2012 TAX
UPDATE
Delia (Dee) Tillman, CPA, MTx
January 17, 2012
SELECTED TAX UPDATES
EXPIRED PROVISIONS
NEW FOR 2012
FORM 8939 (due today!)
EXTENDED SOCIAL SECURITY 2% EMPLOYEE REDUCTION
NEW FUTA CALCULATIONS FOR GEORGIA EMPLOYERS
1099 REPORTING CHANGES
TANGIBLE PROPERTY REPAIR REGULATIONS (T.D. 9564)
FORM 1127 (EXTENSION OF TIME TO PAY)
IRS AND THE TAX PREPARER
EITC NEW REGULATIONS (T.D. 9520) ISSUED 12/19/11
ACCESSING CLIENTS’ ELECTRONIC FILES
EFILING REQUIREMENTS AND FORM 8948
EXPIRED PROVISIONS
* Deduction of health insurance premiums for self-employment
tax purposes
* Hybrid, lean-burn, and alternative fuel motor vehicle credits
(§30B(k)(2))
* Employer’s exemption from the 6.2% Social Security tax for
newly-hired qualified unemployed workers
* “Making Work Pay” credit
* Work Opportunity Credit for unemployed veterans* &
disconnected youth
* Income exclusions for certain state & local tax benefits granted
to members of qualified emergency response organizations
* Tax-free payments from §529 plans for computer-related
equipment & services
* $10,000 up-front deduction for “start-up expenses” (reverts
back to $5,000)
EXPIRED PROVISIONS
* 5-year carry back for qualified general business credits and
allowing credits to reduce AMT (reverts back to 1-year)
* Deferral and ratable inclusion in income for cancellation of
qualifying business debt (COD) under §108(i)
* 5-year amortization of musical compositions & copyrights to
musical compositions
* Treating natural gas line as 15-year property
* Authority to issue “Build America Bonds”
* Provision allowing long-term contractors to ignore §168(k)
deduction in determining percentage of project that is
complete
* 50% credit for investments in qualifying therapeutic discover
projects
NEW FOR 2012
FORM 8939 – due today!!
• New form to Allocate Increase in Basis
for Property Acquired From a Decedent
• Applicable for 2010 – no Form 706
• Executor can elect to file Form 8939 to
elect “Pre-Act” rules for an individual
who dies in 2011
EXTENDED SOCIAL SECURITY 2%
EMPLOYEE REDUCTION
 Bill signed on 12/23/11extending the tax break on the
employee portion of the Social Security tax for the first two
months of 2012.
 Jan & Feb, the employee portion of the OASDI tax has been
limited to 4.2% of wages up to the taxable wage base of
$110,100.
 NOTE: If the reduction is NOT extended for the balance of
the year, any employee who receives more than $18,350 in
wages during the first two months of 2012 (2/12 x $110,100)
will have to add the 2% reduction on any excess wages
received to his or her tax liability on the 2012 income tax
return.
 If Congress extends the current reduction credit rate
through the end of the year, this limit will not apply.
EXTENDED SOCIAL SECURITY 2%
EMPLOYEE REDUCTION
EXAMPLE:
Employee has an annual salary of
$120,000 ($10,000/month) throughout
the year. His total wage received for
January & February equals $20,000.
This is $1,650 in excess of the annual
limit ($20,000 - $18,350). He will have
to add $33 to his 2012 income tax
liability (1,650 x 2% = $33).
NEW FUTA CALCULATIONS FOR
GEORGIA EMPLOYERS
20 States & 1 Territory have been assessed a
Federal Unemployment credit reduction for
2011.
 Any agency that has taken a loan from
the Federal Government for
unemployment benefits and has failed to
repay that loan in a timely fashion is
subject to the reduction.
 Employers paying wages to a
state/territory subject to the reduction
must pay additional FUTA tax
NEW FUTA CALCULATIONS FOR
GEORGIA EMPLOYERS
Payment related to the credit reduction is
calculated on Form 940
 .3% states pay an additional $21 (max) per
employee (AK, CA, CT, FL, FA, IL, KY, MN,
MO, NC, NJ, NV, NY, OH, PA, RI, VA, WI, &
