Updates and guidance on key IRS practice developments.
If an individual fails to file a federal income tax return, Sec. 6020 authorizes the IRS to prepare that return. Typically, the Service determines returns are required to be filed based on the agency's knowledge and
available information from third-party reports, such as Form W-2, Wage and Tax Statement; Form 1099-INT, Interest Income; and Form 1099-DIV, Dividends and Distributions, issued to the person. It is called a substitute for a tax return but is treated as the return of the taxpayer. Regs. Sec. 301.6020-1(a)(2) states that a person for whom a return is prepared in accordance with Sec. 6020 shall, for all legal purposes, remain responsible for the correctness of the return to the same extent as if the person prepared the return.
If returns have not been filed for several years, the agency generally will not use an enforcement period of more than six years, as found in Policy Statement 5-133 (Internal Revenue Manual (IRM) [section]22.214.171.124.18). However, the extent to which delinquency procedures will be enforced depends upon the facts and circumstances of each case. Enforcement for longer or shorter periods may be considered, given the taxpayer's history of noncompliance, the existence of income from illegal sources, the effect upon voluntary compliance, and the anticipated revenue and its collectibility, in relation to the time and effort needed to determine the tax. Any special circumstances for the particular taxpayer or class of taxpayer, or that may be pertinent to the class of tax involved, may also be considered.
Notices sent to a taxpayer
The IRS campuses may issue notices requesting that returns be filed. Field examiners or revenue officers may contact taxpayers if they identify instances of nonfiling, typically from related or project cases, or referrals from other sources. A taxpayer can use the services of a federally authorized representative to represent him or her in this matter by providing a valid Form 2848, Power of Attorney and Declaration of Representative.
It behooves a taxpayer to respond to requests to file returns. If refunds are due because a taxpayer had withholding, estimated tax payments, or other credits, any refunds will not be made if they are requested after the statute of limitation has expired, which is normally three years after the extended due date of the return.
If returns are filed and the IRS does not agree with the tax reported on them, or if the IRS receives no response, a notice of proposed adjustment (30-day letter) is issued, which shows the computation of the tax and interest and any applicable penalties. The taxpayer has 30 days to respond by agreeing to the proposal, providing reasons as to why the adjustments are incorrect, or requesting a meeting with IRS Appeals. If a taxpayer has not responded to prior notices, the IRS may have an incorrect filing status, wrong amounts of income, and no record of any deductions or credits to which the person is entitled. The IRS campuses will make necessary changes to the proposed assessment if the taxpayer provides supporting evidence.
If no response is received or if the taxpayer cannot resolve the matter in Appeals, a statutory notice of deficiency (90-day letter) will be issued. The taxpayer may then agree to the proposed assessment or file a petition with the Tax Court within that 90-day period. The 90-day period is a strict one; if the 90th day falls on a Sunday or a holiday, the number of days is not extended to the next open business day.
When a taxpayer does not respond to the 90-day letter, an assessment is made using the information in the letter. A taxpayer can then file a return to report the correct tax. The IRS can accept or examine the return and, if warranted, adjust the assessment.
If tax is due, the IRS will usually propose the failure-to-file and failure-to-pay penalties found in Sec. 6651. The penalties do not apply if the failure was due to reasonable cause and not due to willful neglect. IRM Section 126.96.36.199.2, Reasonable Cause, provides instances where reasonable cause may exist.
The first-time penalty abatement procedure will not apply if a return is filed after a taxpayer is contacted by the IRS.
If an assessment cannot be fully paid, a taxpayer should consider requesting an installment agreement payment plan or filing an offer in compromise.
The IRS will notify the department of revenue for the state where a taxpayer resides about unfiled returns, which may prompt the state to issue an assessment notice. To prevent additional accruals of interest and penalties, the taxpayer should file or amend state returns as soon as the federal tax is determined.
From Joe B. Marchbein, CPA, CGMA, Ellisville, Mo.
