Warren said, typically were only tangentially related to taxes.

“It was usually narcotics, Ponzi schemes, some public corruption,” he said. “Agents loved Ponzi cases because there was a real victim, an old lady or something like that.”

Federal prosecutors seek out special agents for these cases because they are skilled financial investigators. And tax crimes, like failing to declare illegal income from, say, a bribe or cocaine sales, can be easier to prove than bribery or drug trafficking.

In recent years, the I.R.S. has also been pulled away from classic tax-dodging cases by soaring rates of identity theft. I.R.S. management assigned scores of agents to chaseperpetrators who used stolen identities to collect tax refunds.

One tax fraud hotbed that has been a clear priority of both the IRS and the Justice Department is going after money Americans stashed overseas without reporting it to the federal government. But there are clear reasons that Mr. Manafort, who hid his money in places like Cyprus and St. Vincent and the Grenadines, might still have escaped detection.

Switzerland has been the Justice Department’s primary target over the past 10 years, an effort that has resulted in settlements with the giant Swiss banks UBS and Credit Suisse, and dozens of smaller institutions.

The IRS allowed Americans with foreign accounts to voluntarily disclose them and pay a smaller penalty than they would have had they been caught hiding the information. Some 56,000 people participated, netting the government $11.1 billion. The I.R.S.’s criminal division also brought several cases againstpeople for concealing accounts.

For all this success, there has been little change in the amount of wealth stashed overseas. Americans have about $1.2 trillion of personal assets in tax havens, according to data compiled by Gabriel Zucman, an assistant professor of economics at the University of California, Berkeley, and two colleagues. It’s unclear what portion has been disclosed to the IRS.

“What has happened over the last 10 years is real progress,” Dr. Zucman said. “But what the data suggest is that it has not had a dramatic effect on the amount of offshore wealth.” Money has flowed out of Switzerland and into Asian tax havens like Hong Kong and Singapore.

Moreover, the IRS has made little use of new weapons in the fight against wealth hidden overseas. In 2010, President Barack Obama signed a law that was supposed to provide a crucial tool for government auditors and prosecutors. That law, the Foreign Account Tax Compliance Act, required banks with American account holders to report information to the United States. Like W-2 forms that employers file to tell about their workers, these reports would force account holders to come clean.

Eight years later, the program is still getting off the ground.

operator or the $30,000 he made by brokering the sale of a luxury handbag, Mr. Cohen simply hid the money from his accountant and the government. Over five years, he didn’t disclose $4.1 million, saving himself $1.5 million in taxes.

The IRS typically catches such evasion by auditing taxpayers.

Theoretically, evidence picked up in audits can be used to start criminal cases.

But the rate at which the agency audits tax returns has plummeted by 42 percent since the budget cuts started. Criminal referrals were always rare and are becoming rarer still, dropping to 328 in 2016 from 589 in 2012. With the government conducting 1.2 million audits in 2016, that’s one criminal referral for roughly every 3,600 audits.

“The focus of auditors and tax collectors is not to identify fraud, it’s to collect tax,” said a special agent, who spoke on the condition of anonymity because he was not authorized to speak to the media. Management has set other priorities, the agent said, “so by default, the employees are not doing it.”

In addition, current and former IRS agents say audits are not as intensive as they used to be. Because the IRS pushes agents to close audits more quickly, they make fewer requests for records and interviews.

The I.R.S. Loses Its Bite

“The quality of those referrals was also down,” said Marie Allen, a recently retired auditor who worked at the I.R.S. for more than 30 years conducting complex financial investigations. “That is what people popularly think we should be doing, and I’m trying to say it ain’t so.”

Budget cuts have diminished the criminal investigation division, trimming the number of agents by a fifth since 2010. Recently, the IRS closed four of its 25 field offices, according to Mr. Fort. In New York State, home of the country’s financial industry, the revenue service is down to 161 agents, about a hundred fewer than it had 15 years ago.

It doesn’t help that many agents prefer chasing flashier crimes than tax evasion. Rob Warren, a research associate at Catholic University who previously spent a quarter-century at the I.R.S., interviewed 30 former special agents. He asked themwhich of their cases had been their favorite. The answers, Mr.

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Countries around the world have signed agreements, and more than 100,000 foreign banks have sent information to the United States. But “there is no ongoing compliance impact of the FATCA at this time,” according to a report this year by the inspector general for the IRS.

The report found serious problems with the millions of records collected so far. About half, for example, didn’t include identification numbers for the taxpayers, making it difficult to match the accounts with individuals. The IRS hadn’t set up a process for using the records. The agency said it was working on such a system.

Here, too, the cuts to the IRS’s budget have had an impact. During the Obama administration, the IRS asked Congress for hundreds of millions of dollars to carry out the program, but received nothing. Since Mr. Trump took office, the agency has stopped asking.

Proposed Regs Would Allow Integrating HRAs and Similar Arrangements with Individual Health Insurance Coverage

IRS, the Department of Labor Department (DOL), and the Department of Health and Human Services (HHS) (the Departments) have issued proposed regs that would allow integrating health reimbursement arrangements (HRAs) and other account-based group health plans with individual health insurance coverage, if certain conditions are met. The proposed regs also set out conditions under which certain HRAs and other account-based group health plans would be recognized as limited excepted benefits.

An account-based group health plan is an employer-provided group health plan that provides for reimbursement of expenses for medical care (as defined under Code Sec. 213(d)) (i.e., medical care expenses), subject to a maximum fixed-dollar amount of reimbursements for a period (for example, a calendar year). An HRA is a type of account-based group health plan funded solely by employer contributions (with no salary reduction contributions or other contributions by employees) that reimburses an employee solely for medical care expenses incurred by the employee, or the employee's spouse, dependents, and children who, as of the end of the tax year, have not attained age 27, up to a maximum dollar amount for a coverage period. The reimbursements under these types of arrangements are excludable from the employee's income and wages for Federal income tax and employment tax purposes. Amounts that remain in the HRA at the end of the year often may be used to reimburse medical care expenses incurred in later years, depending on the terms of the HRA. Account-based group health plans also include other arrangements, for example, health flexible spending arrangements (health FSAs).

Background. The Affordable Care Act (ACA or Obamacare, P.L. 111-148, P.L. 111-152), added § 715(a)(1) of the EmployeeRetirement Income Security Act (ERISA) and Code Sec.9815(a)(1) to incorporate the provisions of part A of title XXVII

of the Public Health Service Act (PHSA) into ERISA and the Code, and make them applicable to group health plans and to health insurance issuers providing health insurance coverage in connection with group health plans. The PHSA sections incorporated by this reference are §§ 2701 through 2728 (i.e., the market reform provisions). An excise tax is imposed on failures to meet these requirements. (Code Sec. 4980D)

This included PHSA § 2711's "annual dollar limit prohibition" (annual limit), which provides that a group health plan (or a health insurance issuer offering group health insurance coverage) may not establish any annual limit on the dollar amount of benefits for any individual. It also included PHSA §2713's "preventive services requirements," which requirenon-grandfathered group health plans (or health insuranceissuers offering group health insurance plans) to providecertain preventive services without imposing any cost-sharingrequirements for these services.

Under the ACA, the Health Insurance Portability and Accountability Act (HIPAA, P.L. 104-191) and other statutes, both the Code and ERISA subject group health plans to a variety of requirements. However, these requirements generally do not apply to "excepted benefits," including limited excepted benefits that (a) are provided under a separate policy, certificate, or contract of insurance, or (b) are otherwise not an integral part of the plan. (Code Sec. 9831(c)(1))

Specifically, the benefits offered separately from a group health plan that may be excepted are:

1. limited scope vision or dental benefits; (Code Sec.9832(c)(2)(A))

2. benefits for long-term care, nursing home care, homehealth care, or community-based care, or any combinationof those benefits; (Code Sec. 9832(c)(2)(B)) and

3. other similar, limited benefits as specified in regs.(Code Sec. 9832(c)(2)(C))

On Nov. 18, 2015, the Departments finalized the proposed and interim final rules under PHSA § 2711, incorporating certain subregulatory guidance regarding HRA integration, and making various additional clarifications (the 2015 regs). Consistent with initial subregulatory guidance, the 2015 regs provide two methods for integration of HRAs with other group health plan coverage. The 2015 regs also include a special integration method for certain arrangements offered by employers that are not required to offer, and do not offer, non-HRA group coverage to employees who are eligible for Medicare coverage (generally, employers with fewer than 20 employees), but that offer non-HRA group coverage that does not consist solely of excepted benefits to employees who are not eligible for Medicare.

On Oct. 12, 2017, President Trump signed an executive order that, among other things, encourages federal agencies to expand the permitted duration of short-term, limited-duration insurance (STLDI) and increase the usability of health

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in which an HRA is considered to provide MV, and would clarify the ways in which the generally applicable employer-sponsored coverage PTC eligibility rules apply to HRAs integrated with individual health insurance coverage.

In addition, DOL has proposed a clarification to provide plan sponsors with assurance that the individual health insurance coverage the premiums of which are reimbursed by an HRA and other account-based group health plans or a qualified small employer health reimbursement arrangement (QSEHRA) does not become part of an ERISA plan, provided certain conditions are met.

HHS has proposed regs that would provide a special enrollment period in the individual market for individuals who gain access to an HRA and other account-based group health plans integrated with individual health insurance coverage or who are provided a QSEHRA.

Tips for Taxpayers Who Need to Reconstruct Records After Disaster Strikes

After a disaster, taxpayers might need to reconstruct records. This could help them prove their losses, which may be essential for tax purposes, getting federal assistance or insurance reimbursement.

Here are several things taxpayers can do to help reconstruct or get copies of specific types of records after a disaster:

Tax Return Transcripts

• Taxpayers can get free tax return transcripts by usingthe Get Transcript tool on IRS.gov. They can also call 800-908-9946 to order them by phone.

Proof of loss

• To establish the extent of the damage, taxpayers shouldtake photographs or videos of affected property as soon aspossible after the disaster.

• Taxpayers can look on their mobile phone for picturesthat show the property before the disaster damaged it.

• If a taxpayer doesn’t have photographs or videos oftheir property, a simple method to help them rememberwhat items they lost is to sketch pictures of each room thatwas affected.

• Taxpayers can support the valuation of property withphotographs, videos, canceled checks, receipts, or otherevidence.

• If they bought items using a credit card or debit card,they should gather past statements from their credit cardcompany or bank. If the taxpayer didn’t keep these recordsor they were destroyed, statements may be available onlineor they can contact their financial institution.

reimbursement arrangements (HRAs). The executive order directs the Secretaries of the Treasury, Labor, and HHS to consider proposing regs or revising guidance to "increase the usability of HRAs," expand the ability of employers to offer HRAs to their employees, and "allow HRAs to be used in conjunction with nongroup coverage.

Proposed regs. The Departments have issued proposed regs that would remove the current prohibition against integrating an HRA with individual health insurance coverage under the 2015 regs. The proposed rules would instead permit an HRA to be integrated with individual health insurance coverage and, so, to satisfy PHSA § 2711 and § 2713, if the provisions of the proposed rules are met (“the proposed integration rules”). The proposed rules would expand the definition of limited excepted benefits, under Code Sec. 9832(c)(2), § 733(c)(2) of ERISA, and PHSA § 2791(c)(2)(C), to recognize certain HRAs limited in amount and that are limited with regard to the types of coverage for which premiums may be reimbursed, as limited excepted benefits if certain other conditions are met (an “excepted benefit HRA”).