Virgin Islands)
 .6% states pay an additional $42 (max) per
employee (IN)
 .9% states pay an additional $63 (max) per
employee (MI)
1099 REPORTING CHANGES
COMPREHENSIVE 1099 TAXPAYER PROTECTION &
REPLACEMENT OF EXCHANGE SUBSIDY
OVERPAYMENTS ACT OF 2011 SIGNED 4/14/11
RETROACTIVELY REPEALED:
1)
2)
3)
FORM 1099 REPORTING REQUIREMENT TO CORPORATE
PAYEE
FORM 1099 REPORTING REQUIREMENT FOR PAYMENTS >
$600 FOR “GOODS OR OTHER PROPERTY”
PROVISION THAT ALL LANDLORDS ARE CONSIDERED TO BE
IN A TRADE OR BUSINESS AND ARE THEREFORE SUBJECT
TO FORM 1099 REPORTING REQUIREMENT
1099 REPORTING CHANGES
The IRS now requires credit card processing
companies and third-party payment
services, such as PayPal, eBay and
Amazon to report how much money they
handle for merchants. (Form 1099-K)
Small operations having fewer than 200
transactions totaling less than $20,000 are
exempt from the reporting requirement
TANGIBLE PROPERTY
REPAIRS REGULATIONS
Temporary and proposed regs issued on
12/23/11
Clarifies & expands current §263(a)
standards for repairs & improvements
Covers broad range of tangible property
acquisition issues
Defines materials and supplies
Defines de minimis capitalization threshold
TANGIBLE PROPERTY
REPAIRS REGULATIONS
“[These guidelines] are probably the most
comprehensive set of rules issued related
to fixed asset accounting for federal tax
purposes, in my view, since the 1986 Tax
Reform Act.”
Susan Grais, Executive Director of Ernst & Young
LLP’s Federal Tax Services Group in Washington, D.C.
TANGIBLE PROPERTY
REPAIRS REGULATIONS
New regs :
 Address when repairs to tangible property are treated as
capital expenditures or deductible expenses.
 Address how to account for retirement of components of
tangible property such as buildings, manufacturing
equipment, etc.
 May require some modifications to what taxpayers are
currently doing
 Are Applicable for 2012 and are implemented with a 481
adjustment (requires an adjustment to opening accounts)
 Will treat these changes as automatic method changes
(Form 3115)
TANGIBLE PROPERTY
REPAIRS REGULATIONS
De Minimis Rule Highlights:
Establishes a ceiling that limits total deductible
amount
Aggregate of amounts paid and not capitalized
under the de minimis rule must < the greater of
(1) 0.1% of gross receipts for the taxable year, or
(2) 2% of depreciation and amortization expense
for the taxable year as determined in the
taxpayer’s applicable financial statement (AFS)
TANGIBLE PROPERTY
REPAIRS REGULATIONS
De Minimis Rule Highlights:
Taxpayers without an AFS will be precluded from
applying the de minimis rule. (May take deduction
for materials & supplies costing $100 or less).
Taxpayer must have a written accounting
procedure as part of the AFS that allows for
expensing of items below a certain threshold
TANGIBLE PROPERTY
REPAIRS REGULATIONS
Materials, Supplies and Spare Parts Highlights:
Taxpayers can elect to treat materials
& supplies under the de minimis rule.
Make the election by deducting amounts
paid to acquire or produce a material or
supply and by complying with the other de
minimis rule requirements
Cost of Spare Parts may be deducted when first
installed.
TANGIBLE PROPERTY
REPAIRS REGULATIONS
Improvements to Tangible Property Highlights:
May require an automatic accounting method
change and related §481(a) adjustments.
Must apply improvement standards separately to
the primary components of a building and its
specifically defined building components
(HVAC, plumbing, electrical, etc.)
Eliminates the 50% threshold test & recovery
period previously used to determine whether
a replacement is a major part of the building.
TANGIBLE PROPERTY
REPAIRS REGULATIONS
Leased Property Highlights:

