Category Archives: New Tax Laws and Regulations

Strict Standards for Charitable Contribution Documentation

A recent Tax Court decision highlights the IRS’ tough stance on exactly what taxpayers must have in the way of documentation in order to substantiate their charitable contributions.

In Durden, TC Memo 2012-140, the taxpayers found out the hard way that proper, complete, and (most importantly) contemporaneous written acknowledgement by the charity is what IRS insists on.

IRC Section 170(f)(8)(A) requires this for all contributions of $250 or more.

The Durdens claimed a charitable contribution deduction in 2007 for $25,171, primarily for contributions to their church, and almost all of the components of which were checks for amounts larger than $250.

It’s not enough to show the IRS the cancelled checks – they want, as the Code requires, the contemporaneous acknowledgement letters from the charity/charities to whom the taxpayer made the contributions.

Result in this case – deductions disallowed.

Sales Tax on Services?

This one has been kicking around for years, and in these lean times, don’t be surprised if  your state decides the time has come – impose a sales tax on services.

California (one of the leaders amongst states always on the lookout for new revenue sources) is looking at this:  Assembly Bill 1963 was recently introduced.  This bill would, on and after January 1, 2013, reduce the rate of state sales and use tax to 4% of the gross receipts from the retail sale of tangible personal property (a good thing), and would also, on and after January 1, 2013 impose a state sales and use tax on the privilege of selling services at retail and on the storage, use, or other consumption of services in the state at the rate of 4% of the sales price of the services.

Who knows where this particular bill will go?  But given the currently prevailing fiscal fiasco in many state (and local) jurisdictions, don’t be surprised if you, sometime soon, find yourself paying sales tax to your barber, vet, accountant…..

Capital Gains Reporting — Increased Complexity

The good news for individual taxpayers who sustain long term capital gains is that the tax bite is favorable, compared with the tax on ordinary income.  Beginning with 2011 tax returns, however, the reporting complexity rises to a new level.

First of all, there’s an entirely new form to deal with now:  Form 8949, Sales and Other Dispositions of Capital Assets. Many transactions which used to go directly on our old friend, “Schedule D” must now be reported on Form 8949, though landing eventually on Schedule D.

And all of this further integrates with the new Form 1099-B rules which apply this year, and which impose upon your broker the requirement that your tax basis in any “covered security” which you sold be reported to IRS.

Use Form 8949 to “sort” both long and short term transactions among those for which your broker did or did not report the tax basis of the assets sold, and those related to which the broker-reported basis is correct or incorrect, as well as whether the type of gain or loss (short term or long term) is correct or incorrect as characterized by the broker.  Also use Form 8949 if you received a Form 1099-B as a nominee for the actual owner of the property, to report the sale of your main home at a gain, to report the sale of “qualified small business stock” with some excludable gain, to report a nondeductible loss from a “wash sale,” among other things.

Whew!

It’s probably a good idea to familiarize yourself with the 14 pages of instructions for Schedule D (and Form 8949) before starting the process, which is obviously going to create some new headaches for taxpayers this filing season.

Time For a ‘Repatriation’ Tax Holiday?

With all of the talk about job creation, we’re hearing more and more about encouraging big companies to quit stashing profits abroad, and bring them back home for investment.  The contra, of course, is the potentially onerous U.S. income tax burden on businesses which would slice off a large portion of those profits before the first dollar is put to work.

So Congress has been kicking around the idea of providing a “repatriation” holiday to temporarily solve the problem – H.R. 1834, the Freedom to Invest Act of 2011 was recently introduced, to allow for a U.S. corporation to deduct dividends received from a controlled foreign corporation for a one year period, beginning on the date of enactment.

A similar measure has been introduced in the Senate – S. 1671, the Foreign Earnings Reinvestment Act, which would further provide incentives for companies to use repatriated earnings to increase payrolls, among other things.

As usual, of course, the sentiment to move forward in this manner is far from unanimous.  A recent report issued by the Democratic staff of the Senate Permanent Subcommittee on Investigations says that the 15 companies which benefited the most for a similar 2004 program actually cut more than 20,000 net jobs, and decreased the pace of their research spending.  The report cited the 2004 program as “a failed tax policy” that cost the U.S. Treasury $3.3 billion in estimated lost revenues over 10 years!

