IRS 2014 Tax Law
Update
(as of December 12, 2014)
&
IRS Issues
Richard G. Furlong, Jr.
Senior Stakeholder Liaison
Small Business Self-Employed Division
CPA Continuing Education Society of PA
December 17, 2014
Tax Increase Prevention Act of
2014 (H.R. 5771
• Individual extenders
• Business extenders
• Energy extenders
2
TIPRA Extensions:
Individual Provisions
•Deductions for expenses of elementary and
secondary school teachers
•Mortgage debt relief
•Deduction for mortgage insurance premiums
•Deduction for state and local general sales
taxes
• Tax Free IRA Distributions to Qualified
Charities
• Deduction for higher education expenses
3
TIPRA Extensions:
Business Provisions
• Bonus Depreciation
•Enhanced Section 179 Deduction
•Research and Experimentation tax credit
•New Markets Tax Credit
•Employer wage credit for activated military
reservists
•Work Opportunity Tax Credit
•Exclusion of Gain on Qualified 1202 Stock
Sales
4
TIPRA Extensions:
Energy Provisions
•
•
•
•
Credit for Nonbusiness Energy Property
Incentives for biodiesel and renewable diesel
Credit for construction of new energy efficient
homes
Energy Efficient Commercial Buildings
Deduction
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Net Investment Income Tax
(NIIT)
•
•
Tax of 3.8% on certain net investment income to the
extent modified AGI is above threshold:
– Married Filing Jointly
$250,000
– Married Filing Separately $125,000
– Single
$200,000
– Head of Household
$200,000
– Qualifying Widow(er)
$250,000
For estates and trusts -- threshold for tax year 2014 is
$12,150
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Net Investment Income Tax
(NIIT)
Three critical terms associated with the 3.8%
Medicare Surtax:
•
•
•
Net Investment Income
Threshold Amount
Modified Adjusted Gross Income (MAGI)
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Net Investment Income Tax
(NIIT)
APPLICATION TO INDIVIDUALS
The Medicare Surtax is equal to:
1. “Net
Net investment
Investment Income”
Income
3.8% X
the lesser of
OR OR
2.
2. The
Theexcess
excess(if(ifany)
any)ofof–:
- “Modified
“Modified Adjusted
Adjusted Gross
Gross Income
(MAGI)
Income (MAGI)
--- “Threshold amount”
“Threshold Amount”
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Net Investment Income Tax
(NIIT)
APPLICATION TO ESTATES AND TRUSTS
The NIIT is equal to:
1. “Net
Undistributed
invesIncome”
“net investment
income” for such taxable year
OR
OR
3.8% X
the lesser of
2.
2. The
Theexcess
excess(if(ifany)
any)ofof––
-“Adjusted
“Modified
Adjusted
Gross
Gross
Income”
(as Income
defined in
(MAGI)
section
67) for such taxable year, over the
-dollar
“Threshold
amount”
amount at
which the highest tax
bracket in section 1(e) begins for such a
taxable year
9
Net Investment Income Tax
(NIIT)
“Threshold Amount:” the key factor in
determining the “lesser of” formula for purposes
of calculating the surtax.
Threshold Amounts:
• Single taxpayers - $200,000
• Married taxpayers - $250,000
• Estates/Trusts - $12,150 (i.e. top income tax
bracket in 2014)
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Net Investment Income Tax
(NIIT)
“Modified adjusted gross income” (MAGI): the
amount that is compared to the “threshold
amount” to determine the “net investment
income” that is subject to the NIIT.