The lessee must capitalize improvements
except to the extent of any rental allowance

The lessor must capitalize improvements paid
directly or indirectly through a construction
allowance

The lessor must capitalize a lessee’s
payments for an improvement if such payments
constitute a substitute for rent.
TANGIBLE PROPERTY
REPAIRS REGULATIONS
Compliance with New Temporary Regs:
Any changes made by the taxpayer to comply with these
new Temporary Regs are considered Changes in
Accounting Method and will require a determination of the
Section 481(a) adjustment.
Regs are effective for tax years beginning on or after Jan 1,
2012.
Revenue Procedures related to these changes are
expected.
FORM 1127
APPLICATION FOR EXTENSION OF TIME
FOR PAYMENT OF TAX DUE TO
UNDUE HARDSHIP
The term “undue hardship” means more
than an inconvenience. You must
show you will have a substantial
financial loss (such as selling
property at a sacrifice price) if you
pay your tax on the date it is due.
EARNED INCOME TAX CREDIT
IRS ESTIMATES THAT 1 IN EVERY 4 EITC
CLAIMS FILED LAST YEAR WERE
ERRONEOUS – COST $15B
MAIN REASON TAX PREPARERS FILE
RETURNS WITH ERRONEOUS EITC CLAIMS



MISINTERPRETATION/MISUNDERSTANDING
THE LAW
ACCEPTING CLIENTS’ INFORMATION AT FACE
VALUE (WEAK DUE DILIGENCE)
FRAUD
EARNED INCOME TAX CREDIT
STIFFER PENALTIES FOR TAX PREPARERS
THE UNITED STATES KOREA FREE TRADE
IMPLEMENTATION ACT SIGNED INTO
LAW ON 10/21/2011 - AMENDED IRC
SECTION 6695(g)


INCREASED PENALTY FROM $100 TO $500
PER RETURN
FINAL REGULATIONS (T.D. 9570) WERE
SIGNED ON 12/19/2011.
EARNED INCOME TAX CREDIT
• FORM 8867 MUST BE FILED WITH THE
RETURN
• RETENTION REQUIREMENTS INCLUDE
COPIES OF FORM 8867 PLUS ANY
DOCUMENTS THE CLIENT PROVIDES FOR
THE EITC QUESTIONNAIRE AND ANY NOTES
THE TAX PREPARER TAKES DURING THE
INTERVIEW
• KEEP FOR 3 YEARS AFTER FILING DATE
EARNED INCOME TAX CREDIT
ACCOUNTING FIRMS OR TAX PREPARATION COMPANIES
ARE SUBJECT TO THE SAME PENALTY AS THEIR
PREPARERS IF
o ONE OR MORE MEMBERS OF THE PRINCIPAL
MANAGEMENT OR PRINCIPAL OFFICERS OF THE
FIRM OR ITS BRANCH OFFICE PARTICIPATED IN
OR, PRIOR TO THE TIME THE RETURN WAS FILED,
KNEW OF THE FAILURE TO COMPLY WITH DUE
DILIGENCE;
o THE FIRM FAILED TO ESTABLISH REASONABLE AND
APPROPRIATE PROCEDURES TO ENSURE
COMPLIANCE; OR
o THE FIRM HAD SUCH PROCEDURES BUT
DISREGARDED THEM THROUGH WILLFULNESS,
RECKLESSNESS OR GROSS INDIFFERENCE.
EARNED INCOME TAX CREDIT
NEW DUE DILIGENCE REQUIREMENTS
 FORM 8867 CHECKLIST MUST BE FILED WITH




