Errors in New Tax Law That Need to be…

The new tax law was enacted at warp speed. President Trump signed the legislation on December 22, 50 days after a bill was first introduced in the House. So, it’s no surprise that it’s full of slipups, snafus and drafting mistakes unintended by tax writers.

Congressional GOP members want to fix the errors by passing what are called technical corrections. But Democrats may not be keen to go along. They’re loath to give Trump another legislative victory when it comes to tax changes. Also, Republicans can’t use the same budget reconciliation procedures to bypass the 60-vote requirement in the Senate that they used to pass the package. 

 That doesn’t mean Republicans won’t try. Staff members are drafting language with the hope that they can attach it to this month’s spending bill or another vehicle in order to rally some Democratic votes. Chances of success are uncertain at this time. 

Mistakes in the law.

Let’s start with depreciation for restaurant, retail and leasehold remodeling. It’s now consolidated under the grouping of qualified improvement property (QIP). Congressional Republicans intended to give QIP a 15-year depreciable life and to make it eligible for 100% bonus depreciation. But the new statutory language doesn’t’ reflect this intent, accidentally making QIP ineligible for bonus depreciation.

The rule barring net operating loss carrybacks contains an oversight. The statutory language says that the general prohibition on NOL carrybacks applies to NOLs arising in tax years ending after December 31, 2017, while the conference committee used an effective date for NOLs arising in years beginning after December 31, 2017. The law as currently written allows calendar-year filers to carry back 2017 losses, but fiscal-year taxpayers with 2017 losses are prohibited from doing the same.

There’s a big loophole in the tax treatment of hedge fund managers. The new law requires fund managers who take a share of partnership profits as compensation for services to hold their partnership interest for at least three years for the profits to be long-term capital gains. The law exempts partnership interests held by corporations, and fund managers say that includes S corporations. However, the Revenue Service recently announced that it will issue regulations to clarify that the exemption applies only to C corporations. Some tax advisers question whether IRS has overstepped, saying that only Congress can fix this.

As I predicted, this hurried tax legislation was not unlike the Tax Reform Act of 1976 that resulted in The Technical Corrections Act of 1977 to fix the errors in the domestic tax issues and an entire new legislation enacted in 1978 called the Foreign Earned Income Act of 1978 which also failed to address or foresee future misinterpretations and abuses both by the IRS and unscrupulous taxpayers.

 

Tax Court Determines Some Civilian Contractors Can Claim Foreign…

Filed September 18, 2017, the Tax Court ruled in Linde V. Commissioner, TCM 2017-180, that determination as to whether or not the Tax Home of an American civilian contractor working for the DoD for other than limited durations, is deemed to be in a foreign country for purposes of qualifying to exclude income pursuant to Internal Revenue Code Section 911 if they qualify under the “physical presence test”. Without going into the details of the case in this posting, Americans who resided outside the United States and met the 330/365 day PP test may be able to claim the foreign earned income exclusion, even if they worked in countries such as Iraq or Afghanistan. For those who have otherwise qualified for the exclusion but filed without claiming it (care must be taken as to whether or not it is deemed that the taxpayer chose to “opt out” of the exclusion or if their return was recently audited or presently being audited by the IRS, they need to revisit their open tax returns to see if they meet the criteria of this Tax Court decision.

In TCM 2017-180 the judge ruled that in determining whether or not the taxpayer’s “abode” is in the United States, all facts and circumstances need to be scrutinized. According to Judge Vasquez, “Considering the unique facts and circumstances of this case, including Mr. Linde’s continuous employment in Iraq up to the date of trial, we find that Mr. Linde’s ties to Iraq were stronger than his ties to the United States during the years in issue. We therefore hold that Mr. Linde’s abode was not in the United States and that his tax home was in Iraq”

 

IRS to end offshore voluntary disclosure program; Taxpayers with…

IR-2018-52, March 13, 2018

WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.

“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.

The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017.

The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.

Tax Enforcement

The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”

Streamlined Procedures and Other Options

A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.

The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets.  Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:

• IRS-Criminal Investigation Voluntary Disclosure Program;
• Streamlined Filing Compliance Procedures;
• Delinquent FBAR submission procedures; and
• Delinquent international information return submission procedures.

Full details of the options available for U.S. taxpayers with undisclosed foreign financial assets can be found on IRS.gov.

Winter storm extension: Many businesses have extra time to…

IR-2018-50, March 13, 2018

WASHINGTON — The Internal Revenue Service today granted many businesses affected by severe winter storms additional time to request a six-month extension to file their 2017 federal income tax returns.

The IRS is providing this relief to victims and tax professionals affected by last week’s storm–known as Winter Storm Quinn—and this week’s storm –known as Winter Storm Skylar–that primarily hit portions of the Northeast and Mid-Atlantic.

Business taxpayers who are unable to file their return by the regular due date—Thursday, March 15, 2018–can request an automatic extension by filing Form 7004, on or before Tuesday, March 20, 2018.  Form 7004,  available on IRS.gov, provides a six-month extension for returns filed by partnerships (Forms 1065 and 1065-B) and S corporations (Form 1120S).

Eligible taxpayers taking advantage of this relief should write, “Winter Storm Quinn” or “Winter Storm Skylar,” on their Form 7004 extension request (if filing this form on paper).  As always, the fastest and easiest way to get an extension is to file this form electronically.

The IRS will continue to monitor conditions and provide additional relief if circumstances warrant.