“There is no evidence that the previous repatriation tax giveaway put Americans to work, and substantial evidence that it instead grew executive paychecks, propped up stock prices, and drew more money and jobs offshore,” according to Senator Carl Levin (D-Mich).  “Those who want a new corporate tax break claim it will help rebuild our economy, but the facts are lined up against them.”

Stay tuned…..

Thinking of Revisiting That Roth Conversion? Try a ‘Recharacterization’

Recall the special rule, beginning with the 2010 tax year, which allowed taxpayers to convert a traditional IRA to a Roth IRA regardless of his or her adjusted gross income. And along with that rule came a provision which allows taxpayers to change their mind if they took this action in 2010 and now wish they hadn’t.

Let’s say you converted $100,000 and now, because of a “sideways” stock market and/or just poor investment performance during the interim, your account balance is now worth $50,000, with little or no hope for a near term recovery. You may not think, now, that the tax you paid on the original $100,000 conversion was such a good deal.

So, the “good news” is that you can now undo all or a part of the conversion by orchestrating a trustee-to-trustee transfer of the funds from the Roth IRA back to a traditional IRA if you act no later than the due date, including the six month extension period (to October 17, 2011) which will be upon us very soon. Technically, taking this action now is referred to as a “recharacterization.” And upon its completion, the tax impact of the original conversion can be avoided.

The “recharacterization” can result from unwinding all or only a portion of the original conversion — at the taxpayer’s option. This entails pushing a pencil, and making some assumptions regarding the longer term impact on your overall wealth picture. Also don’t forget that any “recharacterization” amount must include any earnings (dividends or interest) earned since the time of the original conversion. (Learn more about Taxes and Retirement Planning.)

New Foreign Financial Account Reporting Rules Pending

Those of you who deal, annually, with the “foreign financial account” reporting rules will have yet a new form to deal with soon.

IRS recently released a draft of new Form 8938, Statement of Specified Foreign Financial Assets.  For tax years beginning after March 18, 2010, the “Hiring Incentives to Restore Employment Act of 2010″ (so-called “HIRE Act”) requires that folks with an interest in a “specified foreign financial asset” during the tax year must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets equals or exceeds $50,000.

“Specified foreign financial assets” are:

  • Depository or custodial accounts at foreign financial institutions, and
  • To the extent not held in an account at a financial institution:
    • Stocks or securities issued by foreign persons,
    • Any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and
    • Any interest in a foreign entity.

A pretty broad standard.

The draft Form 8938 was released on June 22, 2011 — without instructions (nice). Hopefully, instructions will be forthcoming soon.

On a favorable note, Part II of the draft form notes that specified foreign financial assets that have been otherwise reported on Forms 3520, 3520-A, 5471, 8621 or 8865 do not have to be included on Form 8938.

Thank goodness for small blessings.

Our “Voluntary” Tax System: Dispelling the Myth

Every once in a while, some uninformed bloke or other will pontificate about how income taxes in this country are all “voluntary,” and therefore those who don’t pay aren’t really violating the law.

But the IRS points out that the requirement to pay taxes is NOT voluntary and is clearly set forth in Section 1 of the Internal Revenue Code, which imposes a tax on the taxable income of individuals, estates, and trusts, not to mention Section 11 which similarly imposes income tax on corporations. And beyond all of that, Section 6151 requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the malingerer to criminal penalties, including fines and imprisonment!

And in discussing Section 6151, the Eighth Circuit Court of Appeals noted, “when a tax return is required to be filed, the person so required ‘shall’ pay such taxes to the internal revenue officer with whom the return is filed at the fixed time and place. The sections of the Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the ….. tax, a duty which he chose to ignore.” (United States v. Drefke, 707 F2d 978, 981, 8th Cir. 1983)

And the same goes for the actual filing of returns — not “voluntary” either, according to IRC Sections 6011(a), 6012(a) et seq, and 6072(a). And as the IRS will tell you, the word “voluntary,” as used in IRS publications, refers simply to our system of allowing taxpayers to determine the correct amount of tax and complete the appropriate returns themselves, as opposed to having the government determine the tax for them.