The proposed regs include rules on premium tax credit (PTC) eligibility for individuals offered coverage under an HRA integrated with individual health insurance coverage. An individual is eligible for the PTC for a month if the individual meets various requirements for the month (a coverage month). Among other things, under Code Sec. 36B(c)(2), a month is not a coverage month for an individual if either: (1) the individual is eligible for coverage under an eligibleemployer-sponsored plan and the coverage is affordable andprovides minimum value (MV); or (2) the individual is enrolledin an eligible employer-sponsored plan, even if the coverageis not affordable or does not provide MV. An eligible employer-sponsored plan includes coverage under a self-insured (aswell as an insured) group health plan and is minimum essentialcoverage (MEC) unless it consists solely of excepted benefits.

An HRA is a self-insured group health plan and therefore is an eligible employer sponsored plan. Accordingly, an individual currently is ineligible for the PTC for the individual's Exchange coverage for a month if the individual is covered by an HRA or is eligible for an HRA that is affordable and provides MV for the month. Although IRS guidance provides that an HRA is an eligible employer-sponsored plan and therefore individuals covered by an HRA are ineligible for the PTC, to date, IRS has not provided guidance as to the circumstances in which an HRA is considered to be affordable or to provide MV.

The proposed regs would provide that an employee who is offered, but opts out of, an HRA integrated with individual health insurance coverage, and an individual who is offered such an HRA because of a relationship to the employee (a related HRA individual), are eligible for MEC under an eligible employer-sponsored plan for any month the HRA is affordable and provides MV. Thus, these individuals would be ineligible for the PTC for their Exchange coverage for months the HRA is affordable and provides MV.

The proposed rules would also address the circumstances

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additional representatives. Jerabeck was president and CEO, Guck was vice president and secretary and Tyler was a vice president.

In the summer of 2006, the three sold 5LINX stock for $5.5 million to three investment companies: Trillium Lakefront Partners III, Trillium Lakefront Partners III, NY and Shalam Investment Co. Guck admitted in the plea agreement that from in or about May 2010 to April 2016, 5LINX sold and distributed products for a Florida vendor.

Guck, Tyler and Jerabeck, without the knowledge of the investors, board of directors or other stockholders, conspired and agreed to cause the Florida vendor to pay them personally or companies they owned approximately $2,310,510, which their stockholders agreements prohibited them from receiving.

Authorities also said Guck solely owned YaYa Holdings Corp. and provided material false information on YaYa’s federal returns for fiscal years ending July 31, 2012 and 2013, and failed to file corporate returns for the fiscal years ending July 31, 2014 and 2015. In addition, for fiscal years ending July 31, 2012 and 2013, Guck failed to report income the corporation received from 5LINX. Also, for the fiscal years ending July 31, 2014 and 2015, the corporation had income that Guck should have reported on corporate returns for those years.

The false returns and failure to file returns resulted in a tax loss of some $778,718.

As part of Guck’s plea, he will forfeit various assets previously seized by the government, including approximately $105,000.

Sentencing is pending. The charges carry a maximum penalty of 20 years in prison and a fine of $250,000.

Winston-Salem, N.C.: Preparer Claudia Lynette Shivers has pleaded guilty to conspiring to defraud the U.S. by filing false returns.

According to court documents, Shivers co-owned and operated two prep businesses: Fast Tax of Winston-Salem and Quick Taxes in Greensboro, N.C. She and co-conspirators falsified items on clients’ returns, such as dependents and Schedule A deductions, to inflate refunds. Shivers also directed clients to hand-write false information on tax forms and other documents used in the preparation of their returns.

Shivers further admitted that she held training sessions for her employees, during which she would instruct them on how to manipulate the information on returns to obtain refunds to which the clients were not entitled.

Between January 2014 and April 2017, Shivers and her co-conspirators prepared approximately 519 false returns that claimed some $1.3 million in bogus refunds.

Sentencing is Dec. 20, when she faces a maximum of five years in prison, as well as a period of supervised release, restitution and monetary penalties.

Records about property

• Taxpayers can contact the title company, escrowcompany, or bank that handled the purchase of their hometo get copies of appropriate documents.

• Taxpayers who made improvements to their homeshould contact the contractors who did the work to see ifrecords are available. If possible, the home owner shouldget statements from the contractors to verify the workand cost. They can also get written accounts from friendsand relatives who saw the house before and after anyimprovements.

• For inherited property, taxpayers can check courtrecords for probate values. If a trust or estate existed, thetaxpayer can contact the attorney who handled the trust.

• When no other records are available, taxpayers cancheck the county assessor’s office for old records thatmight address the value of the property.

• There are several resources that can help someonedetermine the current fair-market value of most cars on theroad. These resources are all available online and at mostlibraries. They include Kelley’s Blue Book, the NationalAutomobile Dealers Association, and Edmunds.

Tax Pros in Trouble

Tax Fraud Blotter: Fast, Quick and Guilty

Starkville, Miss.: Former preparer Jameka Coffey has pleaded guilty to aiding and assisting in the preparation and filing of a false return.

According to documents and information provided to the court, from early 2012 through April 2016 Coffey managed ABS Tax Services, and falsified taxpayer client returns by claiming false education credits and reporting fake businesses to seek undeserved refunds for her clients. She also admitted that she trained other preparers to file fraudulent returns.

Coffey faces a statutory maximum sentence of three years in prison, as well as a period of supervised release, restitution and monetary penalties.

Rochester, N.Y.: Jason Guck, 43, of Victor, N.Y., and co-founder of a multi-level-marketing company, has pleaded guilty to conspiracy to commit wire fraud and filing a false return for 2012.

Authorities said that in 2001 Guck, Craig Jerabeck, and Jeb Tyler started 5LINX Enterprise, which offered utility and telecommunications services, health insurance, nutritional supplements and business services. 5LINX used independent representatives to sell products and services and to recruit

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The complaint alleges that the Boursiquots and their corporations continually claimed education credits for taxpayers who did not incur qualifying expenses. The complaint also alleges that they fabricated business income or expenses to qualify for the Earned Income Tax Credit.

It is further alleged that the Boursiquots and their corporations charged clients exorbitant fees without the clients’ knowledge and quoted refunds to clients that were substantially smaller than the refunds requested on the returns filed with the IRS. They would then allegedly pocket the excess as prep fees, often without the clients’ knowledge, according to the complaint.

Durant, Miss.: Former preparer Teresa C. Chism has pleaded guilty to preparing and filing a fraudulent claim for a refund with the IRS.

According to court documents and information provided in court, from 2005 through 2015 Chism operated prep businesses in Mississippi named Mo’ Money, MoneyCo USA and Lady T Taxes. Chism falsified her clients’ returns in different ways to increase their tax refunds, including reporting false wages, false self-employment income and expenses and false education credits.

New Brunswick CPA Accused of Under Reporting $650K in Income

A New Brunswick certified public accountant has been arrested for allegedly under reporting more than $650,000 on his personal income tax returns.

Amit Govil, 58, was is charged with two counts of making and subscribing false tax returns, according to a news release from U.S. Attorney Craig Carpenito.

Govil was arrested at his home and was scheduled to appear before U.S. Magistrate Judge Michael A. Hammer in federal court.

Shiver’s co-conspirators, Shannon DeWayne Patterson, Kristyn Dion Daney and Rakeem Lenell Scales, have all pleaded guilty and await sentencing.

Parker, Colo.: Business owner Calvin Glover has pleaded guilty to conspiracy to impair and impede the IRS for his role in a multi-million-dollar renewable fuel tax credit scheme.

According to court documents, Glover owned Colorado-based renewable fuel company Shintan Inc. and conspired with others to file false claims for refundable federal fuel tax credits. He signed at least 23 false returns that claimed more than $7.2 million in bogus refundable biodiesel mixture tax credits. The IRS issued more than $7 million in refunds to Shintan.

Glover deposited the checks into a bank account that he controlled and then transferred the proceeds to his co-conspirators.

In response to two grand jury subpoenas during the investigation, Glover provided false documents and information to investigators and met with co-conspirators to concoct a false story.

He faces a maximum of five years in prison, as well as a period of supervised release, restitution and monetary penalties.

Miami: A federal court has permanently enjoined Jean-Philippe and Roberton Boursiquot from preparing federal income tax returns for others.

The court also entered a $250,000 judgment against Jean-Philippe Boursiquot and a $100,000 judgment against Roberton Boursiquot on federal authorities’ claim for the disgorgement of ill-gotten fees the two charged clients for preparation of federal returns.

The Boursiquots consented to the injunction order and money judgments. In May, the court also entered an injunction order against B&C Royalty Multi-Services in Oakland Park, Fla., and RBS Flamboyant Solutions in Hollywood, Fla., prohibiting both corporations from preparing federal income tax returns for others.

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Supreme Court Won't Review Imposition of Frivolous Claims Sanctions Against Attorney

MacPherson, et al, v. Comm., (CA 9 11/16/2017) 120 AFTR 2d 2017-6595, cert denied 10/2/2018

The Supreme Court has declined to review the Ninth Circuit's affirmance of Tax Court decisions which imposed frivolous claims sanctions against an attorney. The attorney, despite receiving warnings, continued to knowingly raise frivolous arguments and unreasonably multiply the proceedings.

Background. Code Sec. 6673(a)(2) allows the Tax Court to sanction a practitioner by requiring him or her to personally pay the excess costs, expenses, and attorney's fees that are reasonably incurred because the practitioner unreasonably and vexatiously multiplied the proceedings in any case before the Tax Court.

The following requirements must be satisfied for an award of excess costs:

1. the practitioner must engage in “unreasonable andvexatious” conduct;

2. that unreasonable and vexatious conduct must beconduct that “multiplies the proceedings”; and

3. the dollar amount of the sanction must bear a financialnexus to the excess proceedings; i.e., the sanction may notexceed the costs, expenses, and attorneys' fees reasonablyincurred because of such conduct.

Facts. Donald MacPherson represented Leonard and Evelyn Best in their Tax Court case (Best, TC Memo 2014-72, supplemented at TC Memo 2016-32), in which the Tax Court upheld IRS's collection determination for the taxpayers' unpaid tax, imposed a frivolous claim penalty against the taxpayers under Code Sec. 6673(a)(1), and contemplated sanctioning Mr. MacPherson for unnecessarily bringing and prolonging the proceedings. Throughout the case, Mr. MacPherson raised groundless challenges to IRS's collection determination, some of which were listed in published IRS guidance as frivolous positions. The Court generally found no error in IRS's determination and concluded that IRS's positions throughout the proceedings were supported by substantial authority.

Mr. MacPherson was also the attorney in another collection case (May, TC Memo 2014-194, supplemented at TC Memo 2016-43) in which he was similarly found to have advanced frivolous arguments and unnecessarily prolonged proceedings. The Court contemplated sanctioning Mr. MacPherson in this case as well.