Expenses & Deductions
Pitfalls and treasures of the QBI deduction
The Sec. 199A qualified business income (QBI) deduction is a game-changer in many ways, both obvious and not-so-obvious. In the latter category are a potential pitfall and a potential treasure for small businesses that can benefit from the QBI deduction that could easily be overlooked in their tax planning.
Retirement plan contributions may be a pitfall
Contributing to a retirement plan has been the primary means of achieving significant tax deferral for small business owners. Self-employed taxpayers can make tax-deductible contributions to a wide variety of plans including simplified employee pension individual retirement arrangement (SEP-IRA), Keogh, SIMPLE, 401(k), and cash balance plans. Traditional IRAs are also a tax-deferral vehicle. The objective is to push income from current, higher-tax-bracket years into post-retirement, presumably lower-tax-bracket years.
The QBI deduction is a great boon for small businesses owners who can claim it. However, the interplay with small business retirement plan contributions now requires more timely analysis by the CPA. Because the QBI deduction is reduced by the business retirement plan contribution, the tax-deferral benefit of the retirement plan contribution is substantially reduced in many instances. It may not make sense to make a retirement plan contribution if the current-year tax savings are insignificant compared with the tax liability that could be incurred in the future distribution year.
Example: In 2019, a couple with $100,000 of QBI, other income of $90,000, and no self-employed health insurance deduction have a choice of making a maximum of $12,000 in traditional IRA contributions or a maximum SEP contribution of $18,587. A traditional IRA contribution of $12,000 saves $2,735 in tax. The traditional IRA contribution does not reduce QBI. Due to the reduction of QBI by the total amount of the SEP contribution, the maximum SEP contribution, which is $6,587 higher than the maximum IRA contribution, saves only $3,389, or $654 more than the IRA contribution. This makes the effective tax saving rate on the additional $6,587 less than 10%. Even considering the time value of money, the couple could pay income tax of much more than 10% on the SEP contribution in the year it is included in taxable income.
In this example, a better alternative might be to make traditional IRA contributions of $12,000 and invest the $6,587 in assets producing long-term capital gain because, historically, returns on stock market portfolios have been 7%-10%, and the long-term capital gain tax rates have been lower than ordinary income tax, which, hopefully, will be true in the future as well.
Of course, other factors can affect the ability to make deductible IRA contributions, such as the April 15 deadline in the following year and retirement plan coverage by either spouse. SEP-IRA, 401(k), and Keogh plans also must consider whether other employees of the business qualify for plan contributions. State income tax laws may also affect the decision. Importantly, SEPs can be funded through the extended due date of the tax return, while IRAs must be funded by the original due date of the individual income tax return.
In general, the lower QBI is, the less beneficial small business retirement plan contributions are, compared with deductible traditional IRA contributions. In the right situation, a Roth IRA coupled with a SEP-IRA or Keogh plan could be a tax-advantageous choice. Once the CPA knows how much the taxpayers have available to contribute to any combination of retirement plans, many more options now need to be considered than in the past, due to the QBI deduction. In addition, if traditional IRA or Roth contributions are to be made, the planning must be completed in time to make the contribution by the April 15 deadline.
While this example targets middle-income taxpayers, higher-income taxpayers also need to reconsider retirement plan contributions, including company 401(k) contributions that are not matched by the employer. The tax code currendy has a top bracket that is historically relatively low. The maximum bracket of 37% is set to expire after 2025, but with the political winds, it is possible it will not last even that long. The question is whether high-wealth individuals should make tax-deferred retirement plan contributions at a maximum 37% tax savings rate when their expected top bracket post-2025 could be 40% or higher. Another consideration is that the tax-deferred appreciation and earnings in the IRA will also be taxed at ordinary rates when withdrawn. The same after-tax money invested in capital assets could produce tax-favored long-term capital gains and qualified dividends.
