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The IRS recently lost a lawsuit to Public.Resource.Org, Inc., but its loss may result in greater protection of sensitive taxpayer information.
The U.S. Court of Appeals for the Ninth Circuit in California found that, under the Freedom of Information Act, the IRS was required to provide Public.Resource.Org, a nonprofit corporation that provides public access to information, with a small set of Forms 990. The IRS raised objections to doing this based on cost concerns, but the court ordered the agency to comply anyway.
The problem is that certain information contained on Form 990 (Return of Organization Exempt from Income Tax) is considered to be sensitive and of a personable nature. For this reason, it must be protected from public distribution.
In complying with the court’s decision, the IRS had to manually copy certain portions of the Forms 990, which are available to the public. They then had to assemble this information and send it out to the interested party. This procedure is time-consuming and expensive.
As it stands right now, if the IRS were to send an electronic file to an interested party to comply with the law, that electronic file would contain all of the information on the Forms 990, including the sensitive and personal information that is not to be released to the public.
In response to the court’s requirement to provide the Forms 990, the IRS announced that it was considering using new technology to produce electronic versions of the publicly available portions of exempt organization returns in machine-readable form. Machine-readable is not a format that the IRS has historically used to make Forms 990 available.
With the new technology, the IRS will be able to send the whole electronic file to the interested party, which will be able to print out only the information on the return that is approved for public disclosure. The sensitive personal information will be kept confidential. The interested party will not be able to access this information or print it out.
Using the new technology will allow the IRS to meet the reporting requirement in a timely and cost-effective manner. ■
©2015 CPAmerica International
The tax treatment for renting out your vacation home depends on the number of days it’s rented.
If you don’t use your vacation home all the time and are considering renting it out for a portion of the year, you have three possible situations – all with different tax ramifications:
The first situation is the easiest and most straightforward. You own a second home as a vacation property. You do not rent out that property at all during the year. You would be able to deduct the mortgage interest and real estate taxes that you paid during the year as Schedule A itemized deductions.
If you use your vacation home for personal use at least 15 days and rent it out for fewer than 15 days, the IRS considers the primary function of the property to be personal and not a rental. Therefore no rental income or rental expenses should be claimed on Schedule E, Supplemental Income or Loss, of Form 1040.
You are not required to report the rental income and rental expenses from this activity. The expenses that you are able to deduct include mortgage interest and real estate taxes, which would be deducted on Schedule A as itemized deductions.
The third situation is a little more complicated. If you used the vacation home as a home and rented it out 15 days or more during the year, you would be required to include all of your rental income as income on Schedule E. Because you used the home for personal purposes, you must allocate your expenses between business and personal use.
When allocating your expenses, you should follow these two rules:
The numerator for allocation purposes would be the number of days that the vacation home was rented out at a fair market rental price during the year. The denominator would be 365 days.
Crunching these numbers will give you the business-use percentage. You would then multiply all of your various business/rental expenses by this percentage to arrive at the deductible amount of your expenses.
The deductible amount of your expenses is then entered on Schedule E. The IRS provides a worksheet to help you calculate the amount of your deductible business/rental expenses. Unallocated mortgage interest and taxes (the personal part) still goes on Schedule A.
If you follow these simple rules when renting out your vacation home, you can avoid unintended consequences.
©2014 CPAmerica International
The IRS allows taxpayers to use an optional safe harbor method when claiming a home office deduction.
The safe harbor method saves the taxpayer from having to substantiate, calculate and allocate deductible home office expenses, a procedure that is part of the nightmare taxpayers have to go through if they want to use the old actual expense method.
With the optional method, the taxpayer simply calculates the number of square feet used for the office and multiplies that number times $5. The maximum square footage that can be used is 300, so the maximum home office deduction at the present moment is $1,500.
The IRS can adjust the $5 rate as warranted.
The safe harbor deduction may not exceed the gross income from the business. If it does, the excess may not be carried forward.
Taxpayers using the safe harbor method will not be able to depreciate the portion of their home used in the trade or business. But the advantage is the taxpayer may deduct mortgage interest, real estate taxes and any casualty loss as itemized deductions on Schedule A of Form 1040.
