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New Partnership Audit Rules for 2018 Tax Filing Year

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For the 2018 tax filing year, there are new Internal Revenue Service (IRS) partnership audit rules [also adopted by the California Franchise Tax Board (FTB)] in which the partnership, not its members, will now be responsible for tax adjustments under audit.

There is a very narrowly defined opt-out provision that many partnerships do not qualify for.  Please consider amending the partnership operating agreement to designate a “partnership representative” to represent the company in disputes with the IRS or the FTB.  Also, you should consider including language regarding the responsibility of tax audit adjustments pursuant to the three allowable methods: “amend”, “pull in”, and “push out.”

Below is a chart which discusses the advantages and disadvantages of each method.

MethodProsCons
Election OutPartnership out of CPARLimited to small partnerships with limited kinds of partners
Must elect on annual basis
AmendSimple to implementPartnership can’t compel partners to amend

Partnership can’t monitor who amends and who doesn’t

Pull InSimple to implement

Partnership can act as clearing house for convenience of partners (allows partnership to monitor which partners have pulled in)

Partnership can’t compel partners to pull in
Push OutPartnership can compel reviewed-year partners to pay tax on their share of imputed underpaymentShort time frame to elect and comply

Large administrative burdern on partnership

Partners pay additional 2% penalty

To discuss your situation under the new partnership audit rules, please contact a WFY tax expert at (949) 910-2727 or info@cpa-wfy.com

© Copyright 2019. All rights reserved.

Rental Real Estate Owners-Guidance Related to the 20% Pass-through Deduction

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On January 18, 2019, the IRS issued a notice providing “safe harbor” conditions under which rental real estate activities will be treated as a trade or business for purposes of the IRC Section 199A deduction.

To qualify for the safe harbor:

  1. Separate Books and records must be maintained for each rental real estate enterprise.
  2. At least 250 hours of rental services must be performed by the taxpayer and/or workers for the taxpayer during the tax year for each rental real estate enterprise. To clarify, a real estate enterprise may be one rental or multiple rentals.  Commercial and residential rentals cannot be combined in the same real estate enterprise.  Qualifying rental services counting toward the 250 hour requirement include advertising, negotiating and executing leases, verifying tenant applications, collecting rent, daily operation, maintenance and repair of the property, management, purchase of materials for repairs and supervision of employees and independent contractors.  The services can be performed by owners, employees, agents and/or independent contractors working for the owners.  We recommend filing 1099s by January of the following year for any services performed by non-owners.
  3. The taxpayer must maintain contemporaneous records including time reports, logs or similar support to document the hours of services performed, a description of the services performed, dates on which the services were performed and who performed the services. This will require tracking everything, your personal time and the time of those you employ.  A log book and a file for all invoices from others should be maintained.

Further clarification in the notice:

Triple Net Leases are not eligible for the safe harbor.

Vacation rentals (residences used by the owners) are not eligible for the safe harbor.

A statement is required to be attached to the taxpayer’s tax return and be signed by the taxpayer declaring that all the safe harbor requirements have been met and must include the following language:  “Under penalties of perjury, I declare that I have examined the statement and to the best of my knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure and such facts are true, correct and complete.”

Lastly, an enterprise that fails the safe harbor requirements may still qualify as a trade or business under the regulations for purposes of the 199A deduction.  If you are unsure about your rental real estate enterprise, consult with a WFY tax advisor.

© Copyright 2019. All rights reserved.

New IRS Partnership Audit Rules Prompt New Look at Operating Agreement

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The IRS introduced a new set of partnership auditing rules which take effect in the financial year 2018 and are meant to make it easier for the agency to uncover and collect underpaid taxes from partnership entities.  The previous audit system was challenging for the IRS because it was difficult to pin down who owed the tax under a complex partnership structure.

Small partnerships with less than 100 members can opt out if no partner is a pass-through entity.

The IRS will begin reviewing tax filings in line with the new procedure in 2019, so audits could start as soon as 2020.

When a partnership underpays its taxes, the leftover bill has to be dealt with by a designated individual. If a partnership fails to make that designation, the IRS will select one on its behalf. Designating a representative to deal with the IRS if and when an audit arises could benefit partnerships from having the IRS select one for them.  The IRS promised that it won’t designate its own employees, agents, or contractors.

A partnership without a designated representative may end up relying on outside legal counsel to contact what could be hundreds of partners to determine the needed tax adjustments. Re-evaluating a partnership agreement that has been working all this time is hard to sort out, but it comes down to the potential cost in legal fees in sorting the issue that could possibly come up down the road.