MAGI equals:
•
•
Adjusted gross income (i.e., Form 1040, Line 37) PLUS
Net foreign earned income exclusion (i.e. gross income
excluded under the foreign earned income exclusion less
certain deductions or exclusions that were disallowed due
to the foreign earned income exclusion
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Net Investment Income Tax
(NIIT)
Includes:
Does NOT Include:
•
Interest
•
Salary, wages, or bonuses
•
Dividends
•
Distributions from IRAs or qualified plans
•
Annuity Distributions
•
Any income taken into account for selfemployment tax purposes
•
Rents
•
•
Royalties
Gain on the sale of an active interest in a
partnership or S corporation
•
Income derived from passive
activity
•
•
Net capital gain derived from the
disposition of property
Items which are otherwise excluded or
exempt from income under the income
tax law, such as interest from tax-exempt
bonds, capital gain excluded under IRC
121, and veterans benefits
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Example 1:
John
• Single Taxpayer
• $100,000 of Salary
• $50,000 net investment
income
MAGI is $150,000
3.8% NIIT
would
NOT apply
MAGI is less
than threshold
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Example 2:
Tina & Terry
• Married, filing jointly
• $300,000 combined
salary
• $0 net investment income
3.8% NIIT
would
NOT apply
Wages
Exempt from
NIIT
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Example 3:
Peter & Paula
• Married, filing jointly
• $400,000 salary income
• $50,000 net investment
income
3.8% NIIT
would apply
to
$50,000
15
Example 4:
Randy – Age 70
• Single taxpayer
• $200,000 investment
income
• $125,000 RMD from his
IRA
Excess of
MAGI
Threshold
3.8% NIIT
would apply
to
$125,000
$325,000
- $200,000
=$125,000
16
Example 5:
David & Veronica
• Married, filing jointly
• $100,000 pension
income
• $150,000 IRA income
• $25,000 tax-exempt
interest
• $0 net investment income
3.8% NIIT
would NOT
apply
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Taxpayer Bill of Rights
Ten broad categories:
1. Right to Be Informed
2. Right to Quality Service
3. Right to Pay No More than the Correct
Amount of Tax
4. Right to Challenge the IRS’s Position and
Be Heard
5. Right to Appeal a Decision in an
Independent Forum
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Taxpayer Bill of Rights (cont.)
Ten broad categories (cont.)
6. Right to Finality
7. Right to Privacy
8. Right to Confidentiality
9. Right to Retain Representation
10. Right to a Fair and Just Tax System
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IRS Direct Pay
Richard G. Furlong, Jr.
Senior Stakeholder Liaison
CPA Continuing Education Society of PA
December 17, 2014
Welcome to Direct Pay
IRS.gov/DirectPay
Direct Pay Is …
•
e-Pay option for individual taxpayers
•
Free
•
Secure
•
Available 24X7
Direct Pay – Step 1
Reason for payment?
Direct Pay – Step 1
Select “Tax Year For Payment”
Direct Pay – Step 2
Verify Identity
•
Select a tax year for verification
•
Enter filing status for selected year
•
Enter name – SSN – DOB – address for
selected year
Direct Pay – Step 3
Your Payment Information
•
Amount of payment
•
Payment date (within 30-days)
•
Bank routing & account number
•
Account type – checking or savings
Direct Pay – Steps 4 & 5
•
Step 4 – Review and sign
•
Step 5 – Print or record confirmation number
•
Use confirmation number to
– Check status of payments
– Edit or cancel payments
Direct Pay Benefits
•
Ability to
– Check payment status
– Cancel payments
Direct Pay Benefits
•
•
Available 24X7
Saves time, money & effort
– No waiting for a PIN to be mailed
– No trips to post office
– No postage
– No money order or debit/credit card fees
Direct Pay Benefits
•
Flexible payment scheduling
•
Immediate online confirmation
•
Accounts credited same day
•
Fewer payment posting errors
IRS.gov/DirectPay
Click “Pay Now” to Get Started
And Follow the 5 Easy Steps
my Social Security
Account
Richard G. Furlong Jr.