The taxpayer would still be allowed to deduct, to the extent allowed by the Internal Revenue Code and regulations, any trade or business expenses unrelated to the qualified business use of the home for that taxable year. Some examples would be advertising and office supplies.
If reimbursed by an employer for the home office expenses, a taxpayer cannot use the safe harbor method.
The taxpayer may elect from taxable year to taxable year whether to use the safe harbor method or to calculate and substantiate actual expenses for the purpose of the home office deduction. A method is elected simply by using the particular method for that tax year. A method once selected for that tax year cannot be changed. ■
©2014 CPAmerica International
Nonemployee compensation received in exchange for services rendered is taxable income, despite tax protester arguments to the contrary.
Stephan Foryan, a resident of the state of Washington and an apparent tax protester, did not file a tax return for 2009. He also did not make any estimated tax payments for the 2009 tax year.
Foryan admits to having received nonemployee compensation for services rendered, but he told the U.S. Tax Court that the compensation was not taxable. He mistakenly relied on a court case from 1920 to support this argument. Unfortunately for him, a 1955 Supreme Court case superseded the 1920 case, making it not applicable to the present matter.
Internal Revenue Code Section 61(a) provides that “gross income means all income from whatever source derived,” including compensation for services.
Using information obtained from third parties, the IRS had calculated Foryan’s income for 2009 to be $137,282. Against this income, Foryan was allowed a self-employment income tax deduction of $8,460, a standard deduction of $5,700 and a personal exemption of $3,650.
Foryan had been involved in a prior court case a few years earlier regarding a tax matter. He lost that case, and the court put him on notice regarding raising tax protester arguments.
The same situation arose in this case. The court rejected Foryan’s arguments as frivolous tax protester arguments. In addition, the court fined him $1,000 because it felt that his position in this case was frivolous or groundless.
Therefore, the court agreed with the IRS in this case, finding that Foryan had received $137,282 in compensation for services performed at various farms during the year and including that amount in his gross income for 2009. He was allowed the deductions calculated by the IRS (Stephan Foryan v. Commissioner, U.S. Tax Court, T.C. Memo 2015-114, June 22, 2015). ■
©2015 CPAmerica International
The IRS has announced that it will issue estate tax closing letters only on request for estate tax returns filed on or after June 1, 2015.
Prior to this change, CPAs and clients anxiously awaited the closing letter for filed estate tax returns. A very large portion of returns are audited. Receiving the closing letter meant that the IRS had accepted the return (Form 706, United States Estate Tax Return) as filed and it would not be audited.
The IRS recommends waiting at least four months after filing your Form 706 return before requesting a closing letter.
If you filed your estate tax return before June 1, 2015, the IRS will continue its policy of issuing closing letters provided the return is accepted as filed and has no other errors or special circumstances. Expect to wait four to six months to receive the letter.
Not all returns filed before June 1, 2015, will receive a closing letter. The IRS will not issue a closing letter for any return that was filed after Jan. 1, 2015, but before June 1, 2015, that did not meet the filing threshold for an estate tax return and whose taxpayer portability election was rejected by the IRS.
The filing threshold simply means the gross value of the estate. Those numbers are indexed for inflation and are as follows:
2015 – $5,430,000
2014 – $5,340,000
2013 – $5,250,000
A portability election allows a deceased spouse to transfer the estate’s unused exclusion amount to the surviving spouse.
The IRS gives a great deal of attention to the estate tax return when a portability election is made, so the election must be made properly.
For returns filed after Jan.1, 2015, and before June 1, 2015, the IRS will still issue a closing letter if the estate met the filing threshold. In addition, if the filing threshold was not met, but no portability election was made, you will still receive a closing letter.
If you have any questions about estate tax closing letters, please contact your CPA. ■
Summertime is a busy time for weddings, which can raise concerns about finances.
A few helpful tax tips can make things much easier come tax return filing time:
The IRS website provides many useful tools including YouTube videos and podcasts.
Some of the related YouTube videos are:
Some of the related podcasts include:
Getting married is one of the biggest days of your life – and can be one of the most stressful. Make things easier at tax time by following a few helpful hints. ■
A recent Tax Court case shows that keeping good auto mileage records – as well as a little persistence – pays off when it comes to dealing with the IRS.
