During the second quarter of 2014, there were many important federal tax developments. The following highlights some of the more significant developments for you. As always, contact our office if you have any questions.
Tax legislation continued to move forward in the House during the second quarter of 2014 but appeared to stall in the Senate. The House passed bills to make permanent the research tax credit, Code Sec. 179 enhanced small business expensing, and some tax incentives for S corporations. However, the Obama administration expressed its opposition to the House bills because they were not offset and would add to the federal budget deficit. Senate leaders were expected to bring a tax extenders bill before the full chamber (the EXPIRE Act) but did not before the July 4 recess. The Senate Finance Committee also considered a highway funding bill (the PATH Act), which included some pension-related tax provisions. President Obama signaled his support for the highway bill and for paying for highway funding by closing unspecified corporate loopholes.
In June, after several years of discussion, the IRS adopted a Taxpayer Bill of Rights. The IRS also updated Publication 1, Your Rights as a Taxpayer, to reflect the newly-adopted Taxpayer Bill of Rights. Both steps were taken to educate taxpayers about their rights before the agency, such as the right to confidentiality.
The U.S. Treasury Department announced in April that jurisdictions that have reached intergovernmental agreements (IGAs) in substance with the U.S. can be treated as having agreements in effect under the Foreign Account Tax Compliance Act (FATCA). This will enable foreign financial institutions (FFIs) to timely register with the IRS, based on their expected IGA status. The U.S. has negotiated IGAs with more than 90 jurisdictions.
In May, a jury in a federal district court found a taxpayer liable for civil penalties for willfully failing to file required Reports of Foreign Bank and Financial Accounts (FBARs) (Zwerner, DC-Fla., May 28, 2014). At that time, the U.S. Department of Justice reported that the taxpayer faced a maximum 50-percent penalty of the balance in his unreported bank account for each of the three years at issue. The balance of the bank account during each of those years exceeded $1.4 million, DOJ added.
In June, the IRS expanded streamlined procedures and made other changes to the Offshore Voluntary Disclosure Program (OVDP), while tightening some requirements and increasing penalties for intentional tax violations. Generally, the IRS removed the requirement that taxpayers owe $1,500 or less in taxes per year. Instead of filling out a risk questionnaire, taxpayers will attest (self-certify) that their previous noncompliance was due to non-willful conduct. The IRS will review their circumstances to ascertain their lack of intent.
In a unanimous decision, the U.S. Supreme Court held in June that funds from an inherited IRA are not “retirement funds” exempt from the debtor’s bankruptcy estate ( Clark, SCt., June 12, 2014). The decision resolves a split among the Circuits. In 2012, the Fifth Circuit found that inherited IRAs are retirement funds protected from the reach of creditors. The Seventh Circuit reached the opposite conclusion in 2013.
In April, the Tax Court reminded taxpayers that IRS’s published guidance is not binding precedent ( Bobrow, TC Memo. 2014-21). Previously, the court held that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained. In a motion for reconsideration, the taxpayers unsuccessfully argued that the court’s interpretation of Code Sec. 408(d)(3)(B) was inconsistent with the IRS’s published guidance.
The IRS reported in June that the number of returns paying alternative minimum tax (AMT) more than tripled from 1.1 million to 4.2 million for 2011, the most recent year for which statistics are available. Individual taxpayers filed 145.4 million tax returns fin 2011. Adjusted gross income on taxable returns increased 6.2 percent to $7.69 trillion, while total income tax increased 9.9 percent to $1.05 trillion. The IRS also reported that taxpayers used $73.6 billion of tax credits in 2011. This represented a decrease of 35.2 percent from the $113.6 billion of credits claimed in 2010, due to the expiration of the Making Work Pay Credit, the IRS explained.
Research tax credit
Final and temporary regulations issued in June make the election to compute the Code Sec. 41 research tax credit using the alternative simplified credit (ASC) more taxpayer-friendly. The IRS announced that taxpayers may elect the ASC on amended returns in cases where no credit had been claimed in those respective tax years.
The IRS issued guidance on the application of E.S. Windsor, SCt., June 26, 2013, which struck down Section 3 of the Defense of Marriage Act (DOMA), to qualified retirement plans. The IRS did not require retroactive recognition of same-sex marriages before June 26, 2013.
The IRS provided guidance to safe harbor 401(k) and 401(m) plans on plan amendments reflecting the U.S. Supreme Court’s decision in Windsor. A mid-year plan amendment to comply with Windsor will not affect a plan’s safe harbor status, the IRS explained. Generally, safe harbor 401(k) plans must remain in effect for an entire 12-month plan period and cannot be amended mid-year, subject to some exceptions.
Health savings accounts
The IRS announced in May the annual inflation adjustments for limits on deductible contributions to health savings accounts (HSAs) for the 2015 calendar year. The IRS also included the inflation adjusted limits on annual deductibles for purposes of defining a high-deductible health plan (HDHP). The 2015 annual limitation on deductible contributions under Code Sec. 223(b)(2)(A) for an individual with self-only coverage under an HDHP is $3,350, up from $3,300 for 2014. For an individual with family coverage for 2015, the annual limitation is $6,650, up from $6,550 for 2014.
The IRS issued final regulations in May for determining which estate and trust expenses may escape the two percent floor on deducting miscellaneous itemized deductions. The regulations also describe the treatment of bundled expenses that must be allocated between fully deductible expenses and expenses subject to the floor.
Affordable Care Act
Final regulations issued in May describe how a Health Insurance Marketplace (formerly known as an Exchange) created by the Patient Protection and Affordable Care Act (PPACA) will report information about the Code Sec. 36B premium assistance tax credit to the IRS. Individuals who obtain health insurance through the Marketplace may be eligible to offset the cost of coverage with the Code Sec. 36B credit.
In June, IRS clarified that one month is the maximum allowed length of any employment orientation period under the Patient Protection and Affordable Care Act’s 90-day waiting period limitation for coverage. The one-month maximum is intended to prevent abuse, the agencies explained. The final regulations generally apply to group health plans and health insurance issuers for plan years beginning on or after January 1, 2015.
The Supreme Court announced in June that a taxpayer has a right to conduct an examination of IRS officials regarding their reasons for issuing a summons when the taxpayer points to specific facts or circumstances plausibly raising an inference of bad faith ( Clarke, SCt., June 19, 2014). The Supreme Court emphasized that a taxpayer cannot offer just naked allegations, but must offer some credible evidence to support the claim of improper motive on the part of the government.
In June, the Treasury Inspector General for Tax Administration (TIGTA) warned that the IRS needs to significantly improve its oversight of alimony deductions claimed by individuals. TIGTA estimated the alimony compliance gap could reach $2.3 billion based on its review of recent tax years. TIGTA reviewed more than 500,000 TY 2010 returns and discovered 47 percent that claimed an alimony deduction but for which the corresponding income was either not reported on a recipient’s return or the amount of alimony income reported did not agree with the deduction.
If you have any questions about these or other federal tax developments, please do not hesitate to contact us.