Tax Court awarded costs. The Tax Court concluded in both cases that Mr. MacPherson “intentionally abused the judicial process by bringing and continuing this case on behalf of petitioners knowing their claims to be without merit.”

In Best, in determining the amount of sanctions to be imposed,

11 New Tax Fraud Counts Filed Against Woodbridge Tax Preparer

A tax preparer in the Keasbey section of Woodbridge is facing 11 new tax fraud counts, just five months after being indicted in connection with allegedly using false information to increase his clients tax refunds and secretly funneling some of those funds into accounts he controlled.

In a news release, U.S. Attorney Craig Carpenito said a federal grant jury returned a superseding indictment against David Patterson, 37, adding eight counts of aiding and abetting in the filing of false tax returns and three counts of failure to file tax returns.

Patterson was originally charged by indictment with 16 counts of aiding and abetting in the filing of false tax returns. An arraignment date on the new charges has yet to be set, according to the news release.

According to the indictment, Patterson owned D&D Tax Service LLC, a tax preparation business located in the Keasbey section.

He allegedly prepared multiple fraudulent tax returns on behalf of clients by falsifying their income, charitable contributions, employee business expenses, and education costs, in an effort for his clients to receive larger refunds than they were entitled, according to the news release.

Patterson also allegedly diverted a portion of the tax refunds into bank accounts he controlled without his clients’ knowledge or consent. He also allegedly failed to file an individual tax return and pay federal income taxes from 2013 through 2015, according to the news release.

If convicted, the false filing counts each carry a maximum potential penalty of three years in prison and a $250,000 fine. The failure to file counts each carry a maximum potential penalty of up to one year in prison and a $100,000 fine, the release states.

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the Court accepted the number of excess hours that IRS's attorneys stated that they spent on the case and multiplied the number by a “reasonable hourly rate” provided by IRS ($150 per hour multiplied by 115.25 hours for one attorney, and $200 per hour multiplied by 12.75 hours for the other, for a total of $19,837.50).

And, in May, the Tax Court imposed a $7,188 sanction against Mr. MacPherson, based on the attorney's fees that IRS had incurred.

MacPherson appealed the Tax Court's imposition of sanctions in both cases.

Ninth Circuit affirmed. The Court of Appeals for the Ninth Circuit affirmed the Tax Court's imposition of sanctions in both cases, finding no abuse of its discretion. The Ninth Circuit found that Mr. MacPherson, on his clients' behalf, advanced positions that were contrary to established law and unsupported by fact—and that he admitted in a signed declaration he knew would be unsuccessful. Accordingly, he "multiplied the proceedings" both unreasonably and vexaciously.

No further review. On Oct. 1, 2018, the Supreme Court refused to review the Ninth Circuit's decision. Accordingly, that decision is now final.

The Tax Court's collection determinations in Best and May were also affirmed by the Ninth Circuit in a consolidated decision, and the Supreme Court declined to review that decision as well.."

Already in Prison, Former Tax Preparer Gets 10 Years Probation for Other Crimes

Already in prison on another conviction, a former tax preparer in south Fulton County was sentenced to 10 years of probation after pleading guilty to several crimes.

In 2017, state Department of Revenue agents raided Ruth Barr’s tax business, spokesman William Gaston said. The raid came after a lengthy investigation into her business.

"Ruth Barr was one of the worst offenders for filing fraudulent tax returns," revenue official Josh Waites said. "She did a disservice to legitimate tax preparers across the state and we are pleased with the guilty plea and the sentence.She pleaded guilty to computer theft, false statements and criminal attempt to commit theft, Gaston said. Her 10-year probation goes into effect once she leaves prison.

Ragin Cagin

Who Needs Sec. 179 Expensing When 100% Bonus Depreciation is Available?

Now that the bonus depreciation rules have been liberalized to allow for 100% writeoffs, and expanded to cover used as well as new property, taxpayers that also are eligible for Code Sec. 179 expensing may be wondering why they need to bother with expensing at all. After all, Code Sec. 179 expensing faces dollar limits and other restrictions that don’t burden users of 100% bonus depreciation. However, as this Practice Alert illustrates, Code Sec. 179 has unique advantages. It can be used to fine-tune annual deductions, doesn’t cause UNICAP problems, and covers a number of realty improvements that are ineligible for 100% bonus depreciation.

Under the Tax Cuts and Jobs Act (TCJA), a 100% first-year deduction for the adjusted basis of depreciable property is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (after Sept. 27, 2017, and before Jan. 1, 2024, for certain aircraft and property with longer production periods). (Code Sec. 168(k)) In later years, the first-year bonus depreciation deduction phases down (i.e., to 80% in 2023, to 60% in 2024, 40% in 2015, and 20% in 2026—a one-year date adjustment applies for certain aircraft and property with longer production periods). The additional first-year depreciation allowance for qualified property acquired before Sept. 28, 2017, and placed in service after Sept. 27, 2017 was 50%. Additionally, under the TCJA, for the first time ever, the additional first-year depreciation deduction is allowed for used as well as new property (although used property is ineligible in certain circumstances, such as where it was acquired from a related party or there was previous use by the taxpayer).

Under the TCJA, for tax years beginning in 2018, the dollar limitation on Code Sec. 179 expensing is $1 million (up from $510,000) and the investment-based reduction in the dollar limitation starts to take effect when expensing-eligible property placed in service in the tax year exceeds $2.5 million (up from $2,030,000). (Code Sec. 179(b)(1), Code Sec. 179(b)(2)) However, under long-standing rules that weren’t changed by the TCJA, the Code Sec. 179 expensing deduction is limited

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(B)) By contrast, the additional first year depreciation deduction under Code Sec. 168(k) is not allowable at all for purposes of computing earnings and profits. (Prop Reg § 1.168(k)-1(f)(7), on which taxpayers may rely, Reg § 1.168(k)-1(f), Reg § 1.312-15(a)(1))

5. Under the TCJA, a category of improvements relatedto nonresidential realty may be expensed under CodeSec. 179, but is not, under current law, eligible for 100%bonus depreciation, although the category may becomeeligible if technical corrections are made. Another categoryof nonresidential realty improvements is newly eligible forCode Sec. 179 expensing under the TCJA, but thereis no parallel provision that would allow property inthis category to become eligible for bonus depreciationeven if technical corrections are enacted.

Qualified real property acquired by purchase for use in the active conduct of a trade business is eligible for Code Sec. 179 expensing. (Code Sec. 179(d)(1)) Effective for property placed in service in tax years beginning after Dec. 31, 2017, qualified real property consists of two categories: (1) qualified improvement property; a n d (2) a grab-bag of specific property improvements.

(1) Qualified improvement property. This is anyimprovement to an interior portion of a building whichis nonresidential real property if the improvement isplaced in service after the date the building was firstplaced in service. Qualified improvement p r o p e r t ydoes not include the enlargement of the building, anyelevator or escalator, or the internal structural frameworkof the building. Code Sec. 179(f)(1) defines qualifiedimprovement property by reference to its definition inthe depreciation rules (i.e., Code Sec. 168(e)(6))

Under current law’s Code Sec. 168(e), qualified improvement property (as defined above) is 39-year property under MACRS, and therefore ineligible for 100% bonus depreciation which applies only to property with a MACRS recovery period of 20 yea rs or less.

Congress intended, but failed, to give qualified improvement property a 15-year MACRS recovery period, which would have qualified this asset category for 100% bonus depreciation. Thus, absent a technical correction, which many commentators have called for, qualified improvement property does not qualify for 100% bonus depreciation.

(2) Specific property improvements. Under the TCJA,these Code Sec. 179 expensing-eligible specificproperty improvements consist of any of the following improvements to nonresidential real property placed inservice after the date that the underlying property wasplaced in service: roofs; heating, ventilation, and a i r -conditioning (HVAC) property; fire protection and alarmsystems; and security systems. (Code Sec. 179(f)(2))This category of property improvements is unique toCode Sec. 179 and has no parallel in the depreciation

to taxable income from all of the taxpayer’s active trades or businesses. In general, any amount that cannot be deducted because of the taxable income limit can be carried forward to later years until it is fully deducted. (Code Sec. 179(b)(3))

Business that is eligible for either Code Sec. 179 expensing or 100% bonus depreciation under Code Sec. 168(k) should consider using the expensing option to capture the following advantages.

1. Although taxpayers generally benefit by acceleratingthe timing of deductions, there are situations in whichaccelerating deductions is offset by other considerations.One of those situations is the expiration of net operatingloss (NOL), charitable contribution, or credit carryforwards.That is, the use of NOLs (Code Sec. 172(a)(2)), charitablecontributions (Code Sec. 170(b)), and many credits islimited by a taxpayer’s taxable income (see, e.g., CodeSec. 23(b)(2)), but the carryover of many of these benefitsexpires after a specified time (e.g., the carryover ofunusable charitable contribution deductions is generallylimited to five years under Code Sec. 170(d)(1)(A)).

2. By not claiming Code Sec. 179 expensing, or electingout of bonus depreciation, a taxpayer increases current-year taxable income, but can (1) offset the increase by useof the expiring tax benefit, and (2) receive the deferreddepreciation deductions in future years.

3. Expensing comes out ahead under such circumstancesbecause a taxpayer that uses Code Sec. 179 expensingmakes an annual election to do so on a property-by-propertybasis and specifies the elected-for part of a property’scost. (Code Sec. 179(c)) By contrast, bonus depreciationautomatically applies to all eligible properties at their fullcosts (less any amounts expensed under Code Sec. 179).The taxpayer may elect out of bonus depreciation, but cando so only for one or more full classes of property, suchas all five-year MACRS property. (Code Sec. 168(k)(7))In other words, a taxpayer can’t pick and choose whichproperties it wants to write off via 100% bonus depreciation.

The TCJA changed the rules for NOLs. Effective for losses arising in tax years beginning after 2017, the NOL deduction is limited to 80% of taxable income, determined without regard to the NOL deduction itself. (Code Sec. 172(a)) And, for NOLs arising in tax years ending after 2017, the general 2-year NOL carryback and prior law’s special carrybackprovisions are repealed (except that certain losses incurredin a farming trade or business may be carried back two years,and insurance companies other than life insurance companiesget a 2-year carryback and 20-year carryforward); and NOLsmay be carried forward indefinitely. (Code Sec. 172(b)(1)(A))

4. Code Sec. 179 expensing has a small edge whencalculating corporate earnings and profits. Anamount expensed under Code Sec. 179 isdeducted for earnings and profits purposes ratably over aperiod of five years, beginning with the year the amountis deductible under Code Sec. 179. (Code Sec. 312(k)(3)

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provisions of Code Sec. 168.

Under Code Sec. 168(i)(6)(A), these specific types of property improvements are 39-year property for MACRS purposes and thus are automatically ineligible for 100% bonus depreciation. The benefits of using IRC Section 179 or the new Bonus Depreciation Rules must be weighed heavily particularly in light of the IRC 199A, 20% of QBI rules.

Jerry

Taxpayer Advocacy

Execution of Closing Agreement Caused Mitigation Rules to be Met

Legal Advice Issued by Field Attorneys 20184201F

In Legal Advice Issued by Field Attorneys (LAFA), IRS has set out a series of facts under which the mitigation rules applied after IRS and the taxpayer entered into a closing agreement.

