Practical IRS Tax Insights – January 2020
You may have noticed that I haven’t posted recently. Instead of posting on this blog I have been busy writing three books on IRS topics! They are now available on Kindle Unlimited for free by clicking HERE.
As IRS looks to increase tax compliance…
It’s aiming to hike its enforcement actions. With an IRS chief committed to fighting tax fraud and increasing the agency’s visibility nationwide, along with hiring surges in all of IRS’s divisions after years of employee attrition, the Service is again placing an emphasis on enforcement.
Payroll tax dodges are a major area of focus. Firms that withhold Social Security and Medicare taxes from employees’ paychecks, but use the withheld funds for personal expenses or to pay other creditors instead of sending the money to IRS, are a top abuse demanding attention from the Service and the Dept. of Justice. IRS revenue officers are visiting some noncompliant firms. Businesses with large outstanding payroll tax withholdings that they didn’t forward to IRS are a prime target of this project. IRS is sending teams of revenue officers to Wis., Texas, Ark. and other locales where there is a dearth of Revenue Service employees because of the shuttering of brick-and-mortar offices. Agency collectors will pop in on these taxpayers unannounced and attempt to resolve ongoing payroll tax issues after multiple prior mail contacts by the Service to settle the liabilities went nowhere. This project isn’t limited to payroll tax scofflaws, but they are a significant component.
Among IRS’s other enforcement priorities: Battling offshore tax evasion and cybercrimes. Bearing down on dishonest preparers. Reducing improper refunds. Boosting the number of tax fraud cases referred from the agency’s civil divisions, such as Small Business/Self-Employed, to its criminal investigations unit and DOJ. Plus mining data sources to identify and investigate other areas of noncompliance.
Landlords get help from IRS on the 20% qualified business income deduction. Applying the QBI rules to income from rentals of real property is thorny. IRS regs say the rental activity must generally rise to the level of a trade or business, a standard which depends on each taxpayer’s particular facts and circumstances. Alternatively, there’s a safe harbor if at least 250 hours a year of qualifying time are devoted to the activity by the taxpayer, employees or independent contractors. Meeting the safe harbor lets you treat the rental as a business for QBI purposes. Real estate rental income is usually reported on Schedule E of the 1040… Even if it is treated as a trade or business for purposes of the QBI write-off, the Revenue Service says in recently added items to a set of FAQ on the QBI rules. Also, the rental income generally isn’t subject to self-employment tax. One potential burden of treating your real estate rental income as QBI: You may need to send out 1099 forms to certain service providers whom you pay $600 or more in a year, other than corporations, and give IRS a copy.
Having your corporation pay your personal expenses is a tax loser.
A man who owned a corporation used its bank account to pay for groceries, a gym membership, his rent, child care and other costs. He also comingled funds in his corporate and personal accounts and didn’t keep separate expense records. According to the Tax Court, he is treated as receiving a constructive dividend from the company’s payment of his personal expenses (Santos, TC Memo. 2019-148). Here’s a tip: Make sure to use separate credit cards and bank accounts for your business and personal expenses. It’ll help relieve the stress at tax time.
Selling marijuana isn’t good for a firm’s tax health, a Calif. company learned. It ran a marijuana dispensary where customers could buy the drug for medical use. Although the sale and use of medical marijuana are legal in Calif., a federal tax statute prohibits tax deductions for sellers of controlled substances that are considered illegal under U.S. law. The taxpayer’s argument that the applicable federal tax statute amounted to an excessive fine and violated the Eighth Amendment fell on deaf ears at the Tax Court (Northern California Small Business Assistants, 153 TC No. 4). Marijuana businesses that deduct expenses are a prime audit target. Agents eye dispensaries that deduct expenses, and courts generally side with IRS.
Transferring value via a merger triggers a gift tax bill, the Tax Court decides.
A couple merged their firm with a company owned by their three sons. Too much value was placed on the sons’ firm, so the kids ended up with 81% of the combined company. The Service claimed that the parents made a $30-million taxable gift to their children by overvaluing the kids’ firm. But after finding an error in IRS’s valuation report, the Court said the value of the gift was $23 million (Cavallaro, TC Memo. 2019-144). It’s back to the drawing board for IRS on a couple’s tax-debt repayment plan.
A couple who owed $640,000 in back taxes offered to pay $6,341 a month under a six-year installment plan. The Service contended they could pay much more, but agreed to the offer if the couple also liquidated and paid over a retirement account belonging to the 60-year-old husband. The couple claimed he was close to retirement, and liquidating the account would be a hardship. The Tax Court sent the case back to IRS’s appeals office to delve into whether circumstances such as the husband’s age should restrict tapping the account to pay the tax (Lowery, TC Memo. 2019-151).
Jail time is no excuse for failing to file a tax return. An ex-basketball player in prison for running a Ponzi scheme got a big pension payout from the NBA. He didn’t file a return for the year, claiming he had no access to his tax records and income tax was withheld from the distribution. The Tax Court wasn’t moved by his plight, so he owes income tax and penalties (George, TC Memo. 2019-128).
Remember – tax season is upon us. Give us a call at 713-826-3263 for your tax and accounting needs!