August 19, 2020
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Where a disaster-related postponement exists, the IRS is required, by law, to pay interest, calculated from the original April 15 filing deadline, as long as an individual files a 2019 federal income tax return by the postponed deadline − July 15, 2020, in this instance. This refund interest requirement only applies to individual income tax filers − businesses are not eligible.
Interest is paid at the legally prescribed rate that is adjusted quarterly. The rate for the second quarter ending June 30 was 5%, compounded daily. Effective July 1, the rate for the third quarter dropped to 3%, compounded daily.
So if your refund is a little bigger than you expected, this probably is why.
How to Use the New Carried Interest Rules - Adam Sweet, Eide Bailly.
For taxpayers holding an API [Applicable Partnership Interest], section 1061 and the accompanying regulations recharacterize any long-term capital gain allocated to the API if the gain stems from an asset that was held by the partnership for three years or less. The allocated gain is recharacterized as short-term capital gain for the holder of the API (but not to any other partners).
Interestingly, the proposed regulations confirm the focus is on the partnership’s holding period in the capital asset, and not the partner’s holding period in its API. For instance, if a taxpayer acquires an API in a partnership in 2019, and in 2020 the partnership sells a capital asset with a holding period in excess of three years, the gain from the sale allocated to the API holder is not recharacterized, even though the API holder has only held its interest for a year.
Planning is key.
IRS: Unemployment compensation is taxable; have tax withheld now and avoid a tax-time surprise - IRS. "Withholding is voluntary. Federal law allows any recipient to choose to have a flat 10% withheld from their benefits to cover part or all of their tax liability. To do that, fill out Form W-4V, Voluntary Withholding Request (PDF), and give it to the agency paying the benefits. Don't send it to the IRS. If the payor has its own withholding request form, use it instead."
With the enhanced $600 addition to unempolyment benefits that applied for much of this year, many taxpayers who didn't have taxes withheld on their benefits will be in a bind at tax time next April.
Business Coalition Slams ‘Unworkable’ Payroll Tax Deferral Memo - Jonathan Curry, Tax Notes ($). "An employee earning $4,000 biweekly — the maximum amount allowed under the memo to still qualify for deferral — would have to pay back up to $2,232 in 2021, while an employee with an annual income of $35,000 would face the prospect of a $751 tax bill the following year, the letter notes. If those tax liabilities aren’t forgiven, the later repayment would likely cause 'serious hardship'” to employees, the groups said."
IRS Issues Updated Safe Harbor Notices for Eligible Rollover Distributions - Thomson Reuters Tax And Accounting. "The updated safe harbor explanations reflect the increased age for determining the required beginning date for minimum distributions (age 72, for individuals attaining age 70-1/2 after 2019), and address the tax treatment of qualified birth or adoption distributions—both enacted as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act (see our Checkpoint article)."
Nebraska Governor Signs Tax Relief Package - Carolina Vargas, Tax Notes ($):
The legislation also creates a new business tax incentive program under the ImagiNE Nebraska Act that will be based on a business’s number of employees and level of capital investment.
Businesses could receive a refund or exemption on “all sales and use taxes under the Local Option Revenue Act, the Nebraska Revenue Act of 1967, the Qualified Judgment Payment Act, and sections 13-319, 13-324, and 13-2813” on purchases and rentals of some qualifying business property.
Individuals receive a refundable credit for property taxes paid to a school district.
Taking Control of Tax Incentives - Roxanne Bland, Tax Notes Opinions. "Absent strict controls, tax incentives of any type are ripe for abuse by those seeking to obtain them."
Form 1040-X now can be e-filed, but just (for now) to correct 2019 return mistakes - Kay Bell, Don't Mess With Taxes. "It shouldn't be long though. The major tax preparation software companies that already deal with the IRS on other e-filings already are working on adding the electronic 1040-X to their inventories."
IRS Now Accepting Electronically Filed Individual Amended Returns for 2019 Tax Year - Ed Zollars, Current Federal Tax Developments. "Note that since only 2019 returns can be amended electronically, it is likely that a large number of amended returns filed for the remainder of the year will still need to be filed on paper. As well, it will likely take some time before all states will also accept electronically filed amended returns."