Background—mitigation. The mitigation provisions of Code Sec. 1311 - Code Sec. 1314 provide for the correction of the effect of an erroneous treatment of an item in a tax year which is closed by the statute of limitations or otherwise, in cases where, in connection with the ascertainment of the tax for another tax year, it has been determined that there was erroneous treatment of the item in the closed year. Four tests must be met:

(1) An error must have occurred in a closed tax year thatcannot otherwise be corrected by operation of law. (CodeSec. 1311(a))

(2) There must be a “determination” for an open tax year.(Code Sec. 1311(a))

(3) The determination must result in one of the sevencircumstances under which an adjustment is authorized byCode Sec. 1312. (Code Sec. 1311(a))

(4) Subject to exceptions, the determination must adopt a position maintained by a party that isinconsistent with the error that has occurred. (Code Sec.1311(b)(1))

The definition of “determination” is contained in Code Sec. 1313(a) and the regs under that Code section. One type of determination is a closing agreement. (Code Sec. 1313(a)(2)) Under one of the seven circumstances described in Code Sec. 1312, i.e., a "double allowance of a deduction or credit," an adjustment under the mitigation provisions is made only if there is adopted in the determination a position maintained by the taxpayer with respect to whom the determination is made,

and the position maintained by the taxpayer is inconsistent with the erroneous allowance of a deduction or credit. (Code Sec. 1312(2); Code Sec. 1311(b)(1))

Background—closing agreements. IRS may enter into a written agreement with any taxpayer relating to his liability for any internal revenue tax. (Code Sec. 7121(a)) The agreement, a final closing agreement, is, in effect, a mutual release that binds both parties. In the absence of fraud, malfeasance, etc., (1) the case cannot be reopened as to matters agreed upon or the agreement modified by any officer, employee, or agent of the U.S.; (2) in any suit, action, or proceeding, the agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance with the agreement, may not be annulled, modified, set aside, or disregarded. (Code Sec. 7121(b))

Facts. IRS auditors sought advice regarding their attempt to apply the mitigation rules to assess an amount against a taxpayer for a tax year that was never assessed and for which the statute of limitations had expired. That amount was the tax that resulted from a net operating loss (NOL) carryback to the closed year, where the taxpayer originally carried back the NOL to that year, IRS originally allowed that carryback to that year, and which the taxpayer currently claimed should be carried back to a different tax year. IRS intends to allow the taxpayer's claims in full and will enter into a closing agreement to that effect.

The closing agreement will result in the mitigation rules being met. IRS has held that the closing agreement being considered will result in mitigation rules being met.

First, IRS noted that, upon execution of the closing agreement by all parties, the closing agreement will be a determination within the meaning of Code Sec. 1313(a)(2).

And, IRS said, the execution of the closing agreement will result in an error described in Code Sec. 1312(2). The taxpayer was originally allowed a deduction in the closed year for the NOL carryback. As a result of allowing the current claim as well, the NOL will be allowed twice.

Correction of this error is prohibited by law because the statute of limitations on assessing additional tax for the closed tax year had already expired as of the date of the proposed closing agreement. IRS noted that the statute of limitations for the closed year was open when the taxpayer filed amended returns to change the carryback year. However, IRS said, under Code Sec. 1311(a), the operative date to determine if correction of the error is prevented is the date of determination (in this case the date the closing agreement is executed), not the date the claims were filed.

The execution of the closing agreement will also result in the adoption of a position maintained by the taxpayer that is inconsistent with the erroneous allowance of an NOL deduction in the closed year. The taxpayer affirmatively maintained its position by filing a refund claim for the NOL carryback related to the closed year, and the taxpayer's position with respect to

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that year is inconsistent with the erroneous allowance of the same carryback in the open year.

Reduced 24-percent Withholding Rate Applies to Small Businesses and Other Payers

The Internal Revenue Service urged small businesses and other payers to check out the agency’s newly-revised backup withholding publication, now available on IRS.gov.

Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), posted last month on IRS.gov, has been updated to reflect a key change made by the Tax Cuts and Jobs Act (TCJA). As a result of this change, effective Jan. 1, 2018, the backup withholding tax rate dropped from 28 percent to 24 percent.

In general, backup withholding applies in various situations including, but not limited to, when a taxpayer fails to supply their correct taxpayer identification number (TIN) to a payer. Usually, a TIN is a Social Security number (SSN), but in some instances, it can be an Employer Identification Number (EIN), Individual Taxpayer Identification Number (ITIN) or Adoption Taxpayer Identification Number (ATIN). Backup withholding also applies, following notification by the IRS, where a taxpayer underreported interest or dividend income on their federal income tax return.

Publication 1281 is packed with useful information designed to help any payer required to impose backup withholding on any of their payees. Among other things, the publication features answers to 34 frequently asked questions (FAQs). One of them, Q/A 34, points out that a payer who mistakenly backup withheld at an incorrect rate (such as the old 28-percent tax rate, rather than the new 24-percent rate), need not refund the difference to the payee. However, a payer who chooses to refund the difference must do so before the end of the year and can then make appropriate adjustments to their federal tax deposits.

When backup withholding applies, payers must backup withhold tax from payments not otherwise subject to withholding. Payees may be subject to backup withholding if they:

• Fail to give a TIN,

• Give an incorrect TIN,

• Supply a TIN in an improper manner,

• Underreport interest or dividends on their income taxreturn, or

• Fail to certify that they’re not subject to backupwithholding for underreporting of interest and dividends.

Backup withholding can apply to most kinds of payments reported on Form 1099, including:

• Interest payments;

• Dividends;

• Patronage dividends, but only if at least half of thepayment is in money;

• Rents, profits or other income;

• Commissions, fees or other payments for workperformed as an independent contractor;

• Payments by brokers and barter exchange transactions;• Payments by fishing boat operators, but only the portionthat's in money and represents a share of the proceeds ofthe catch;

• Payment card and third-party network transactions;and• Royalty payments.

Backup withholding also may apply to gambling winnings that aren't subject to regular gambling withholding.

To stop backup withholding, the payee must correct any issues that caused it. They may need to give the correct TIN to the payer, resolve the underreported income and pay the amount owed, or file a missing return. The Backup Withholding page, Publication 505, Tax Withholding and Estimated Tax and Publication 1335, Backup Withholding Questions and Answers have more information.

Payers report any backup withholding on Form 945, Annual Return of Withheld Federal Income Tax. The 2018 form is due Jan. 31, 2019. For more information about depositing backup withholding taxes, see Publication 15, Employer’s Tax Guide. Payers also show any backup withholding on information returns, such as Forms 1099, that they furnish to their payees and file with the IRS.

Like regular federal income tax withholding, a payee can claim credit for any backup withholding when they file their 2018 federal income tax return.

On-Demand WebinarsncpeFellowship.com

website

Use Resources and Toolsfor Tax Professionals

On Our Website ncpeFellowship.com

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the Trump Administration’s latest tax law changes might have incidentally changed the rules.

A loophole allowing for tax deductible investments

The investment-research platform Pareto stumbled upon a loophole for investors and businesses looking to build their net operating losses by end of year. By way of background, Pareto’s research subscription is accessed by making purchases of the Pareto token to build up a score, with a higher score determining preferential access to the content. Any purchases made to this end qualify as expenses, for businesses and sole proprietorships. But on your balance sheet, there remain assets, in the form of the Pareto token. With its vibrant market, and limited supply of Pareto tokens, you can still recoup the costs, at least partially, or sell as profit.That means any of your end-of-year Pareto token purchases can become something once thought impossible: tax-deductible investments.

Usually there are no assets used to access a service like this that also have a secondary market. It’s a unique situation, and it opens the door to potentially unlimited tax deductions and net operating losses, if one were inclined to take it so far.

The IRS in response

So how will the IRS — or the newly formed “J5” — respond to such a strategy?

That depends on how they decide to classify cryptos, or the many kinds of transactions related to them. “There is still a lot of uncertainty about how the IRS will come down on virtual currency,” tax attorney Clay Littlefield recently told Bloomberg. “There are some good arguments for why this analogy or that analogy should apply, but there’s not a lot there.”

The American Institute of Certified Public Accountants (AICPA), whose 400,000 members practice as Certified Public Accountants (CPAs) in 143 countries, has been looking for more specific answers.

“The rapid emergence of virtual currency has generated several new questions on how the tax rules apply to various transactions involving virtual currency and activities and assets related to it,” wrote chair of the AICPA Tax Executive Committee Annette Nellen in a letter to the IRS, adding that “the development in the number of types of virtual currencies and the value of these currencies make these questions both timely and relevant to a growing number of taxpayers and tax practitioners.”

In the interest of CPAs and their clients remaining in good standing, Nellen recommended that the IRS release “immediate guidance” on the taxation of cryptocurrencies.

“Virtual currency transactions, in which taxpayers increasingly engage, add a new layer of complexity to the analysis of a client’s reporting requirements. The issuance of clear guidance in this area will provide confidence and clarity to preparers

Foreign Taxes

Cryptocurrency Taxation Just Got Nuttier with This Million-Dollar Loophole and the IRS’ “J5” Formation

The IRS wants your money — and that means crypto gains, too.

In July, the IRS announced it would be launching initiatives to “address noncompliance related to the use of virtual currency.” Those holding crypto assets are now in the tax man’s crosshairs. That same day the IRS also revealed the agency is teaming up with peer revenue services in Australia, Canada, the Netherlands, and the UK “to pursue cyber criminals” and “fight against international and transnational tax crime and money laundering.”

The member countries, self styling themselves “The J5”, are directed — at least in part — toward enforcing tax laws on cryptocurrency traders.

“The formation of the J5 demonstrates the serious commitment of governments around the globe in enhancing international cooperation in fighting serious international tax and financial crimes, money laundering, and cybercrime through the use of cryptocurrencies,” said Johanne Charbonneau, Director General of the Canada Revenue Agency.

Hans van der Vlist, General Director of the Netherlands’ FIOD, cited “the threat of cryptocurrencies to tax administrations” as a primary concern of the J5, while Simon York, Director of HMRC Fraud Investigation Service, ominously added “no one is beyond our reach.”

The IRS has also been muscling crypto exchanges like Coinbase for user information. In February, Coinbase turned over the names, birthdates, taxpayer IDs, home addresses and transaction histories of 13,000 high-volume users. What they will do with it remains to be seen, but the handover disrobes the anonymity cloak quickly.

Nevertheless, there are still some ways to keep your crypto money and stay on the right side of the law. Especially since

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go into a trust for the lifetime of the surviving spouse, avoiding estate taxes on the first death. When the surviving spouse dies, the trust assets are includable in the second estate. But because of the bizarre interplay of the one-year federal estate tax repeal in 2010 and the New York state estate tax laws, the Seiden estate lawyers argued that they could avoid including the value of the trust in the widow’s estate altogether.