RETURNS STARTING WITH 2011
COMPLETE THE EITC WORKSHEET, DOUBLE-CHECK
COMPUTER SOFTWARE GENERATED
RECORD RETENTION: WORKSHEETS MUST BE ON
FILE AND AVAILABLE FOR 3 YEARS; MUST
SHOW
WHO PROVIDED THE INFORMATION AND WHEN IT
WAS RECEIVED (EITHER PAPER OR
ELECTRONIC FORMAT)
KNOWLEDGE REQUIREMENT: SHOW AN
UNDERSTANDING OF THE LAW AND THE
CLIENT; BE ABLE TO DETERMINE THE
REASONABLENESS OF CLAIMS
EARNED INCOME TAX CREDIT
90% OF TAX PREPARERS WHO RECEIVE FINES FOR FILING
ERRONEOUS EITC CLAIMS FAIL THE KNOWELDGE
REQUIREMENT.
YOU CAN NOT KNOW, OR HAVE REASON TO KNOW, THAT THE
EITC INFORMATION PROVIDED BY YOUR CLIENT IS
INCORRECT, INCOMPLETE, OR CONTRADICTORY.
(REASONABLENESS)
60% OF ERRORS IN THE EITC CLAIMS RELATE TO:



CLAIMING A CHILD WHO DOES NOT MEET THE AGE,
RELATIONSHIP, OR RESIDENCY TEST
INCORRECT FILING STATUS: CLAIMING SINGLE STATUS
WHEN MARRIED
UNDER/OVER REPORTING INCOME AND/OR EXPENSES
EARNED INCOME TAX CREDIT
TIPS TO AVOID THE TAX PREPARER PENALTY FOR
ERRONEOUS EITC CLAIMS:
# 1) DOCUMENT THE QUESTIONS YOU ASK AND THE
RESPONSES GIVEN AT THE TIME THE CLINET
INTERVIEW HAPPENS
# 2) ASK ADDITIONAL QUESTIONS; DON’T RELY ON
SOFTWARE CHECKLISTS ALONE
# 3) REVIEW THE FORM 8867 AND YOUR WORKSHEET
FOR ACCURACY AND COMPLETENESS
# 4) ASK SIMPLE QUESTIONS; MAKE SURE YOUR
CLIENT UNDERSTANDS WHAT YOU ASK
# 5) ASK ENOUGH QUESTIONS TO MAKE SURE CHILD
MEETS ALL ELIGIBILIGY REQUIREMENTS
EARNED INCOME TAX CREDIT
TIPS TO AVOID THE TAX PREPARER PENALTY FOR
ERRONEOUS EITC CLAIMS:
# 6) KNOW THE SPECIAL RULES AND EXCEPTIONS AND
WHEN THEY APPLY
# 7) UNDERSTAND WHEN AND HOW TO DETERMINE THE
TIE-BREAKER RULES
# 8) DON’T LET THE CLIENT DETERMINE HIS/HER FILING
STATUS
# 9) KNOW THE SPECIAL RULES FOR HH STATUS WHEN
TAXPAYER IS STILL MARRIED
#10) WATCH FOR QUESTIONABLE W-2S (HANDWRITTEN OR
ALTERED)
EARNED INCOME TAX CREDIT
TIPS TO AVOID THE TAX PREPARER PENALTY FOR
ERRONEOUS EITC CLAIMS:
#11) BE VIGILENT WITH SCH C AND OTHER INCOME
ENTRIES ON THE TAX RETURN
#12) SUBSTANTIATE INCOME OR EXPENSES THAT
PUTS A CLIENT IN THE “SWEET SPOT” THAT
MAXIMIZES THE EITC
http://www.eitc.irs.gov/rptoolkit/hottopicsrp
EARNED INCOME TAX CREDIT
IRS ENFORCEMENT PROGRAM:
# 1) OUTREACH AND EDUCATIONAL PROGRAMS TO
CONTACT PREPARERS WITH A HIGH VOLUME OF
EITC ERRORS
# 2) EDUCATIONAL VISITS TO TAX PRACTISIONERS
# 3) CONDUCT ON-SITE AUDITS OF PREPARERS WHO
FILE AT LAST 25 RETURNS WITH EITC
FILING (90% OF THESE AUDITS RESULT IN
PENALTIES)
# 4)CONTINUED NON-COMPLIANCE BEHAVIOR COULD
FACE CRIMINAL CHARGES AND ADDITIONAL
PENALTIES
# 5) INJUNCTIONS TO BAR PREPARERS WITH HISTORY
OF FILING ERRORS FROM FUTURE TAX
ACCESSING CLIENTS’
ELECTRONIC FILES
Small Business/Self-Employed Division of the IRS has
implemented a program to request the accounting
software files of certain business taxpayers under
examination.
The IRS has taken the position that, if a Client’s
business files are maintained in software like
QuickBooks and Peachtree, the entire electronic file
must be turned over if records have been requested
in an audit or examination, even though the file may
contain information from tax years unrelated to the
examination or data not normally considered part of
a firm’s “books and records.”
ACCESSING CLIENTS’
ELECTRONIC FILES
The IRS offers two suggestions in response to this
concern:

Have your clients backup their electronic data files
at the end of each tax year, thus reducing the
amount of data provided to the IRS.

Have your clients condense/archive the files for
dates prior to the year(s) under audit.
Note: QuickBooks has released its 2012 version which
includes a “time bound” breakout feature that gives
you the ability to create a copy that is for a datespecific range and adheres to the IRS requirements.
EFILING REQUIREMENTS AND
FORM 8948
The Worker, Homeownership, and Business Assistance Act
of 2009 mandates that tax preparers who prepare and
file 11 or more individual or trust income tax returns in
2012 will be required to e-file.
Notice 2011-27 addresses situations where a paper return
may be filed on behalf of a client;
1) tax preparer obtains written statement from the
taxpayer, and
2) statement is hand signed and dated by the taxpayer,
and
3) statement is signed and dated on or before the date
the return is mailed, and
4) statement provides that the taxpayer wishes to paper
file
EFILING REQUIREMENTS AND
FORM 8948
Notice 2011-27 says the following statement will meet these
requirements:
“I do not want to have my income tax return electronically filed, and
I choose to have my return filed on paper forms. I have asked
my tax return preparer to mail my return to the IRS on my
behalf.”
Taxpayer’s Signature: ________________________
Date: _____________________________________
Note: Either spouse may sign for a joint return
Statement should NOT be attached to the return, but be retained by
the tax preparer.
This statement is applicable if the tax preparer will be filing the
return for the taxpayer, not if the taxpayer is filing on his own.
EFILING REQUIREMENTS AND
FORM 8948
Rev Proc 2011-25 – Safe-Harbor Statement for client Choosing to
File Return in Paper Format
“My tax return preparer [Insert Preparer’s Name] has informed me
that [insert he/she] may be required to electronically file my
[insert tax year] individual income tax return [insert type of
return] if [insert he/she] files it with the IRS on my behalf (e.g.,
submits it by mail to the IRS). I understand that electronic filing
may provide a number of benefits to taxpayers, including an
acknowledgment that the IRS received the returns, a reduced
chance of errors in processing the return, and faster refunds. I
do not want to have my return electronically filed, and I choose
to file my return on paper forms. I will mail or otherwise submit
my paper return to the IRS myself. My preparer will not file or
otherwise mail or submit my paper return to the IRS.
Taxpayer’s Signature: ________________________
Date: _____________________________________
EFILING REQUIREMENTS AND
FORM 8948
Notice 2011-26 provides for cases where an
Administrative Exemption is available for paper filed
returns.
Complete Form 8948 (Preparer Explanation for Not
Filing Electronically) and attach it to the paper return
being filed.