To discuss your situation under the new audit regime, please contact Wright Ford Young & Co. at (949) 910-2727 or info@cpa-wfy.com

© Copyright 2019. All rights reserved.

Making Large Gifts Now Won’t Harm Estates After 2025

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On November 20th, the IRS announced individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to levels before 2018.

The Treasury Department and the IRS issued proposed regulations which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA).  As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

In general, gift and estate taxes are calculated, using a unified rate schedule, on taxable transfers of money, property and other assets. Any tax due is determined after applying a credit – formerly known as the unified credit – based on an applicable exclusion amount.

The applicable exclusion amount is the sum of the basic exclusion amount (BEA) established in the statute, and other elements (if applicable) described in the proposed regulations. The credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.

The TCJA temporarily increased the BEA from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2018, the inflation-adjusted BEA is $11.18 million. In 2026, the BEA will revert to the 2017 level of $5 million as adjusted for inflation.

To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.

To discuss more about your gift and estate tax situation, contact WFY’s Estates and Trusts Partners, Marisa Alvarado and Kevin Wiest, at info@cpa-wfy.com or (949) 910-2727.

© Copyright 2018. All rights reserved.

IRS To Issue More ACA Penalties

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The IRS began issuing Affordable Care Act penalty assessments in its Letter 226J tax notice in November 2017. These notices are being sent to employers who the IRS identified through its recently developed Affordable Care Act Compliance Validation System “ACV” System, as having failed to comply with the ACA’s employer mandate.  So far, the IRS has issued more than 30,000 of these notices containing employer shared responsibility payments (ESRPs) assessments of more than $4.4 billion.

Under the ACA, organizations with 50 or more full-time employees and full-time equivalent employees, are required to offer minimum essential coverage to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets minimum value and is affordable for the employee or be subject to IRS 4980H penalties. These organizations are referred to by the IRS as applicable large employers (ALEs).

According to the latest report from the Treasury Inspector General for Tax Administration (TIGTA), the IRS identified 318,296 organizations that qualified as ALEs for 2015. Of that amount, TIGTA reports that 49,259 are at risk for compliance action by the IRS. Employers who have not yet received a Letter 226J penalty notice for 2015 should not breathe a sigh of relief yet.  There are still more Letter 226J penalty notices to be issued for 2015.

The TIGTA report also indicated that the IRS now has the data to begin the analysis to calculate the potential ESRPs for tax year 2016 to be issued to those ALEs determined not to be in compliance with the ACA.  TIGTA reports that the IRS has spent over $2.8 million to improve the process for identifying, calculating, and processing ALEs who are not in compliance with the ESRP.

As the IRS improves its ACA enforcement process, employers need to assess their potential risk of receiving IRS penalties for not complying with the ACA.  We find many vendors are not providing clients with copies of their filed 1094-C, 1095C, and Receipt IDs provided by the IRS for the 2015-2017 tax years.  Consider undertaking a spot audit of your IRS information filings for 2015, 2016 and 2017. We are providing this service at no cost to your business by working with First Capitol Consulting.

To see how this program can benefit your company, please contact us at info@cpa-wfy.com or 949-910-2727

Avoid Scammers: How the IRS Does and Does Not Contact Taxpayers

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In order to help taxpayers avoid scams in which criminals impersonate IRS employees, IRS has issued a Fact Sheet in which it sets out the ways that it does and does not contact taxpayers.  The IRS has been publishing this sheet for years to help taxpayers protect themselves from scammers and the warning signs.

Below are the legitimate ways the IRS employees will contact taxpayers:

IRS initiates most contacts with taxpayers through regular mail delivered by the U.S. Postal Service. However, there are special circumstances in which IRS will call or come to a home or business. Even then, taxpayers will generally first receive a letter or sometimes more than one letter, often called notices, from IRS in the mail.

Reasons the IRS will call or come to a home or business:

  • When a taxpayer has an overdue tax bill,
  • To secure a delinquent tax return or a delinquent employment tax payment, or
  • To tour a business, for example, as part of an audit or during criminal investigations.

Note: All IRS representatives will always provide their official credentials, called a pocket commission and a HSPD-12 card. The HSPD-12 card is a government-wide standard form of reliable identification for federal employees and contractors. Taxpayers have the right to see these credentials. IRS employees can provide an additional method to verify their identification. Upon request, they’re able to provide a toll-free employee verification telephone number.