“This is wild! It’s brilliant!” says Bruce Steiner, a New York estate lawyer who wasn’t involved in the case. He notes that it potentially applies to not just surviving spouses of New Yorkers who died in 2010, but to others who filed only New York estate tax returns. (The New York estate tax kicks in at a lower level of wealth than the federal estate tax; for 2018, the federal threshold is $11.18 million versus the New York threshold of $5.25 million.)

“We said, ‘Let’s take a chance,’” says Sabino Biondi, the estate lawyer who handled estate administration and filed both of the Seidens’ estate tax returns, disclosing the existence of the QTIP, but not including its value in her estate. It was a calculated risk based on New York tax law as written. Evelyn Seiden (nee Zaager) was a homemaker; her late husband, Jules, was a German immigrant who worked as an architect in the construction design industry. He was 94. She was 89.

“The courts must apply the laws as written,” says Robert Benjamin, whose firm took the case to court. A tax department memorandum tried to anticipate this problem, and the state’s lawyers pointed it out. But the judge said that the statute, not the memorandum, controls. The judge also dismissed the state’s “duty of consistency” argument: “Both estates followed the law in effect at the time of their decedents’ respective deaths.”

The state has until mid-November to appeal. And the legislature could amend the tax law to apply to future estates.

Grewal ‘Proud to Lead’ Latest Challenge to IRS on Federal Tax Changes

The Internal Revenue Service proposed new rules to stymie ‘blue’ state efforts to get around a federal cap on SALT deductions. Attorneys general reveal how they plan to fight back

State Attorney General Gurbir Grewal

and taxpayers on application of the tax law to virtual currency transactions.“

But until we have such guidance, the jury — so to speak — is still out and a lot of questions still remain about how the IRS will handle all the tricky little details that make crypto so interesting.

2018 has been a different crypto experience than 2017, with new complexities—and new loopholes—helping to stir the pot.

State News of Note

New York Estate Tax Win Opens Floodgates For Millions In Refunds And Future Tax Savings

An under-the-radar Surrogate’s court opinion is upending the staid world of trusts and estates in New York. In the matter of the will of Evelyn Seiden, the court overturned the state’s 2014 tax grab on the marital trust established on her husband’s death in 2010, ordering a refund of $530,000 to her estate. The result could be far reaching: Using the same arguments, many families could be in line for big estate tax refunds and future savings. For example, it could even impact the estate of billionaire George Steinbrenner.

In their briefs, the state lawyers were apoplectic. They called the taxpayer’s move one of “gamesmanship” and warned of “a potential opening of the flood-gates” for similarly situated estates and “an untenable risk” to state revenue.

The executor’s argument boiled down to this: New York cannot tax what the IRS cannot tax.

Normally, QTIPs—as these trusts are called—allow tax deferral, not tax avoidance. At the first spouse’s death, assets

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local governments can now create charitable organizations to collect donations from residents to fund services — like education and law enforcement — that traditionally are paid for using property taxes. It also allows the local governments, including municipalities, counties and school boards, to offer tax credits worth up to 90 percent to residents who donate to the new civic groups; the tax credits would offset their property-tax liabilities.

IRS roadblock

But the IRS put up a big roadblock when the agency published a new set of regulations for allowable tax deductions in August. If adopted, the IRS rule-change would reduce the tax benefit of the workaround laws passed in New Jersey and other states by effectively capping the allowable benefit at only 15 percent of any contribution.

New Jersey’s initial response was to issue new state regulations last month that included a disclaimer saying the state “makes no representations with respect to how the IRS will treat property tax creditable-contributions to a charitable fund.” But in the letter submitted to the IRS last week by Grewal and the other attorneys general, the states are now going on offense against the IRS by arguing the proposed new rules are legally flawed.

For example, the state officials allege the new rules, as currently written, would unfairly allow corporations to continue taking full charitable deductions while seeking to restrict those tax benefits for individual taxpayers.

“Any attempt to give businesses a back-door way effectively to claim charitable deductions for donations to certain entities while barring individuals from doing so merely confirms that the underlying rule is arbitrary, capricious, and unlawful,” the letter says.

‘…not within the IRS’s rulemaking power’

The letter also argues that the proposed rules conflict with treaties the U.S. maintains with other countries, including Canada, Israel, and Mexico, when residents make contributions to charitable groups that are based overseas. The attorneys general also suggest that by interpreting federal tax law in the way the IRS has, the agency has gone beyond the constitutional authority that’s granted to the executive branch.

“It is not within the IRS’s rulemaking power to usurp Congressional authority and overrule a tax law principle that has been unquestioned for more than 100 years,” the letter says.

The letter was submitted to the IRS just before a deadline for public comment on the proposed new rules that passed earlier this month. The next step in the rulemaking process is the holding of a public hearing on the issue, which has been scheduled for November 5, according to the IRS.

But if the agency continues to move ahead with its effort to

New Jersey’s attorney general is once again threatening to sue the Trump administration, this time to defend a new state law that helps to restore a full federal tax deduction for state and local taxes.

Attorney General Gurbir Grewal sent a letter to the Internal Revenue Service urging the federal government to drop a plan to adopt new tax regulations that would undermine the effectiveness of New Jersey’s new tax law.

The letter was signed by Grewal and his counterparts in California, Connecticut and New York, three other high-tax, majority Democrat states where new laws have been adopted to preserve the full deduction for state and local taxes that’s known as SALT.

The acrimony isn’t new between the Trump administration and the blue-state legal officials over the future of the SALT deduction since a recent federal tax-policy change capped the write-off; a related legal case is already going through federal court. But the letter that was sent to the IRS by Grewal and the other attorneys general last week sheds new light on exactly how they would try to defend the state tax laws in the legal arena. It cites more than 100 years of precedent and argues the new IRS rules, if adopted, would go beyond executive-branch rulemaking authority.

Grewal: ‘…dangerous and illegal’

“I’m proud to lead a coalition of Attorneys General opposing the proposed rules as dangerous and illegal, and I promise to challenge the IRS in court if it goes through with its plans,” Grewal said.

The dispute over tax policy stems largely from the broad overhaul of the federal tax code that was enacted late last year by President Donald Trump and the Republican Congress. Those changes resulted in a lowering of individual income-tax rates and also provided a significant reduction of the federal tax burden for corporations and those with large estates.

But to help finance the tax cuts, several deductions and exemptions were also adjusted. Among those changes was the capping of the longstanding SALT deduction at $10,000. That new limit will result in many New Jersey residents seeing a tax hike because their combined property tax and state income tax soar over the capped amount; local property tax bills average close to $8,700 in New Jersey, and the per-capita state income-tax burden is nearly $1,500.

New Jersey joined with legal officials from New York, Connecticut and Maryland earlier this year in a lawsuit that is challenging the constitutionality of the new SALT cap. Elected officials in several states, including New Jersey, have also adopted new state laws to help residents preserve their full SALT deduction.

New Jersey’s “workaround” law, enacted in May, takes advantage of the full deductibility for charitable contributions that the federal tax code allows. Under the state workaround,

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the value of SALT credits from a charitable deduction, the receipt of a foreign tax benefit would leave the same charitable deduction unchanged. For example, pursuant to treaties with Canada, Mexico, and Israel, U.S. taxpayers with source income in those countries may claim a charitable deduction for contributions made to qualifying Canadian, Mexican, and Israeli organizations, which reduce the donor's tax liability in the foreign jurisdiction. Under Canadian law, donors receive a tax credit worth 29% of contributions that exceed $200; Israeli tax law entitles donors to credits worth up to 35% of the contribution amount; and under Mexican law, taxpayers may deduct charitable contributions up to 7% of their taxable income. However, IRS does not require taxpayers to subtract the value of Canadian, Mexican, or Israeli tax benefits from their charitable deductions.

...Corporations v. individuals: Third, the comments claim that the proposed rules also unfairly favor corporations over individuals because on Sept. 5, 2018, IRS issued a clarification noting that business taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses. The states believe that IRS's clarification "creates an arbitrary, illogical, and untenable distinction between business taxpayers and individual taxpayers."

Other issues. The comments also claim the proposed regs are misguided as a matter of policy. The proposed rules would undermine state sovereignty by depriving state and local governments of the revenue necessary to sustain vital public services. In addition, the proposed regs would upset the status quo for the individuals, charities, and governments that have come to depend on existing programs.

Furthermore, the proposed regs would create difficult administrative problems for both taxpayers and IRS, in order to determine the amount of an individual's charitable deduction. Many taxpayers would not be able to determine the value of a federal charitable deduction without first filing their state tax returns to ascertain the true value of the SALT credit, but they would not be able to file their state tax returns without first filing their federal tax returns, which supply many of the calculations, such as taxable income and adjusted gross income for state tax returns.

Disaster Victims in Florida and Other States Qualify for Tax Relief

IRS has announced on its website that victims of Hurricane Michael in counties of Florida that are designated as federal disaster areas qualifying for individual assistance have more time to make tax payments and file returns. Certain other time-sensitive acts also are postponed. This article summarizes the relief that's available and includes up-to-date disaster area designations and extended filing and deposit dates for all areas affected by storms, floods and other disasters in 2018.

Who gets relief. Only taxpayers considered to be affected taxpayers are eligible for the postponement of time to file

adopt the new rules, Grewal promised New Jersey would be among the states that would be taking the IRS to court to upend what he’s calling “bad law and bad public policy.”

“The IRS should have stood by its longstanding view that tax credit programs like New Jersey’s are lawful,” he said.

CA, CT, NJ and NY Submit Comments On Proposed SALT Regulations

The Attorneys General of California, Connecticut, New Jersey and New York have filed joint comments opposing proposed regs on the availability of federal charitable contribution deductions when the taxpayer receives or expects to receive a corresponding state and local tax (SALT) credit. The proposed regs are designed to block states and localities from setting up charitable funds to preserve the deductibility of state and local property taxes in response to the limitation on the federal SALT deduction imposed by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017), which limited the deduction to $10,000 of state and local income and property taxes. The proposed regs would require taxpayers to subtract the value of any SALT credits that they receive from their charitable contribution deductions.

Arbitrary and capricious. The comments claim that the proposed regs are arbitrary and capricious and contrary to law for three reasons:

...Tax credits v. tax deductions: First, the regs would treat tax credits and tax deductions differently, even though both have the same effect of reducing tax liability. The rulemaking would treat tax credits, but not tax deductions, as evidence of a quid pro quo that reduces the amount of a charitable deduction. Under the proposed regs, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive. If the taxpayer receives or expects to receive a state or local tax credit in return for such payment, IRS claims that the tax credit constitutes a return benefit, or quid pro quo, to the taxpayer and, therefore, the charitable contribution deduction should be reduced. The comments point out that case law and IRS's own administrative guidance have uniformly held that the expectation of a tax benefit does not give rise to a quid pro quo that would negate charitable intent or reduce the amount of a charitable deduction. The courts and IRS have not previously treated tax benefits as consideration reflecting a bargained-for exchange.