Senior Stakeholder Liaison
December 17, 2014
my Social Security Account
•
•
•
Open online at www.socialsecurity.gov
– Click on my Social Security
It’s quick, safe, free and easy
Must be 18-years-old and have a:
– Valid email address
– Social Security Number
– U.S. mailing address
my Social Security Account
Use your account to:
• Get an online Social Security Statement
• Review lifetime earnings
• See estimates of future benefits
• Get an instant benefit verification letter
• Change your address and phone number
• Start or change direct deposit of benefit
payments
The Collection Process
• Begins when a return is filed without paying
the debt in full
• Paying your taxes
– Options for paying in full
– Options if you can’t pay in full now
• Installment agreement
• Offer in compromise
− If you need more time to pay
35
Collection Appeals Options
• Taxpayers can appeal most collection
actions.
• Main options:
− Collection Due Process
− Collection Appeals Program
36
Offer in Compromise
• Five basic requirements:
− Filed all returns
− Made all required estimated taxes payments
− Current with federal tax deposits
− Can’t pay full amount
− Not in bankruptcy
37
Offer in Compromise
• IRS may accept an offer on three grounds:
− Doubt as to liability
− Doubt as to collectability
− Effective tax administration
38
OIC Pre-Qualifier Tool
The OIC Pre-Qualifier tool helps
applicant s confirm eligibility and prepare
preliminary proposals.
39
Offer in Compromise Components
• The completed offer package must include all
of the following items:
– Form 433A or 433B
– Form 656 for each taxpayer
– $186 non-refundable fee
– Non-refundable payment
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Notice of Federal Tax Lien
• Claim against current and future rights to
property
• Once lien exists, controlled by IRC §6322
– Date of origin becomes assessment date
– Exists until liability is satisfied or becomes
unenforceable by lapse of time
• IRS not required to file Notice of Federal Tax
Lien for tax lien to attach
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Notice of Federal Tax Lien
• Filing criteria: Generally, the IRS will not file a
Notice of Federal Tax Lien if the unpaid
balance of assessment is less than $10,000.
• Payoff amount: Call 800-913-6050
• Appeal: Within 5 business days of filing. IRS
will send a Notice of Your Right to a Collection
Due Process Hearing.
42
NFTL - IRS Actions
• Release of lien
– IRS has cleared both the lien for the debt
and the public NFTL
– IRS Publication 1450
• Withdraw of lien
– Removes NFTL from public records
– Does not mean federal tax lien is released
or taxpayer no longer liable for amount
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NFTL - IRS Actions (cont.)
• Discharge of lien
– Removes a lien from specific property
– IRS Publication 783
• Subordination of lien
– Allows a creditor to move ahead of the
government’s priority position
– IRS Publication 784
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Audit Reconsideration
Process used by IRS to help taxpayers when
they disagree with the results of an IRS audit of
their tax returns, or returns created for them by
the IRS because they did not file tax returns as
authorized by the Internal Revenue Code
6020(b).
45
Audit Reconsideration Process
• Step 1:
– Review examination report and attachments;
determine which items you feel are incorrect
– Gather documentation needed to support
your position
– Verify supporting documentation is
information that has not been presented
before; ensure it’s for tax year in question
46
Report of Foreign Bank and
Financial Accounts (FBAR)
WHO MUST FILE?
• Any United States person who:
– has financial interest in, or
– signature authority over
♦ financial accounts in a foreign country
• If aggregate value of accounts exceeds
$10,000 at any time during calendar year
47
Report of Foreign Bank and Financial
Accounts (FBAR)
WHEN AND HOW TO FILE?
•
•
•
•
FinCEN Report 114 must be received on or
before June 30 following year being reported
FBARs are electronically filed through the
BSA E-Filing System
Extensions granted for federal tax returns do
not extend due date for FBAR filing
Retain records for five years
48
FinCEN Report 114a
• New report for filers who…
– submit FBARs jointly with spouses, or
– who wish to have a third party preparer file
on their behalf
• Not submitted when filing an FBAR, kept in
records maintained by filer / account holder
• Must be made available to FinCEN and IRS
upon request
49
Reporting Foreign Assets
(Two Reporting Regimes)
1. FinCEN Report 114, Report of Foreign Bank
and Financial Accounts (FBAR)
• Title 31, § 5314
• Stand-alone report, must be electronically
filed on or before June 30
2. Form 8938, Statement of Specified Foreign
Financial Assets
• Title 26, § 6038D
• Attached to Income Tax Return
50
Other Reporting Requirements
Related to Foreign Assets
WHO MUST FILE FORM 8938?