Below are the legitimate ways the IRS employees will not contact taxpayers:

  • Demand that people use a specific payment method, such as a prepaid debit card, gift card or wire transfer. IRS will not ask for debit or credit card numbers over the phone. People who owe taxes should make payments to the U.S. Treasury or review IRS.gov/payments for IRS online options.
  • Demand immediate tax payment. Normal correspondence begins with a letter in the mail and taxpayers can appeal or question what they owe. All taxpayers are advised to know their rights as a taxpayer.
  • Threaten to bring in local police, immigration officers or other law enforcement agencies to arrest people for not paying. IRS also cannot revoke a license or immigration status. Threats like these are common tactics scam artists use to trick victims into believing their schemes.

Collection employees won’t demand immediate payment to a source other than “U.S. Treasury”.

IRS employees conducting criminal investigations are federal law enforcement agents and will never demand money.

Scammers may, but IRS will not, ask taxpayers about refunds or filing status or ask them to confirm personal information, order transcripts, or verify personal identification numbers.

IRS does not use email, text messages, or social media to discuss tax debts or refunds with taxpayers.

If you have questions about any contact with the IRS, do not hesitate to contact a Wright Ford Young tax specialist.

What Is an Offer in Compromise with the IRS?

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An offer in compromise can make you happy: “Oh boy, the IRS said yes, and my tax debts are over!” Or it can frustrate you. Let’s go over how to navigate the IRS settlement guidelines and see what an OIC entails.

Here’s the good news:

  • An OIC can be a fresh start from your IRS debt.
  • You no longer have to worry that the IRS will seize your wages or bank accounts.
  • Your credit score will no longer show any tax liens against you — the IRS releases them all.
  • IRS collections are put on hold and the compromise is investigated. And then — peace, ah, peace — from IRS certified-mail letters and visits from IRS revenue officers.
  • You put the debt behind you and you can go back to saving for retirement.

But here’s some of the bad news:

  • The IRS will dig deeply into your finances.
  • You have to tell the IRS where you work and bank and you must list your assets, including your house, cars, valuables and retirement accounts.
  • The IRS will look at your paystubs, tax returns, bank statements, business profit and loss statements and proof of payment of monthly bills.
  • After acceptance of the OIC, the IRS will put you on a five-year probation, requiring full compliance in filing and paying taxes. Not playing ball with all IRS expectations will default the settlement.

But wait! It gets even more dicey:

  • An OIC is not a quick fix — it can take the IRS a minimum of nine to 12 months to investigate, and another six months if an appeal is needed. The IRS allows five to 24 months to pay the settlement.
  • If you want to pay credit card, mortgage or car loan monthly bills, think again. The IRS may effectively take over your budgeting.
  • If the IRS determines it can collect what you owe, it will reject your offer, but you can appeal.
  • The settlement amount is not based on fairness, but on collectability.
  • It may not work at all! The IRS recently rejected 60 percent of the offers it received: 41,000 rejections out of a pool of 68,000 submissions!

Let’s see where that leaves us:

  • An OIC can be a wonderful way to rid yourself of the IRS bugging you.
  • You need to consider it from all angles to make sure it’s the right move for you.

A compromise is not the only way to clear the IRS out of your life. The agency can agree that you owe debt, but not force you to repay it — the IRS terms it currently uncollectible and puts you in its bad debt category and leaves you alone. The IRS has 10 years to collect the taxes. You could let the time frame expire rather than compromising. Bankruptcy may be able to eliminate taxes too. See what’s in your best interest.

The point is that you have options, and you should talk to a professional if you’re having tax problems.

© Copyright 2018. All rights reserved. 

Estate and Gift Tax 2018 Inflation Adjustments

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On October 19th, the IRS issued Revenue Procedure 2017-58, the annual inflation adjustments for 2018 for many tax provisions, including exemptions for estate, gift and generation-skipping transfer (GST) taxes as well as the annual exclusion amount for gifts as follows:

Estate, Gift and GST Tax Exemption Increases to $5,600,000. For estates of decedents who pass away during 2018, and for gifts made during 2018, the combined estate and gift tax exemption will increase to $5,600,000, up from a total of $5,490,000 for estates of decedents in 2017.  The generation-skipping transfer exemption increased as well to $5,600,000. In 2018 an individual can bequeath $5,600,000 (or $11,200,000 from a married couple’s estate) to heirs and pay no federal estate or gift tax.

Gift Tax Annual Exclusion Increases to $15,000. For gifts made in 2018, the gift tax annual exclusion will increase to $15,000 from $14,000, where it has been since 2013. An individual can give to another individual up to this amount without utilizing any of the gift tax exemption.  For example, a married couple can gift each donee up to $30,000 in 2018 without utilizing either spouse’s gift tax exemption amount.

We are available to answer your estate and gift tax questions at info@cpa-wfy.com.