2016 Post-Filing Season Tax Update

The end of the 2016 filing season finds a long list of new developments that have taken place since January 1, 2016, especially those developments with an immediate impact on what taxpayers do next. Key items include guidance and new rules involving the Affordable Care Act, (ACA), individuals, partnerships, corporations, and more. Treasury and the IRS also started rolling out guidance under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), passed at year-end 2015 with significant impact on 2016 and beyond. At the same time, Treasury and IRS officials previewed important guidance due out over the next several months. Meanwhile, the courts and Congress were also active.

Here are of some the significant developments that effect this year.

Affordable Care Act

Code Sec. 45R credit. Small employers with no more than 25 full-time equivalent employees may qualify for a special tax credit to help offset the cost of health insurance for their employees. The employer must pay average annual wages of no more than $50,000 per employee (indexed for inflation) and maintain a qualifying health care insurance arrangement. In March, a House committee reported that the number of small employers taking advantage of the credit is far behind expectations.

Small businesses. Many small employers continue to wait for guidance about the application of market reforms under the ACA to health premium payment plans. Transition relief expired in 2015.

Student health coverage arrangements. The IRS announced transition relief regarding market reforms under the ACA to student health coverage arrangements in February (Notice 2016-17). Schools will not be penalized if the arrangement is offered in connection with other student health coverage (insured or self-insured) for a plan year or policy year beginning before January 1, 2017.

Individuals

Interest rates.The IRS announced that the over- and underpayment interest rates for the second quarter of the calendar year, beginning April 1, 2016, will rise by one percentage point, the first increase since third quarter 2011. The new rates are: 4 percent for overpayments, other than corporations; 3 percent for overpayments by corporations (except 1.5 percent of the portion of a corporate overpayment exceeding $10,000); 4 percent for underpayments (except large corporations); and 6 percent for large corporation underpayments.

Offers in compromise. An offer in compromise (OIC) is an agreement between the taxpayer and the agency that settles a tax debt for less than the full amount owed. The IRS posted in March the 2016 version of the Form 656 Booklet, Offer in Compromise, describing how to apply for an offer-in-compromise (OIC) and what criteria are used to measure acceptance of any OIC.

Collection financial standards. Collection financial standards are used to help determine a taxpayer’s ability to pay a delinquent tax liability, beyond which the IRS must accommodate collection alternatives to direct and immediate collection. The IRS posted updated collection financial standards on its website in March.

Tax basis from estates. The Surface Transportation and Veterans Health Care Act of 2015 created the new requirement to prevent heirs from benefiting from a low estate tax value while claiming a higher value from what was received for purposes of selling the inherited asset years later. After several postponements and final regulations in March, the IRS announced that the due date for estates to furnish statements on the value of estate property to the IRS and to estate tax beneficiaries is now June 30, 2016. The extension applies to estate tax returns filed after July 31, 2015.

Businesses

Vehicle-related limits. The IRS released in April inflation-adjusted depreciation limits for business automobiles, light trucks and vans placed in service in 2016. For vehicles for which bonus depreciation is allowed, the first-year depreciation limit is $8,000 higher than the general non-bonus depreciation limits. The IRS also issued the maximum fair market value (FMV) amounts that designate the proper valuation rule for employers calculating fringe benefit income from employer-provided automobiles, trucks, and vans first made available for personal use in 2016.

Section 179 expensing. Even more attractive than bonus depreciation for many businesses as the result of the PATH Act is the availability of enhanced Section 179 expensing. The PATH Act permanently sets the Code Sec. 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts indexed for inflation beginning for tax years after 2015). The IRS announced that the inflation adjustment for 2016 calls for no increase in the $500,000 amount, but an increase to $2,010,000 in the investment limitation.

Inversions. In early April, Treasury and the IRS issued temporary, final and proposed regulations to impose further limits on corporate inversions, especially transactions designed to avoid anti-inversion rules issued in 2014 and 2015. At the same time, the IRS issued proposed regulations that would target earnings stripping transactions by re-characterizing debt between certain related parties as stock.