In 2010, Ricky Ray Ressen was employed as a construction manager at Innovative Construction Solutions, Inc. (ICS).
For most of 2010, he lived away from home to carry out his job responsibilities. He would return home on weekends.
Ressen owned two different trucks that he used for commuting and for traveling between various jobsites. One of the vehicles was a 2008 Chevrolet Silverado 2500 and the other a 2007 Chevrolet Silverado. He put 11,585 business miles on the 2008 Silverado and 45,422 business miles on the 2007 Silverado.
Ressen’s employer, ICS, did not and would not reimburse him for the use of the 2007 or 2008 Silverado.
Ressen maintained both a logbook and a calendar to record his business activities and the business use of the two Silverados. He maintained, in general terms, a summary of his business activities and weekly travel in a logbook.
He recorded the beginning and ending odometer readings for the two Silverados in the logbook. He kept track of his mileage on a weekly basis on a calendar.
On Form 2106, Employee Business Expenses, Ressen claimed 100 percent of the 45,422 miles for the 2007 Silverado and 100 percent of the 11,585 miles for the 2008 Silverado as business miles. After multiplying the total miles driven times the standard mileage rate, Ressen claimed unreimbursed vehicle expenses of $28,504. He also reported additional unreimbursed employee business expense of $7,597.
Unfortunately, communication broke down between Ressen and the Internal Revenue Service, with the IRS ultimately disallowing all of the unreimbursed employee business expenses and issuing a notice of deficiency. The deficiency notice disallowed the deductions because of insufficient substantiation of the claimed miles.
Generally, the taxpayer bears the burden of proof for any claimed deduction. There is an income tax regulation that says if a taxpayer produces credible evidence about any factual issue relevant to determining the taxpayer’s tax liability for any year, the burden of proof shifts to the IRS.
The IRS has strict substantiation requirements regarding the use of trucks and automobiles. The taxpayer must substantiate by adequate records or sufficient evidence corroborating the taxpayer’s own statement:
➜ The amount of the expense
➜ The time and place of travel, entertainment or use of the property
➜ The business purpose of the expense of other items
➜ The business relationship of the taxpayer to the persons entertained or using the property
The taxpayer must also be able to establish the amount of business use and the amount of total use of the property.
Ressen provided his calendar and logbook and backed those items up in court with corroborating testimony. The burden of proof shifted from him to the IRS concerning the standard mileage deduction amount.
The court ruled in Ressen’s favor on the standard mileage deduction amount of $28,504 subject to the 2 percent miscellaneous deduction limitation.
Ressen was unable to provide any evidence regarding the other $7,597 in deductions. The burden of proof was on him to substantiate the deductions. Because he was unable to do so, the court disallowed these deductions and ruled in favor of the IRS (Ricky Ray Ressen and Rosalind Ressen v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2015-32, April 21, 2015). ■
©2015 CPAmerica International
The one-year IRS pilot program to provide relief to plan administrators who didn’t file required retirement plan returns on Form 5500-EZ expires June 2, 2015. So, anyone wanting to take advantage of the penalty relief program should act fast.
This penalty relief is available to:
➜ Certain small business (owner-spouse) plans and plans of business partnerships
➜ Certain foreign plans
Small business plans provide retirement benefits only for the owner and the owner’s spouse.
The late filing penalty for 5500-EZs is $25 per day, up to a maximum of $15,000 per return. A business being assessed the maximum penalty for four years’ worth of unfiled returns could pay as much as $60,000 in penalties if it were not for this pilot program.
Under the program, no penalty or other payment is required to be paid for late filing. The applicant must include a complete Form 5500 Series Annual Return/Report, including all required schedules and attachments, for each year that the applicant is seeking penalty relief.
All of the delinquent 5500s must be sent directly to the IRS. The businesses cannot file through the Department of Labor’s EFAST2 filing system. Filing through the EFAST2 filing system results in returns being processed as they normally would be, with applicable late-filing penalties being assessed.
Plans subject to ERISA are not eligible for this program.