Hidden QBI treasures
PTP hot-asset ordinary income: Publicly traded partnerships (PTPs) and real estate investment trusts (REITs) have specific benefits under Sec. 199A. A percentage of their business income is added to the QBI deduction. The qualifying income is reported to each partner on the PTP's Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., line 20 with a code of AD. What is not reported on line 20 of Schedule K-1 is any Sec. 751(a) hot-asset ordinary income recognized upon sale of PTP units. Under Regs. Sec. 1.199A-3(b) (1)(i), Sec. 751(a) ordinary income is added to other qualified PTP income in computing the QBI deduction. The Sec. 751(a) information is found in the Schedule K-1 attachments. This hidden treasure is easily overlooked.
Sec. 481(a) adjustments: Post-2017 Sec. 481(a) adjustments are included in computing QBI. Both positive and negative adjustments affect the calculation. Sec. 481(a) adjustments are the result of accounting method changes requested by the taxpayer. Any time a Form 3115, Application for Change in Accounting Method, is filed, the QBI effects must also be considered.
Planning for QBI
Tax planning is even more complex than expected under the law known as the Tax Cuts and Jobs Act, PL. 115-97, particularly Sec. 199A. Searching for hidden treasures and avoiding pitfalls makes CPAs into pirates of a different sort.
From Janet C. Hagy, CPA, Austin, Texas
Practice & Procedures
IRS practitioner services and AlCPA's ongoing advocacy for improvement
More than 154 million tax returns were filed in the 2018 filing season, and over half of those returns, more than 80 million, were prepared by paid tax return preparers, according to the IRS (see tinyurl.com/y3f9y8ps). As of Aug. 1, 768,255 individuals had current preparer tax identification numbers (PTINs) (see tinyurl.com/yxrltr4d). Basic math will tell you that providing those 768,255 preparers with easier access in working with the IRS will in turn reach more than half of all taxpayers in the United States.
Considering these statistics, it appears that every dollar invested in facilitating tax practitioner communication with the IRS is a sound investment that could benefit millions of taxpayers.
Currently, the IRS provides the following tools for practitioners:
Most tax practitioners will have their clients agree to complete the Third Party Designee section of their returns, which will allow the IRS to discuss the processing of that return with the tax return preparer/practitioner. The authorization is good for one year from the due date of the return, and the IRS is limited to discussing the processing of the return. Unfortunately, this authority has proved to be of little or no benefit to practitioners other than to possibly check on the status of a refund, which can be handled much more efficiently using the "Where's My Refund?" tool on the IRS website. If an IRS notice were to arrive within that one-year period, practitioners generally cannot use Checkbox Authority to resolve the issue.
It is a good idea to get a signed authorization form (Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization) and to have it available when calling the IRS, because the Centralized Authorization File (CAF) is not always up to date for authorizations that have been filed, and internal communication at the IRS is sometimes unreliable. To overcome these shortcomings in IRS practices, practitioners can fax these documents to other IRS personnel.
Practitioner Priority Service phone line
Currently, the first point of contact for practitioners looking to obtain help for their clients is the Practitioner Priority Service (PPS) phone line at 866-860-4259. The following topics can be addressed via the hotline:
* Option 1: For general tax law questions (including questions about tax reform laws).
* Option 2: For individual accounts not in collection or examination status.
* Option 3: For business accounts not in collection or examination status.
* Option 4: If a client's account is in Automated Collection System (ACS) status.
* Option 5: If the client has received an automated underreporter notice (e.g., a CP2000).
* Option 6: If a client's account is under correspondence examination.
Additional contacts are available for practitioners, and the AICPA has created a quick reference chart that can be found at tinyurl.com/y2q44sbe (AICPA member login required).