Claiming a Refund Without Signing the Return - Keith Fogg, Procedurally Taxing. "In the refund case of Gregory v. United States, No. 1:19-cv-00386 (Ct. Cl. 2020) the Court of Federal Claims denies the refund claim of a couple because they did not sign the amended return. The issue of signatures has become more important during the pandemic because of the difficulties of meeting in person."
Don't Make These Common Medicare Mistakes - Bob Vineyard, Insureblog. "If you are a year away from your 65th birthday you are already being bombarded with junk mail and robocalls from folks who want to "help" you navigate the Medicare maze."
Peter Reilly on Real Estate Phantom Taxable Income Gaming the Audit Lottery - Jack Townsend, Federal Tax Procedure. "Basically, Peter deals with tools that the IRS has in its system that his informant asserts can locate large amounts of income that goes unreported through the phantom income that arises from real estate losses funded by nonrecourse debt."
Framing the Issue of Bankruptcy Courts Determining Tax Liability - Jason B. Freeman, Freeman Law. "At a minimum, bankruptcy courts in the Seventh Circuit lack the authority to determine the amount a debtor owes in a federal tax dispute, where the debtor is unlikely to pay and nothing remains to be done in the bankruptcy case."
Oh, THAT $2.9 Million. Taxpayers of a certain age will remember the Steve Martin Saturday Night Live skit about the "I forgot" defense to not paying taxes on $1 million. A taxpayer this week raised a defense in Tax Court with about that sophistication.
The taxpayer ran a business processing tax returns for a tax prep outfit, Refunds Plus, LLC ("RP"), earning a $100.95 fee for each return processed. He owned almost all of the LLC, which filed a partnership return.
Though an attorney who told the Tax Court that he has “a pretty good understanding of tax,” the taxpayer "maintained no formal books or records tracking RP's income and expenses during 2014." A rookie mistake, which, perhaps, led to a small error on the RP 2014 tax return:
On its 2014 Federal income tax return RP checked the box electing the cash basis of accounting and reported that it had zero gross receipts. The parties now agree that RP during 2014 in fact had gross receipts of $2,819,433...and that petitioner failed to report, on his individual return, $2,908,220 of flow-through income from RP.
The taxpayer didn't try to convince the Tax Court that "I forgot" would get him out of the tax on $2.9 million. He was litigating penalties:
The Code imposes a 20% penalty upon the portion of any underpayment of tax that is attributable to (among other things) “[a]ny substantial understatement of income tax.” Sec. 6662(a), (b)(2). An understatement of income tax is “substantial” if it exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. Sec. 6662(d)(1)(A). Petitioner concedes that he failed to report $2,908,220 of flow-through income from RP for 2014. The record shows (and petitioner does not dispute) that the understatement of income tax attributable to this failure (and to the other adjustments petitioner has conceded) exceeds $5,000 and 10% of the total tax required to be shown on his return.
The defense (my emphasis):
Putting aside any purported tax advice, petitioner contends that he believed it reasonable to report RP as having no gross receipts because RP was a cash basis taxpayer that received no payments directly from GTX during 2014. As a condition of performing return-processing services for GTX, however, petitioner insisted that [GTX, the tax prep service] execute deposit account control agreements enabling petitioner to withdraw cash from GTX's bank accounts. Exercising this authority petitioner wired well over $3 million out of GTX's bank accounts, to himself and others, during 2014. That sum comfortably exceeded the amount that RP was owed for processing almost 30,000 tax returns for a fee of $100.95 per return.
In other words, he withrew cash from his customer's account straight to his personal account. So it's reasonable to assume there is no business income? Judge Lauber was unconvinced:
Petitioner was a lawyer with at least seven years of intensive experience in the business of preparing Federal income tax returns. By his own admission he emerged from law school “with a pretty good understanding of tax.” His argument, in essence, is that RP had no gross receipts because he, as RP's sole member, deposited directly into his bank accounts the fees that RP was owed for the services it performed. We do not believe that petitioner actually misunderstood the tax law that makes this argument a nonstarter. It is obvious and well established that a shareholder cannot avoid current taxation by diverting a company's gross receipts to himself.
Decision on penalties for IRS.
The moral? Business income doesn't become tax-exempt when you divert it to your personal bank account. Oh, and maybe don't give a vendor direct access to your bank accounts.
Cite: T.C. Memo. 2020-121
This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.