Specified individuals with an interest in
specified foreign financial assets, exceeding
the applicable reporting threshold:
 Unmarried or MFS and living in US:
$50,000 / $75,000
 Married and living in US:
$100,000 / $150,000
 Taxpayers living abroad:
(S or MFS) $200,000 / $300,000
(MFJ)
$400,000 / $600,000
51
Offshore Voluntary Disclosure
Enables noncompliant taxpayers to resolve their
tax liabilities and minimize their chance of
criminal prosecution
• 2009 OVDP: Closed Oct. 15, 2009
$3.4B collected from 18,000 participants
• 2011 OVDI: Closed Sept. 9, 2011
$1.6B collected from 15,000 participants
• 2012 OVDP: Opened Jan. 19, 2012
$1.5B collected from 12,000 participants
52
Streamlined Filing Compliance
Procedures
Available to taxpayers certifying that their failure
to report foreign financial assets and pay all tax
due in respect to those assets did not result from
willful conduct on their part; provides:
– Streamlined procedure for filing amended
or delinquent returns
– Terms for resolving their tax and penalty
obligations
53
Third Party Payer
Payroll Service Providers (PSPs)
Many employers outsource their payroll and
related tax duties, the 3rd party payers will:
• Administer payroll and employment taxes
• Provide assistance in meeting filing deadlines
and deposit requirements
• Streamline business operations
55
Types of Third Party Payers
Common third party arrangements include:
– Payroll Service Providers (PSPs)
– Reporting Agents
– Section 3504 Agents
– Professional Employer Organizations (PEOs)
Reminder: Employers are ultimately responsible for the
payment of income tax withheld (employer and
employee portions of social security and Medicare
taxes). See Fact Sheet 2013-9 Tips for Employers
Who Outsource Payroll Duties
56
Electronic Federal Tax Payment System
The EFTPS is:
• Mandatory
• Secure, accurate and easy to use
• Available to be viewed online after enrollment
• Accessible by an Inquiry PIN
The system:
• Provides immediate confirmation for each
transaction
• Maintains a history for 16 months
57
Employment Tax Investigations
Can result in:
– Prosecutions of individuals and companies, acting
under the guise of a third party payroll service.
For more information, visit IRS.gov and type in the
key search words “employment tax investigations.”
– Liabilities for employers who are ultimately
responsible for the payment of income tax
withheld (employer and employee portions of
social security and Medicare taxes).
58
1120S Officers’ Compensation
Compliance Focus
• Zero (or very small) wages paid and significant
distributable income
• Officer performs significant services
• Employment taxes reduced or eliminated
• Case study ‒ Watson
59
Independent Contractor
or Employee
Three Categories of Evidence:
• Behavioral Control ‒ Instruction, evaluation,
training
• Financial Control ‒ Investment, method of
payment, ability to make a profit or incur a
loss, services available to others
• Relationship of the Parties ‒ Written contract,
permanency, integral part of business
60
Independent Contractor
or Employee
Tax Court Considerations:
1.Degree of Control
2.Investment in Facilities
3.Options for Profit and Loss
4.Right to Discharge
5.Integral Part of Business
6.Permanency of Relationship
61
Case Study
Peno Trucking
62
Direct Deposit Restrictions
•
•
•
Only three direct deposit refunds per financial
account (subsequent refunds convert to
checks)
Direct deposit only into account(s) bearing
client’s (taxpayer’s) name(s)
No portion of refund may go into preparer’s
account
63
E-Signatures
•
Allowed on Forms 8878 and 8879
•
No specific technology required
•
Identity verification required
64
Contact Information
Richard G. Furlong Jr.
Senior Stakeholder Liaison
215-861-1551
richard.g.furlong@irs.gov
65