...Discrimination against state and local governments: Secondly, the attorneys general claim that the proposed regs discriminate against state and local governments. They claim that the proposed rulemaking unfairly treats states and localities relative to the federal government because while the receipt of SALT credits would reduce or eliminate a charitable deduction, charitable donations that trigger federal tax benefits would remain fully deductible. In addition, the proposed regs would prejudice states and localities relative to foreign governments. While a taxpayer would be required to subtract

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returns, pay taxes and perform other time-sensitive acts. Affected taxpayers are those listed in Reg. § 301.7508A-1(d)(1)) and thus include:

…any individual whose principal residence, and any business entity whose principal place of business, is located in the counties designated as disaster areas;

…any individual who is a relief worker assisting in a covered disaster area, regardless of whether he is affiliated with recognized government or philanthropic organizations;

…any individual whose principal residence, and any business entity whose principal place of business, is not located in a covered disaster area, but whose records necessary to meet a filing or payment deadline are maintained in a covered disaster area;

…any estate or trust that has tax records necessary to meet a filing or payment deadline in a covered disaster area; and

…any spouse of an affected taxpayer, solely with regard to a joint return of the husband and wife.

What may be postponed. Under Code Sec. 7508A, IRS gives affected taxpayers until the extended date (specified by county, below) to file most tax returns (including individual, estate, trust, partnership, C corporation, and S corporation income tax returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date falling on or after the onset date of the disaster (specified by county, below), and on or before the extended date. IRS also gives affected taxpayers until the extended date to perform certain other time-sensitive actions that are due to be performed on or after the onset date of the disaster, and on or before the extended date.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after the onset date of the disaster, and on or before the deposit delayed date(specified by county, below), provided the taxpayer made these deposits by the deposit delayed date.

Affected areas and dates for storms, floods and other disasters occurring in 2018 that are federal disaster areas qualifying for individual assistance, as published on IRS's website, are carried below.

Alabama: The following are federal disaster areas qualifying for individual assistance on account of severe storms and tornadoes beginning on Mar. 19, 2018: Calhoun, Cullman, and Etowah counties.

For these Alabama counties, the onset date of the disaster was Mar. 19, 2018 and the extended date was July 31, 2018. The deposit delayed date was Apr. 3, 2018.

American Samoa: Following the President's declaration that a major disaster exists in the Territory of American Samoa, IRS has announced that taxpayers who reside or have a business in the disaster area will qualify for tax relief on account of Tropical Storm Gita, which took place beginning on Feb. 7, 2018.

For the Territory of American Samoa, the onset date of the disaster was Feb. 7, 2018 and the extended date was June 29, 2018 (which includes 2017 individual income tax returns normally due on Apr. 17, 2018). The deposit delayed date was Feb. 22, 2018.

California: The following is a federal disaster area qualifying for individual assistance on account of wildfires and high winds that began July 23, 2018: Lake and Shasta counties.

For these California counties, the onset date of the disaster was July 23, 2018, and the extended date is Nov. 30, 2018 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; quarterly estimated income tax payments due on Sept. 17, 2018; quarterly payroll and excise tax returns normally due on July 31, 2018 and Oct. 31, 2018; and tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Aug. 7, 2018.

Florida: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Michael that took place beginning on Oct. 7, 2018: Bay, Franklin, Gulf, Taylor and Wakulla counties.

For these Florida counties, the onset date of the disaster was Oct. 7, 2018, and the extended date is Feb. 28, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018 and Jan. 31, 2019; tax-exempt organizations that operate on a calendar-year basis that had an automatic extension due to run out on Nov. 15, 2018; and the businesses with extensions including, among others, calendar-year corporations whose 2017 extensions run out on Oct. 15, 2018). The deposit delayed date is Oct. 22, 2018. (IR 2018-199, 10/12/2018)

Hawaii: The State of Hawaii is a federal disaster area qualifying for individual assistance on account of volcanic eruptions and earthquakes beginning on May 3, 2018.

For the State of Hawaii, the onset date of the disaster was May 3, 2018, and the extended date was Sept. 17, 2018. The deposit delayed date was May 18, 2018.

Hawaii: The State of Hawaii is a federal disaster area qualifying

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For these North Carolina counties, the onset date of the disaster was Sept. 7, 2018, and the extended date is Jan. 31, 2019 (which includes taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 24, 2018.

South Carolina: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Florence, which took place beginning on Sept. 8, 2018: Chesterfield, Darlington, Dillon, Florence, Georgetown, Horry, Marion, and Marlboro counties.

For these South Carolina counties, the onset date of the disaster was Sept. 8, 2018, and the extended date is Jan. 31, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 24, 2018.

Texas: The following are federal disaster areas qualifying for individual assistance on account of severe storms and flooding that began on June 19, 2018: Cameron, Hidalgo and Jim Wells counties.

For these Texas counties, the onset date of the disaster was June 19, 2018, and the extended date is Oct. 31, 2018 (which includes taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018 and businesses with extensions due to run out on Sept. 17, 2018; the Sept. 17, 2018 deadline for making quarterly estimated tax payments; and the July 31, 2018 deadline for filing quarterly payroll and excise tax returns). The deposit delayed date was July 5, 2018.

Disaster Victims in Georgia and Virginia, and Additional Victims in Florida, North Carolina, and South Carolina, Qualify for Tax Relief

IRS has announced on its website that victims of Hurricane Michael in counties of Georgia and victims of Hurricane Florence in Virginia that are designated as federal disaster areas qualifying for individual assistance, as well as additional victims of Hurricane Florence in counties of South Carolina and North Carolina and additional victims of Hurricane Michael in counties of Florida, that have been similarly designated, have more time to make tax payments and file returns. Certain other time-sensitive acts also are postponed. This article summarizes the relief that's available and includes up-to-date disaster area designations and extended filing and deposit dates for all areas affected by storms, floods and other disasters in 2018.

for individual assistance on account of severe storms, flooding, landslides and mudslides that occurred starting on Apr. 13, 2018.

For the State of Hawaii, the onset date of the disaster was Apr. 13, 2018, and the extended date was Aug. 20, 2018. The deposit delayed date was Apr. 30, 2018.

Indiana: The following are federal disaster areas qualifying for individual assistance on account of severe storms and tornadoes beginning on Feb. 14, 2018: Carroll, Clark, Dearborn, Elkhart, Floyd, Fulton, Harrison, Jasper, Jefferson, Kosciusko, Lake, LaPorte, Marshall, Ohio, Porter, Pulaski, Spencer, Starke, St. Joseph, Switzerland, Vanderburgh, and White counties.

For these Indiana counties, the onset date of the disaster was Feb. 14, 2018, and the extended date was June 29, 2018 (which includes the Apr. 18 deadline for filing 2017 individual income tax returns and the Apr. 18 and June 15 deadlines for making quarterly estimated tax payments). The deposit delayed date was Mar. 1, 2018.

Northern Mariana Islands: The following are federal disaster areas qualifying for individual assistance on account of Typhoon Mangkhut that took place beginning on Sept. 10, 2018: Rota, Saipan and Tinian islands.

For these Northern Mariana Islands areas, the onset date of the disaster was Sept. 10, 2018, and the extended date is Jan. 31, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 25, 2018.

North Carolina: The following are federal disaster areas qualifying for individual assistance on account of severe storms and a tornado that occurred on Apr. 15, 2018: Guilford and Rockingham counties.

For these North Carolina counties, the onset date of the disaster was Apr. 15, 2018 and the extended date was Aug. 15, 2018 (which includes the Apr. 18 deadline for filing 2017 individual income tax returns and the Apr. 18 and June 15 deadlines for making quarterly estimated tax payments). The deposit delayed date was Apr. 30, 2018.

North Carolina: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Florence that took place beginning on Sept. 7, 2018: Beaufort, Bladen, Brunswick, Carteret, Columbus, Craven, Cumberland, Duplin, Greene, Harnett, Hoke, Hyde, Johnson, Lee, Lenoir, Jones, Moore, New Hanover, Onslow, Pamlico, Pender, Pitt, Richmond, Robeson, Sampson, Scotland, Wayne and Wilson counties.

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tornadoes beginning on Mar. 19, 2018: Calhoun, Cullman, and Etowah counties.

For these Alabama counties, the onset date of the disaster was Mar. 19, 2018 and the extended date was July 31, 2018. The deposit delayed date was Apr. 3, 2018.

American Samoa: Following the President's declaration that a major disaster exists in the Territory of American Samoa, IRS has announced that taxpayers who reside or have a business in the disaster area will qualify for tax relief on account of Tropical Storm Gita, which took place beginning on Feb. 7, 2018.

For the Territory of American Samoa, the onset date of the disaster was Feb. 7, 2018 and the extended date was June 29, 2018 (which includes 2017 individual income tax returns normally due on Apr. 17, 2018). The deposit delayed date was Feb. 22, 2018.

California: The following is a federal disaster area qualifying for individual assistance on account of wildfires and high winds that began July 23, 2018: Lake and Shasta counties.For these California counties, the onset date of the disaster was July 23, 2018, and the extended date is Nov. 30, 2018 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; quarterly estimated income tax payments due on Sept. 17, 2018; quarterly payroll and excise tax returns normally due on July 31, 2018 and Oct. 31, 2018; and tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Aug. 7, 2018.

Florida: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Michael that took place beginning on Oct. 7, 2018: Bay, Calhoun, Franklin, Gadsden, Gulf, Hamilton, Holmes, Jackson, Jefferson, Leon, Liberty, Madison, Suwannee, Taylor, Wakulla and Washington counties.

For these Florida counties, the onset date of the disaster was Oct. 7, 2018, and the extended date is Feb. 28, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018 and Jan. 31, 2019; tax-exempt organizations that operate on a calendar-year basis that had an automatic extension due to run out on Nov. 15, 2018; and the businesses with extensions including, among others, calendar-year corporations whose 2017 extensions run out on Oct. 15, 2018). The deposit delayed date is Oct. 22, 2018. (IR 2018-199, 10/12/2018; IR 2018-202, 10/15/2018)

Georgia: The following is a federal disaster area qualifying for individual assistance on account of Hurricane Michael that took place beginning on Oct. 9, 2018: Baker, Bleckley, Burke, Calhoun, Colquitt, Crisp, Decatur, Dodge, Dooly, Dougherty, Early, Emanuel, Grady, Houston, Jefferson, Jenkins, Johnson,

Who gets relief. Only taxpayers considered to be affected taxpayers are eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts. Affected taxpayers are those listed in Reg. § 301.7508A-1(d)(1)) and thus include:

…any individual whose principal residence, and any business entity whose principal place of business, is located in the counties designated as disaster areas;

…any individual who is a relief worker assisting in a covered disaster area, regardless of whether he is affiliated with recognized government or philanthropic organizations;

…any individual whose principal residence, and any business entity whose principal place of business, is not located in a covered disaster area, but whose records necessary to meet a filing or payment deadline are maintained in a covered disaster area;

…any estate or trust that has tax records necessary to meet a filing or payment deadline in a covered disaster area; and

…any spouse of an affected taxpayer, solely with regard to a joint return of the husband and wife.

What may be postponed. Under Code Sec. 7508A, IRS gives affected taxpayers until the extended date (specified by county, below) to file most tax returns (including individual, estate, trust, partnership, C corporation, and S corporation income tax returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date falling on or after the onset date of the disaster (specified by county, below), and on or before the extended date. IRS also gives affected taxpayers until the extended date to perform certain other time-sensitive actions that are due to be performed on or after the onset date of the disaster, and on or before the extended date.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after the onset date of the disaster, and on or before the deposit delayed date(specified by county, below), provided the taxpayer made these deposits by the deposit delayed date.