WOTC. The IRS posted in March an updated Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Tax Credit (WOTC), and Instructions, to reflect the PATH Act. Employers use Form 8850 to pre-screen and to request certification of an individual as a member of a targeted group.

Tax shelters. The U.S. Supreme Court declined in March to review several tax shelter cases, including two involving the Structured Trust Advantaged Repackaged Securities (STARS) tax shelter. In each case, a federal court of appeals had concluded that the transaction lacked economic substance and the taxpayer was not entitled to claim foreign tax credits.

TEFRA partnership repeal. The IRS requested comments in March on the new partnership audit regime following repeal of the TEFRA and electing large partnership (ELP) rules in theBudget Control Act of 2015 (Budget Act). The Budget Act repeals the TEFRA and electing large partnership rules and replaces it with a streamlined structure for auditing partnerships and their partners at the partnership level, which is mandatory for tax years beginning after 2017. IRS Chief Counsel William Wilkins indicated in March that the agency is welcoming comments on the change and is drafting guidance.

Form 3115. The IRS issued in March a revised Form 3115, Application for Change in Accounting Method, for taxpayers to request agency consent to any change in method of accounting. To provide a transition to the new form, the IRS requested taxpayers to start using the revised form immediately, but would not mandate that taxpayers use the revised form until April 20, 2016, unless use of the revision is specifically required in guidance.

International

FATCA. The IRS issued final regulations under Code Sec. 6038D in February that require “specified domestic entities” to report their interests in specified foreign assets under FATCA. In January, the IRS provided relief to foreign financial institutions (FFIs) for several reporting requirements under FATCA, such as certifications for preexisting accounts. The IRS also provided relief to withholding agents under Chapter 3 of the Tax Code for relying on certain electronic withholding forms.

FBAR. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued proposed regulations in March that would exempt holders of signature authority over foreign financial accounts from having to file Fin-CEN Form 114, Report of Foreign Bank and Financial Accounts (known as the “FBAR”) in most circumstances, provided they have no financial interest in the account. The proposed regulations make another significant change by eliminating rules that currently limit the information that must be reported by filers with 25 or more foreign financial accounts.

Tax legislation

Congress was active during the filing season. In March, President Obama signed the Trade Facilitation and Trade Enforcement Act of 2015 (Trade Act), which includes an increase in the penalty for failure to file a return. Lawmakers debated further extensions of energy extenders, along with taking a close look at cybersecurity at the IRS. Tax writers in the House and Senate have renewed interest in tax reform. Meanwhile, House Ways and Means Chair Kevin Brady, R-Texas, predicted that the committee would release a blueprint for tax reform before July 4th that would offer to jump-start major changes, with focus on international tax laws in particular. How much traction Brady’s blueprint will get, if any, is debatable in a presidential election year … but its probable impact, post-election, cannot be ignored.

Aviation taxes. President Obama signed the short-term Airport and Airway Extension Act of 2016 on March 30. The bill extends certain aviation-related taxes through mid-July 2016, including the domestic passenger ticket tax, domestic flight segment tax, certain taxes on international arrivals and departures and others.

Tax administration

Delivery services. The IRS updated in April its list of designated private delivery services that taxpayers may use to submit documents to the agency to qualify for the “timely-filed, timely-mailed” rule. The IRS added eight new delivery services.

Payment options. The IRS announced in April a new payment option for individuals who pay their income taxes in cash. The IRS has partnered with ACI Worldwide’s Officialpayments.com and the PayNearMe Company to allow individuals to make cash payments at participating 7-Eleven stores.

Private tax collection. The Fixing America’s Surface Transportation Act of 2015 (FAST Act) requires the IRS to contract with private collection agencies to work some taxpayer accounts. In January, IRS Commissioner John Koskinen said that the agency would not be able to implement the program until later in 2016.

IRS Future State. The IRS is developing a blueprint for the future, known as the Future State Initiative. The plan is expected to help the agency adapt to the changing needs of taxpayers and the tax community. As part of this plan, the IRS wants to create secure individual online accounts through which taxpayers could obtain information and communicate with the IRS, including responding to notices, providing documentation and filing amended returns.

If you have any questions about these changes and the impact to your specific situation, please do not hesitate to contact us.

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