IRS Simplifies Home Office Deduction

The home office deduction has been a subject of controversy over the years, but in 2013, IRS issued Rev Proc 2013-13, which simplifies the issue, providing a “safe harbor” for taxpayers.

In lieu of calculating and substantiating actual expenses, you may simply determine your deduction by multiplying the “allowable square footage” by the “prescribed rate.”

The former is the portion of your home which is used in a qualified business manner, but not more than 300 square feet.  The latter is $5, thus allowing for a maximum deduction of $1,500.

And you can use this method in a particular year, switching to the “actual” expense method in the next.  It’s your choice from one year to another.

IRS Continues Leniency for Blown Timely IRA Rollovers

In a recent private letter ruling (PLR 201351031), IRS waived the 60 day rollover requirement in a case where the taxpayer’s failure to timely accomplish the task was due to her mental condition which impaired her ability to make decisions following her husband’s sudden death.  Consequently, the taxpayer was granted a 60 day extension from the date of the PLR to complete the rollover.

Noting that earlier pronouncements provided similar guidance, the Service observed that it will consider all relevant facts and circumstances including:  (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, or hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed; and (4) the time elapsed since the distribution occurred.

Reminder: No Deduction for Paying Someone Else’s Debts

In Lourdes Puentes, TC Memo 2013-277, the taxpayer’s brother purchased a home, later allowing the taxpayer to live in the property.  When her brother lost his job in 2009, the taxpayer “paid certain amounts owing under the mortgage loan, including interest.”  The taxpayer recognized that she was not the owner of the property, but thought she should still be entitled to a deduction for the mortgage interest which she paid because she was an equitable owner.

“No dice,” said the Court, because the taxpayer offered no evidence that she had any agreement with her brother entitling her to an ownership interest or any beneficial rights, such as the right to rents, the right to profits, the right to possession, the right to improve, or the right to purchase the property.

Stolen EINs Used to Report False Income and Deductions

That’s what the Treasury Inspector General for Tax Administration (TIGTA) says, anyway.

In a report issued in September, TIGTA estimates that IRS could issue almost $2.3 billion in potentially fraudulent tax refunds based on these EINs yearly (about $11.4 billion over the next five years).

TIGTA identified 767,071 tax year 2011 electronically filed individual income tax returns with refunds based on falsely reported income and withholding.  Of the some 285,000 EINs used on these tax returns, 277,624 were stolen EINs used to report false income and withholding with potentially fraudulent refunds issued totaling more than $2.2 billion.

TIGTA recommended that IRS update fraud filters to identify potentially fraudulent tax returns.

IRS Advisory Council Makes Recommendations

The IRS Advisory Council (IRSAC) exists to provide an organized public forum for senior IRS executives and representatives of the public to discuss relevant tax issues.  In its recently released annual report, IRSAC made several recommendations, including:

  • IRS needs sufficient funding to operate efficiently, provide timely and useful guidance to taxpayers, and enforce current law, so that respect for our voluntary tax system is maintained.
  • IRS should continue to expand voluntary correction programs to facilitate taxpayers’ self-reporting of prior year noncompliance.
  • IRS should engage in “risk assessing” large taxpayers.

Tax Reform Proposals Emerging

Last week, Senate Finance Committee Chairman Max Baucus (D-MT) issued a discussion draft of some tax reform proposals.  He’s not the first, and certainly won’t be the last with tax reform ideas, some of which will be popular, and a few of which will not.

Among other things, Baucus suggests:

  • Replacement of the current depreciation rules with new ones which better approximate economic depreciation, reducing the number of major depreciation rates from more than 40 to five.
  • Repeal of the last-in, first-out (LIFO) method of inventory accounting, and the like kind exchange provisions.
  • Extension of current maximum expensing amounts and limitations for one year, and then permanently increasing Section 179 expensing to $1 million with a $2 million ceiling.

The proposed reforms are perceived to be simpler and fairer, and have the effect of reducing tax burdens on small business, while raising enough revenue to support substantial corporate tax rate reductions.

No Mortgage Deduction If Debt Isn’t Recorded

Generally speaking, “qualified residence interest” paid during a year on “acquisition indebtedness” or “home equity indebtedness” is deductible (within limitations).  A recent Tax Court decision (Christopher DeFrancis, et al v. Commissioner) brings home the importance of paying close attention to the definitions of these tax terms.

In this case, the taxpayers borrowed from a relative, signed a “mortgage note,” and another document entitled “mortgage,” but did not actually record the documents with county authorities.

The IRC section 163 Regulations require that acquisition indebtedness not only be incurred in buying or building one’s residence, but also that the property be made security for payment of the debt, and that such debt be “recorded, where permitted, or (be) otherwise perfected in accordance with applicable State law.”

This mortgage was not recorded, and the Court further concluded that the taxpayers did not establish that the mortgage was otherwise perfected under Massachusetts law.

“In Massachusetts, an unrecorded mortgage is invalid as against third parties who do not have actual notice of it,” said the Court.

So, bottom line:  unrecorded mortgage = no tax deduction.

IRS Broadens ‘Fast Track’ Settlement Program

IRS recently announced the opportunity for smaller businesses to take advantage of its “fast track” settlement program, and thus enable them to more quickly settle audit issues with IRS.

The “fast track” settlement program is designed to expedite case resolution by allowing taxpayers under audit to work directly with IRS representatives from the Small Business/Self Employed Examination Division and Appeals to resolve those issues, with the Appeals representative generally serving in a mediator role.

Taxpayers interested in entering this program generally must do so before a 30 day letter is issued.  The goal is to complete cases within 60 days of acceptance of the application.

IRS Contractor Employees Slipping Through a Crack?

Seems there’s an inordinate number of employees of IRS contractors who owe millions in Federal taxes.  So says the Treasury Inspector General for Tax Administration (TIGTA) in a recent report.

“Because many contractor employees have access to sensitive IRS systems and facilities, the IRS should address tax noncompliance for these employees in a similar manner as it would for its own employees,” says TIGTA J. Russell George.

TIGTA found that as of June 14, 2012, about five percent of the 13,591 IRS contractor employees examined owed $5.4 million in Federal tax debt.

IRS requires its own employees to file their Federal income tax returns on time and pay any tax due, but it appears that the same standard is not imposed on contractor employees.

Social Security – Days Numbered?

A recent study by the Congressional Research Service (CRS) opines when Social Security is expected to run out of money, and potential scenarios regarding future Social Security benefit funding.

2033 is the big year – the first year of projected insolvency, when it is expected that the program will have enough dough to pay only about 77% of the required benefit payments.

And if the government fails to pay the benefits required by law, says CRS, beneficiaries could take legal action.  Insolvency would not relieve the government of its obligation to pay.

If Congress waits until insolvency takes place, it will just have to cut benefit payments by about 23% as noted above.  Or, they could eliminate annual deficits by raising the Social Security payroll tax rate from 12.4% to 16.1% in 2033, gradually increasing it to 17% thereafter – the more likely scenario in our view.  But if Congress acted right now, the benefit cuts and/or tax increases necessary to restore solvency until 2087 would be about half as large as those needed if Congress just punts – once again.