Affected areas and dates for storms, floods and other disasters occurring in 2018 that are federal disaster areas qualifying for individual assistance, as published on IRS's website, are carried below.

Alabama: The following are federal disaster areas qualifying for individual assistance on account of severe storms and

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Laurens, Lee, Macon, Miller, Mitchell, Pulaski, Seminole, Sumter, Terrell, Thomas, Treutlen, Turner, Wilcox, and Worth counties.

For these Georgia counties, the onset date of the disaster was Oct. 9, 2018, and the extended date is Feb. 28, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018 and Jan. 31, 2019; the tax-exempt organizations that operate on a calendar-year basis that had an automatic extension due to run out on Nov. 15, 2018; and the businesses with extensions also have the additional time including, among others, calendar-year corporations whose 2017 extensions run out on Oct. 15, 2018). The deposit delayed date is Oct. 24, 2018. (IR 2018-202, 10/15/2018)

Hawaii: The State of Hawaii is a federal disaster area qualifying for individual assistance on account of volcanic eruptions and earthquakes beginning on May 3, 2018.

For the State of Hawaii, the onset date of the disaster was May 3, 2018, and the extended date was Sept. 17, 2018. The deposit delayed date was May 18, 2018.

Hawaii: The State of Hawaii is a federal disaster area qualifying for individual assistance on account of severe storms, flooding, landslides and mudslides that occurred starting on Apr. 13, 2018.

For the State of Hawaii, the onset date of the disaster was Apr. 13, 2018, and the extended date was Aug. 20, 2018. The deposit delayed date was Apr. 30, 2018.

Indiana: The following are federal disaster areas qualifying for individual assistance on account of severe storms and tornadoes beginning on Feb. 14, 2018: Carroll, Clark, Dearborn, Elkhart, Floyd, Fulton, Harrison, Jasper, Jefferson, Kosciusko, Lake, LaPorte, Marshall, Ohio, Porter, Pulaski, Spencer, Starke, St. Joseph, Switzerland, Vanderburgh, and White counties.

For these Indiana counties, the onset date of the disaster was Feb. 14, 2018, and the extended date was June 29, 2018 (which includes the Apr. 18 deadline for filing 2017 individual income tax returns and the Apr. 18 and June 15 deadlines for making quarterly estimated tax payments). The deposit delayed date was Mar. 1, 2018.

Northern Mariana Islands: The following are federal disaster areas qualifying for individual assistance on account of Typhoon Mangkhut that took place beginning on Sept. 10, 2018: Rota, Saipan and Tinian islands.

For these Northern Mariana Islands areas, the onset date of the disaster was Sept. 10, 2018, and the extended date is Jan. 31, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on

Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 25, 2018.

North Carolina: The following are federal disaster areas qualifying for individual assistance on account of severe storms and a tornado that occurred on Apr. 15, 2018: Guilford and Rockingham counties.

For these North Carolina counties, the onset date of the disaster was Apr. 15, 2018 and the extended date was Aug. 15, 2018 (which includes the Apr. 18 deadline for filing 2017 individual income tax returns and the Apr. 18 and June 15 deadlines for making quarterly estimated tax payments). The deposit delayed date was Apr. 30, 2018.

North Carolina: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Florence that took place beginning on Sept. 7, 2018: Allegany, Anson, Ashe, Beaufort, Bladen, Brunswick, Cabarrus, Carteret, Chatham, Columbus, Craven, Cumberland, Dare, Duplin, Granville, Greene, Harnett, Hoke, Hyde, Johnston, Jones, Lee, Lenoir, Montgomery, Moore, New Hanover, Onslow, Orange, Pamlico, Pender, Person, Pitt, Randolph, Richmond, Robeson, Sampson, Scotland, Stanly, Union, Wayne, Wilson, and Yancey counties counties.

For these North Carolina counties, the onset date of the disaster was Sept. 7, 2018, and the extended date is Jan. 31, 2019 (which includes taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 24, 2018. (IR 2018-202, 10/15/2018)

South Carolina: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Florence, which took place beginning on Sept. 8, 2018: Berkeley, Charleston, Chesterfield, Darlington, Dillon, Dorchester, Florence, Georgetown, Horry, Marion, Marlboro, Orangeburg, Sumter, and Williamsburg counties.

For these South Carolina counties, the onset date of the disaster was Sept. 8, 2018, and the extended date is Jan. 31, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 24, 2018. (IR 2018-202, 10/15/2018)

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Texas: The following are federal disaster areas qualifying for individual assistance on account of severe storms and flooding that began on June 19, 2018: Cameron, Hidalgo and Jim Wells counties.

For these Texas counties, the onset date of the disaster was June 19, 2018, and the extended date is Oct. 31, 2018 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018 and businesses with extensions due to run out on Sept. 17, 2018; the Sept. 17, 2018 deadline for making quarterly estimated tax payments; and the July 31, 2018 deadline for filing quarterly payroll and excise tax returns). The deposit delayed date was July 5, 2018.

Virginia: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Florence that took place beginning on Sept. 8, 2018: Henry, King and Queen, Lancaster, Nelson, Patrick, Pittsylvania, and Russell counties and the Independent Cities of Newport News, Richmond, and Williamsburg counties.

For these Virginia counties, the onset date of the disaster was Sept. 8, 2018, and the extended date is Jan. 31, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 24, 2018. (IR 2018-202, 10/15/2018)

Federal vs. California

Federal tax reform approved in December 2017 changed many areas of federal income tax law. These new laws may conflict with state income tax law..

Credits and Deductions

Here are some key areas of the tax reform. The changes may affect your 2018 tax return that most will file in early 2019:

Standard Deductions

• One goal of the tax reform was to simplify tax filing byincreasing the standard deduction so some taxpayers willno longer need to itemize deductions on their federal taxreturns.

• You may want to itemize on your CA return, but takethe increased standard deduction on your federal return.State and Local Taxes

• The IRS limits your state and local tax (SALT) deductionto $10,000 if single or married filing jointly.

• We do not allow a deduction of state and local income

taxes on your state return.• We do allow deductions for your real estate tax (homeyou live in) and vehicle license fees.Mortgage Interest

• The IRS limits deductions for home mortgage intereston mortgages up to $750,000 for loans taken out afterDecember 15, 2017.

• We allow deductions for home mortgage interest onmortgages up to $1 million.

Child Tax Credit

• The IRS raised the child tax credit to $2,000 per childand $500 for other qualifying dependents.

• We do not offer this credit.

Charitable Contributions

• The IRS limits charitable contributions to 60 percent ofyour federal adjusted gross income.

• We limit charitable contributions to 50 percent of yourfederal adjusted gross income.

Moving Expenses

• The IRS allows moving expense deductions tomembers of the Armed Forces on active duty.

• We allow you to deduct work-related moving expensessubject to distance and time requirements.

Disaster Victims in Wisconsin Qualify for Tax Relief

IRS has announced on its website that victims of the severe storms, tornadoes, straight-line winds, flooding, and landslides in counties of Wisconsin that are designated as federal disaster areas qualifying for individual assistance, have more time to make tax payments and file returns. Certain other time-sensitive acts also are postponed. This article summarizes the relief that's available and includes up-to-date disaster area designations and extended filing and deposit dates for all areas affected by storms, floods and other disasters in 2018.Who gets relief. Only taxpayers considered to be affected taxpayers are eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts. Affected taxpayers are those listed in Reg. § 301.7508A-1(d)(1)) and thus include:

…any individual whose principal residence, and any business entity whose principal place of business, is located in the counties designated as disaster areas;

…any individual who is a relief worker assisting in a covered disaster area, regardless of whether he is affiliated with recognized government or philanthropic organizations;

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…any individual whose principal residence, and any business entity whose principal place of business, is not located in a covered disaster area, but whose records necessary to meet a filing or payment deadline are maintained in a covered disaster area;

…any estate or trust that has tax records necessary to meet a filing or payment deadline in a covered disaster area; and

…any spouse of an affected taxpayer, solely with regard to a joint return of the husband and wife.

What may be postponed. Under Code Sec. 7508A, IRS gives affected taxpayers until the extended date (specified by county, below) to file most tax returns (including individual, estate, trust, partnership, C corporation, and S corporation income tax returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date falling on or after the onset date of the disaster (specified by county, below), and on or before the extended date. IRS also gives affected taxpayers until the extended date to perform certain other time-sensitive actions that are due to be performed on or after the onset date of the disaster, and on or before the extended date.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after the onset date of the disaster, and on or before the deposit delayed date(specified by county, below), provided the taxpayer made these deposits by the deposit delayed date.

Affected areas and dates for storms, floods and other disasters occurring in 2018 that are federal disaster areas qualifying for individual assistance, as published on IRS's website, are carried below.

Alabama: The following are federal disaster areas qualifying for individual assistance on account of severe storms and tornadoes beginning on Mar. 19, 2018: Calhoun, Cullman, and Etowah counties.

For these Alabama counties, the onset date of the disaster was Mar. 19, 2018 and the extended date was July 31, 2018. The deposit delayed date was Apr. 3, 2018.

American Samoa: Following the President's declaration that a major disaster exists in the Territory of American Samoa, IRS has announced that taxpayers who reside or have a business in the disaster area will qualify for tax relief on account of Tropical Storm Gita, which took place beginning on Feb. 7, 2018.

For the Territory of American Samoa, the onset date of the disaster was Feb. 7, 2018 and the extended date was June 29, 2018 (which includes 2017 individual income tax returns normally due on Apr. 17, 2018). The deposit delayed date was Feb. 22, 2018.

California: The following is a federal disaster area qualifying for individual assistance on account of wildfires and high winds that began July 23, 2018: Lake and Shasta counties.For these California counties, the onset date of the disaster was July 23, 2018, and the extended date is Nov. 30, 2018 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; quarterly estimated income tax payments due on Sept. 17, 2018; quarterly payroll and excise tax returns normally due on July 31, 2018 and Oct. 31, 2018; and tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Aug. 7, 2018.

Florida: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Michael that took place beginning on Oct. 7, 2018: Bay, Calhoun, Franklin, Gadsden, Gulf, Hamilton, Holmes, Jackson, Jefferson, Leon, Liberty, Madison, Suwannee, Taylor, Wakulla and Washington counties.

For these Florida counties, the onset date of the disaster was Oct. 7, 2018, and the extended date is Feb. 28, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018 and Jan. 31, 2019; tax-exempt organizations that operate on a calendar-year basis that had an automatic extension due to run out on Nov. 15, 2018; and the businesses with extensions including, among others, calendar-year corporations whose 2017 extensions run out on Oct. 15, 2018). The deposit delayed date was Oct. 22, 2018. (IR 2018-199, 10/12/2018; IR 2018-202, 10/15/2018)

Georgia: The following is a federal disaster area qualifying for individual assistance on account of Hurricane Michael that took place beginning on Oct. 9, 2018: Baker, Bleckley, Burke, Calhoun, Colquitt, Crisp, Decatur, Dodge, Dooly, Dougherty, Early, Emanuel, Grady, Houston, Jefferson, Jenkins, Johnson, Laurens, Lee, Macon, Miller, Mitchell, Pulaski, Seminole, Sumter, Terrell, Thomas, Treutlen, Turner, Wilcox, and Worth counties.