A foreign plan is a retirement plan maintained outside the United States, primarily for nonresident aliens. A foreign plan is eligible for relief if the employer that maintains the plan is a domestic employer or a foreign employer with income derived from sources within the United States.
At the end of this pilot program, the IRS will consider whether it should be replaced with a permanent one. If a permanent program is established, the IRS will charge businesses a fee to take part in the program. ■
©2015 CPAmerica International
The Internal Revenue Service provides many different educational products, webinars and videos to help small businesses thrive.
Take child care services as an example. The IRS webinar “Tax-Related Guidance for Child Care Providers” provides information that would be beneficial for a provider just starting out in the business as well as anyone who is relatively new in the business.
Most small businesses employ CPAs to handle their financial needs, but having some knowledge of what is going on regarding the financial side of the business is important.
The child care webinar is broken down into four main topics:
1. Child Care Income – This section covers various types of income that must be reported. Some examples are:
➜ Income from contracts specifying charges, terms and responsibilities
➜ Late pick-up or early drop-off fees
➜ Registration fees
2. Child Care Expenses – This section focuses on what criteria must be met for an expense to be deductible. Some examples of topics covered in this section are:
➜ The business must be a for-profit activity. Remember, hobby losses are not deductible.
➜ The expense must be ordinary and necessary.
➜ An allocation must be made for business/personal expenses. Only the business portion is deductible.
➜ Personal expenses are never deductible.
3. Special Rules – A hot button for child care providers is the business use of the home. The webinar covers the special method used to compute the business use percentage of a home available only for daycare service providers.
4. Other Expenses – There are some expenses common to the daycare industry. The webinar discusses how to deal with these expenses:
➜ Food consumed by daycare recipients, including the USDA food reimbursement program
➜ Supplies such as games, books, child-proofing devices, toys and diapers
➜ Depreciation expenses
Child care is only one of several businesses that can benefit from the targeted IRS educational products. Check out the various webinars and videos at www.irsvideos.gov. ■
It might seem like driving expenses to some, but to the IRS, it’s commuting.
Lonnie Bartley, a construction supervisor for Far West Contractors Corp. in California, was denied a deduction for nearly $25,000 in business expenses because the Tax Court said they were actually nondeductible commuting expenses.
Bartley’s job required him to travel to various job sites in the metropolitan Los Angeles area, mainly Redondo Beach and El Segundo.
Far West did not provide Bartley with a vehicle, nor did it reimburse him for mileage.
On his 2010 Form 1040 return, Bartley claimed $24,448 in auto-related expenses on Form 2106 EZ, Unreimbursed Employee Business Expenses. He also had $2,482 in other unreimbursed expenses.
The IRS sent Bartley a deficiency letter regarding the 2010 return. It was challenging the large amount of deductions on the Form 2106. In this situation, the taxpayer bears the burden of proof and must substantiate the deductions.
When expenses involve passenger automobiles and traveling while away from home, deductions are not allowed unless the taxpayer substantiates by adequate records or sufficient evidence the following three items:
1. The amount of the expenditure or use
2. The time and place of the expenditure or use
3. The business purpose of the expenditure or use
The business purpose test is usually not met if commuting is involved. There are two exceptions to this general rule.
The first exception permits a taxpayer to deduct transportation expenses incurred in going between a taxpayer’s residence and a temporary work location outside the metropolitan area where the taxpayer normally lives and works.
The second exception permits a taxpayer to deduct commuting expenses between the taxpayer’s residence and a temporary work location, regardless of distance, if the taxpayer also has one or more regular work locations away from the taxpayer’s residence.
Bartley did not meet the first exception to the commuting rule because he both lived and worked in the metropolitan Los Angeles area. He did not meet the second exception because the two job sites where he worked were determined by the court not to be temporary work locations because he already had worked at both the Redondo Beach and El Segundo locations for well over a year. Temporary work locations are usually job sites worked at for less than a year.
Bartley did not meet one of the exceptions to the commuting rule. Therefore, he did not meet the business purpose part of the three-part test that must be met to deduct automobile expenses.
The court ruled the $24,448 in auto-related expenses was nondeductible (Lonnie J. Bartley and Kimberly A. Bartley v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2015-23, March 31, 2015). ■
©2015 CPAmerica International