In addition to providing phone services for practitioners, the IRS has developed e-Services that practitioners can use to obtain taxpayer information. According to the IRS website, e-Services is a suite of web-based tools that allows tax professionals to complete transactions online. To access these services, practitioners must register and create an account that uses multifactor authentication. Practitioners can register for e-Services by going to irs.gov or by using a shortcut link at irs.gov/e-services.
Once a practitioner is registered, the following information can be accessed:
* Transcript Delivery System (TDS): Use TDS to view a client's return and account information.
* Taxpayer Identification Number (TIN) matching: Use this tool to validate TIN and name combinations before submitting information returns. Bulk and interactive options are available.
* Other services: E-file provider services to apply and participate in e-filing of returns, Affordable Care Act (ACA) services to e-file ACA-related information returns, and state agency services.
The AICPA provides information regarding the use of this system on its website at tinyurl.com/y45pt6kw.
While these tools can be of great help to practitioners, they are not without issues. Hold times on IRS phone lines can be long, individual IRS departments do not always effectively communicate internally, the registration process can be daunting, and setting up multifactor authentication requires practitioners to provide their own sensitive personal information that has no connection to the taxpayer they are trying to assist.
For many years, the AICPA Tax Division has worked diligently to improve the situation for members. Members of various committees within the AICPA Tax Division, along with many key AICPA staff members, have worked to bring the various issues to the attention of the IRS and Congress. In 2015, the AICPA's governing Council adopted a resolution regarding tax administration (see tinyurl.com/y3ododcw). In addition, the AICPA has provided written testimony to members of Congress, has communicated regularly with the IRS, and recently took the issue directly to members of Congress as part of the AICPA spring Council meeting.
On July 1, the Taxpayer First Act of 2019, PL. 116-25, was signed into law. In Subtitle D, Section 1302, of Title I, the law calls for modernizing the IRS's organizational structure. This is consistent with the message of the AICPA's advocacy efforts that have called for the development of a framework to modernize the IRS. In particular, the AICPA has specifically asked that the IRS consolidate existing resources spent on represented taxpayers and organize a dedicated Practitioner Services Division. AICPA advocacy publications on this topic have pointed out that consolidating practitioner services would increase the effectiveness of practitioners as an IRS resource and ultimately lead to overall better taxpayer/customer service.
The Taxpayer First Act presents an opportunity for improved practitioner services, and the AICPA Tax Division and advocacy teams will continue to be involved to offer assistance in developing a structure that is centralized, staffed with higher-skilled IRS staff, and offering more opportunities for practitioners to access their clients' data. As this process unfolds, AICPA members should consider strongly supporting the advocacy efforts of the AICPA, beginning with a visit to the AICPA Advocacy webpage at aicpa.org/advocacy.
AICPA advocacy efforts are supported through membership dues, while the AICPA PAC Fund, which helps to open doors for legislative efforts, is supported solely through donations that are separate from member dues. These AICPA efforts focus in part on molding meaningful improvements to the practitioner services at the IRS. Small and medium-size accounting firms especially benefit from the AICPA efforts, as they often do not lobby or have another organized voice in the conversation. Consider this a call to action to support these AICPA advocacy efforts in whatever way possible to ensure a better future.
From Cheri H. Freeh, CPA, CGMA, Quakertown, Pa.
Valrie Chambers, CPA, Ph.D.
Valrie Chambers, CPA, Ph.D., is an associate professor of accounting at Stetson University in Celebration, Fla. Joe B. Marchbein, CPA, CGMA, is with Rice Sullivan LLC in Ellisville, Mo. Janet C. Hagy, CPA, is a shareholder of Hagy & Associates PC in Austin, Texas. Cheri H. Freeh, CPA, CGMA, is a partner with Hutchinson, Gillahan & Freeh PC in Quakertown, Pa. Mr. Marchbein, Ms. Hagy, and Ms. Freeh are members of the AICPA Tax Practice and Procedures Committee. For more information about this column, contact email@example.com.
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|Publication:||The Tax Adviser|
|Date:||Oct 1, 2019|
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