For these Georgia counties, the onset date of the disaster was Oct. 9, 2018, and the extended date is Feb. 28, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018 and Jan. 31, 2019; the tax-exempt organizations that operate on a calendar-year basis that had an automatic extension due to run out on Nov. 15, 2018; and the businesses with extensions also have the additional time including, among

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individual income tax returns and the Apr. 18 and June 15 deadlines for making quarterly estimated tax payments). The deposit delayed date was Apr. 30, 2018.

North Carolina: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Florence that took place beginning on Sept. 7, 2018: Allegany, Anson, Ashe, Beaufort, Bladen, Brunswick, Cabarrus, Carteret, Chatham, Columbus, Craven, Cumberland, Dare, Duplin, Granville, Greene, Harnett, Hoke, Hyde, Johnston, Jones, Lee, Lenoir, Montgomery, Moore, New Hanover, Onslow, Orange, Pamlico, Pender, Person, Pitt, Randolph, Richmond, Robeson, Sampson, Scotland, Stanly, Union, Wayne, Wilson, and Yancey counties counties.

For these North Carolina counties, the onset date of the disaster was Sept. 7, 2018, and the extended date is Jan. 31, 2019 (which includes taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 24, 2018. (IR 2018-202, 10/15/2018)

South Carolina: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Florence, which took place beginning on Sept. 8, 2018: Berkeley, Calhoun, Charleston, Chesterfield, Clarendon, Colleton, Darlington, Dillon, Dorchester, Florence, Georgetown, Horry, Lancaster, Marion, Marlboro, Orangeburg, Sumter, and Williamsburg counties.

For these South Carolina counties, the onset date of the disaster was Sept. 8, 2018, and the extended date is Jan. 31, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 24, 2018. (IR 2018-202, 10/15/2018)

Texas: The following are federal disaster areas qualifying for individual assistance on account of severe storms and flooding that began on June 19, 2018: Cameron, Hidalgo and Jim Wells counties.

For these Texas counties, the onset date of the disaster was June 19, 2018, and the extended date is Oct. 31, 2018 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018 and businesses with extensions due to run out on Sept. 17, 2018; the Sept. 17, 2018 deadline for making quarterly estimated tax payments; and the July 31, 2018 deadline for filing quarterly payroll and excise tax returns). The deposit delayed date was July 5,

others, calendar-year corporations whose 2017 extensions run out on Oct. 15, 2018). The deposit delayed date is Oct. 24, 2018. (IR 2018-202, 10/15/2018)

Hawaii: The State of Hawaii is a federal disaster area qualifying for individual assistance on account of volcanic eruptions and earthquakes beginning on May 3, 2018.

For the State of Hawaii, the onset date of the disaster was May 3, 2018, and the extended date was Sept. 17, 2018. The deposit delayed date was May 18, 2018.

Hawaii: The State of Hawaii is a federal disaster area qualifying for individual assistance on account of severe storms, flooding, landslides and mudslides that occurred starting on Apr. 13, 2018.

For the State of Hawaii, the onset date of the disaster was Apr. 13, 2018, and the extended date was Aug. 20, 2018. The deposit delayed date was Apr. 30, 2018.

Indiana: The following are federal disaster areas qualifying for individual assistance on account of severe storms and tornadoes beginning on Feb. 14, 2018: Carroll, Clark, Dearborn, Elkhart, Floyd, Fulton, Harrison, Jasper, Jefferson, Kosciusko, Lake, LaPorte, Marshall, Ohio, Porter, Pulaski, Spencer, Starke, St. Joseph, Switzerland, Vanderburgh, and White counties.

For these Indiana counties, the onset date of the disaster was Feb. 14, 2018, and the extended date was June 29, 2018 (which includes the Apr. 18 deadline for filing 2017 individual income tax returns and the Apr. 18 and June 15 deadlines for making quarterly estimated tax payments). The deposit delayed date was Mar. 1, 2018.

Northern Mariana Islands: The following are federal disaster areas qualifying for individual assistance on account of Typhoon Mangkhut that took place beginning on Sept. 10, 2018: Rota, Saipan and Tinian islands.

For these Northern Mariana Islands areas, the onset date of the disaster was Sept. 10, 2018, and the extended date is Jan. 31, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 25, 2018.

North Carolina: The following are federal disaster areas qualifying for individual assistance on account of severe storms and a tornado that occurred on Apr. 15, 2018: Guilford and Rockingham counties.

For these North Carolina counties, the onset date of the disaster was Apr. 15, 2018 and the extended date was Aug. 15, 2018 (which includes the Apr. 18 deadline for filing 2017

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2018.

Virginia: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Florence that took place beginning on Sept. 8, 2018: Charles City, Halifax, Henry, King and Queen, King William, Lancaster, Nelson, Patrick, Pittsylvania, and Russell counties and the Independent Cities of Franklin, Newport News, Richmond, and Williamsburg.

For these Virginia areas, the onset date of the disaster was Sept. 8, 2018, and the extended date is Jan. 31, 2019 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and Jan. 15, 2019; the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 24, 2018. (IR 2018-202, 10/15/2018)

Wisconsin: The following are federal disaster areas qualifying for individual assistance on account of severe storms, tornadoes, straight-line winds, flooding, and landslides that took place beginning on Aug. 17, 2018: Crawford, Dane, Juneau, La Crosse, Monroe, Richland, Sauk, and Vernon counties.

For these Wisconsin areas, the onset date of the disaster was Aug. 17, 2018, and the extended date is Dec. 17, 2018 (which includes the taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018; the quarterly estimated income tax payments due on Sept. 17, 2018 and the quarterly payroll and excise tax returns normally due on Oct. 31, 2018; and the tax-exempt organizations that operate on a calendar-year basis and had an automatic extension due to run out on Nov. 15, 2018). The deposit delayed date was Sept. 3, 2018.

Wayne's World

I look forward each month to the Tax Court postings in the Taxing Times. However, Beanna has sent me a case I find particularly of interest and it is shared below:

Owner of Return Preparation Business Not Liable for Penalties on Returns He Didn't Sign or Prepare

Lowery v. U.S., (DC NC 9/26/2018) 122 AFTR 2d ¶2018-5290 A district court has determined on summary judgment that a return preparer who owned a tax preparation business was not liable for Code Sec. 6694 penalties with respect to returns that he didn't sign or help prepare. The court found that IRS failed to show that the preparer had any involvement with those returns or that liability could nonetheless be imposed on the basis that he employed the preparers. However, the court denied the preparer's motion for summary judgment with respect to the returns signed by him, stating that whether he acted willfully under Code Sec. 6694 was a factual issue to be decided by a jury.

Background—preparer penalty. Code Sec. 6694(b) provides in relevant part that a penalty will be assessed on any tax return preparer who prepares a tax return “with respect to which any part of an understatement of liability is due to...a willful attempt in any manner to understate the liability for tax on the return or claim, or...a reckless or intentional disregard of rules or regulations.”

A “tax return preparer” is “any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by this title or any claim for refund of tax imposed by this title.” (Code Sec. 6694(f))

A “signing preparer” is “any preparer who signs a return of tax or claim of refund as a preparer.” (Reg. § 1.6694-2) “[T]he signing tax return preparer generally will be considered the person who is primarily responsible for all of the positions on the return.” (Reg. § 1.6694-1(b)(2)) “A nonsigning tax return preparer is any tax return preparer who is not a signing tax return preparer but who prepares all or a substantial portion of a return or claim for refund...” (Reg. § 301.7701-15(b)(2))Under Reg. § 1.6694-1(b)(3), if there is no signing tax

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return preparer within a firm or if the signing tax return preparer is determined not to be primarily responsible for the position(s) on the return giving rise to the understatement, the nonsigning tax return preparer within the firm with overall supervisory responsibility for the position(s) giving rise to the understatement generally will be considered the tax return preparer who is primarily responsible for the position for purposes of Code Sec. 6694.

Facts. Marshall Lowery was the sole member of an LLC that employed individuals, including Lowery, to provide tax preparation services to clients (Business).

IRS originally sought to impose $170,000 in tax preparer penalties against Lowery ($5,000 penalty × 34 returns). This amount was ultimately reduced to $77,500, reflecting a full $5,000 penalty for each of the six returns that he prepared and a 50% penalty for 19 returns prepared and signed by other employees of Business. The Appeals Officer who recommended the reduced penalty noted that is was unclear in certain instances whether Mr. Lowery would be determined to be the tax return preparer, and that there were "significant evidentiary hazards" with respect to a number of returns.

Notice and demand was sent to Lowery, who made partial payment and filed a claim for refund. IRS took no action on the refund claim, so Lowery filed a refund suit.

In its answer and counterclaim, the government sought to reduce the outstanding tax assessments against Lowery to judgment, contending that he was the "statutory return preparer of returns filed by [Business]" because he is its sole owner.

Both parties filed motions for summary judgment.

Lowery's motion granted in part and denied in part. The court found that Lowery was entitled to summary judgment with respect to the 19 returns that he didn't prepare. The court found that there was no evidence that Lowery was involved in the preparation of these returns, and also found that IRS failed to introduce any authority that would support holding him liable given his lack of involvement. Although IRS pointed to two separate cases, the court found that neither of these cases actually stood for the proposition of imposing Code Sec. 6694 liability against an employer. Accordingly, the court found that since he wasn't involved in the preparation of these returns, he could not be held liable for the alleged understatements of tax liability on them.

However, the court denied Lowery's motion with respect to the remaining six returns, finding that the question of whether his conduct was willful or reckless was one of fact that should be decided by a jury.

The magnitude and scope of these penalties require we review our office procedures. Due diligence is not the issue. Simply, could we be running our offices better and smarter.

Wayne

Tax Jokes and Quotes

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Go to the Sponsors "tab" at www.ncpeFellowship.com.

Small BusinessRecordkeeping

Visit our other Sponsors to "get ready for the 2019 Filing Season":

RC Reports - Reasonable Compensation SourceTarget Professional E & O Insurance

TASC - IRC 105 Plans and much moreAffordable Checks and Office Solutions

Audit Defense and Audit Detective - Roger Nemeth

CFS Office ToolsEric Christenson - Cost Segregation Services

Monroe - the Calculator Company

Taxing TimesncpeFellowship Monthly NewsletterNext Edition - December 1st, 2018

Renew Your Membership OnlineIf Your Membership is duein October or November

WebinarsOn-Demand

With Concinued Education Hoursncpefellowship.com

2018 Ethics: They Begin And End With You!2 CE Hours

2018 Today's Internal Revenue Service2 CE Hours

The § 754 Election2 CE Hours

The New Offer In Compromise2 CE Hours

Tangible Property Regulations2-CE HOURS WEBINAR

Estate And Gift Tax1-CE HOUR

The Incredible LLCLimited Liability Company

2-CE HOURS

Identity Theft1-CE HOUR

Taxation Of Ministers1-CE HOUR

IRS Audits1-CE HOUR