IRS recently sponsored a Nationwide Tax Forum at which some significant information reporting issues were discussed relative to enabling IRS to implement the “Affordable Care Act.”  Some such issues include:

• IRS will be required to provide information to the state health insurance “exchanges” which must come into being by 2014.  Exchanges will need information about household income and size, which may necessitate expansion of such disclosures on individuals’ Forms 1040.
• Employers will be responsible to report the extent and level of insurance coverage they provide to employees to enable IRS to determine whether the individuals are entitled to a premium tax credit.
• Employees will be receiving a flurry of notices from employers, notifying them about the options for coverage, the premium tax credit, and other matters, likely starting in early 2013.

Let’s hope the question of whether the “Affordable Care Act” will even remain in existence is resolved soon!

Ever since the passage of “Obamacare” in early 2010, the press has been rife with reports — many inaccurate — regarding how the new (effective January 1, 2013) 3.8% Medicare tax will apply to the sale of real estate, including the sale of one’s primary residence.  Many folks have become alarmed at the (inaccurate) assertion that every time a taxpayer sells a primary residence, he or she will incur the new 3.8% tax.

The National Association of Realtors has developed a brief and informative brochure on the subject (available online right here) which clarifies various of the important rules surrounding this impending new tax, which include:

• The new tax only applies to single taxpayers with a modified adjusted gross income (MAGI) over $200,000, and to married taxpayers with MAGI over $250,000;
• The tax would be 3.8% of the lesser of the taxpayer’s “net investment income,” (which would include capital gains) or the amount by which MAGI exceeds the threshold amount; and
• Relative to the sale of one’s primary residence, the tax will only apply to any taxable gain (and not the gross sales price) arising from disposition of the property, meaning that the the gain would only be subject to the 3.8% to the extent such gain exceeds the $250,000 ($500,000 joint return) principal residence exclusion if the taxpayer otherwise qualifies for that benefit.

A recent pronouncement by the Office of Chief Counsel tells taxpayers that self-employed individuals are entitled to deduct from their self-employment income Medicare premiums paid during the taxable year.  The deduction includes Medicare premiums paid for themselves, their spouse and dependents.

This Chief Counsel Advice (CCA 201228037) further provides that a taxpayer may file an amended return to claim a refund for any open years in which this deduction was not claimed.

Prior to 2010, the instructions to Form 1040 omitted mention that Medicare premiums could be taken as a self-employed health insurance deduction on Form 1040.

So you’ve lived in California for years, and you’re now working outside of the state for an extended period of time, and you wonder how that affects your residency status.

Turns out that there is a special statutory provision for many in your circumstances. California R & TC Section 17014 provides that a taxpayer is considered a nonresident if he or she:

• is outside of California for at least 546 consecutive days under an employment-related contract (which would be best if it were written)
• spends no more than 45 days in California; and
• derives less than $200,000 in intangible income (dividends, interest, etc.) in taxable years in which the employment-related contract is in effect.

A spouse is also considered a nonresident if accompanying the spouse meeting the tests. But if a taxpayer (and spouse) does not meet the 546 day test, and the others, they may or may not qualify as nonresidents, depending on the facts and circumstances prevailing in the given case, and based on their intention at the time of their departure. It can get murky.

So you’ve lost that copy of your tax return which your preparer gave you and your banker won’t talk to you about your loan request until you give him that tax return he insists on?

No problem. IRS will be happy to provide you another copy – for a modest fee of $57.  All you have to do is complete Form 4506 and send it off with your check.  Copies are generally available for returns filed in the current and past six years, and should be in your hands within 60 days.

And maybe another alternative will allow you to satisfy your banker – IRS can provide you a “tax account transcript,” free of charge, which shows all of the basic information from your return, including marital status, type of return filed, adjusted gross income and taxable income.  Order one of these by use of Form 4506-T, which also allows you to tell IRS to send your transcript directly to a third party.

Congressional inaction on the tax front portends a real mess, come this year end’s “lame duck” session.

And it probably doesn’t matter who wins the election. As has become all too usual, the final weeks of 2012 promise to be a true nightmare for tax practitioners. And so notes the National Taxpayer Advocate (NTA) in her recently-released mid year report to Congress.

“The continual enactment of significant tax law and extender provisions late in the year has led to IRS delays in handling millions of taxpayers’ returns and caused many taxpayers to underclaim benefits because they did not know what the law was,” quoth the NTA, who further opines that the 2013 filing season is likely to create problems for IRS, not to mention taxpayers themselves if Congress doesn’t act soon on the many provisions that either have already, or soon will expire.

Congress may or may not extend, retroactive to January 1, 2012 many expired/expiring provisions, which include:

• the increase in the exemption amount for the AMT (the so-called “patch”)
• the deduction for state and local taxes
• the deduction for mortgage insurance premiums
• the provision which allows persons over 70-1/2 to make tax-free withdrawals from their IRAs for use in funding charitable contributions

And these pale in comparison to the impact of pending expiring provisions which include the “Bush tax cuts” of marginal tax rates, reduced tax rates on dividends and long-term capital gains, not to mention the estate and gift tax exemption of $5 million per person and favorable gift tax rates.

The inflexible Treasury deadline for filing the 2011 “Report of Foreign Bank and Financial Accounts” – Form TD F 90-22.1 (FBAR) is rapidly approaching. The FBAR must be received by the Department of the Treasury on or before June 30th of the year immediately following the calendar year being reported. That would be this coming Saturday, which ordinarily means the deadline would be the next business day, but why push it. The penalties for noncompliance are onerous to say the least.

A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation. If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed.

A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Willful violations may also be subject to criminal penalties.

Not something you want to fool around with.

Last week, IRS issued temporary and proposed regulations which provide guidance relative to the election of the “portability” of a deceased spouse’s unused exclusion (DSUE) to the benefit of the surviving spouse.

The DSUE is the lesser of (1) the basic exclusion amount, or (2) the excess of the basic exclusion amount of the last deceased spouse dying after December 31, 2010, of the surviving spouse over the amount on which the tentative tax on the estate of the deceased souse is determined.

An executor electing portability must do so on a timely-filed estate tax return – i.e., a return filed within nine months of the date of death (plus the six month extension period if necessary).   Note that executors of estates not otherwise required to file an estate tax return do not have to report in detail the value of certain property that qualifies for the marital or charitable deduction.  An executor who chooses to make use of this special rule must nonetheless estimate the total value of the gross estate.

An executor must make an affirmative statement on the estate tax return if he chooses to “opt out,” of having the portability rules apply.  If no estate tax return is required for the decedent’s estate under IRC Section 6018(a), not filing a timely return will be considered to be an affirmative statement signifying the decision not to make a portability election.

A recent Tax Court decision (Mohamed, TC Memo 2012-152) supports the draconian results which IRS will impose when taxpayers don’t observe the substantiation rules for charitable contributions of property valued at more than $5,000.

Taxpayers Mr. and Mrs. Mohamed prepared their own returns for 2003 and 2004. Mr. Mohamed is a real estate broker, and a certified real estate appraiser. He included IRS Form 8283 (related to his claimed charitable contributions valued in the millions) though he used his own appraised values (rather than those of an independent appraiser) for the properties, which the IRS, upon audit, didn’t consider sufficient compliance with the rules.

And after the audit commenced, the taxpayers did hire independent appraisers, who eventually came up with values actually greater than amounts claimed by the taxpayers. But IRS stood their ground, denying all deductions!

The Tax Court agreed with IRS’ position that the taxpayers hadn’t properly complied with the substantiation requirements – largely because Mr. Mohamed wasn’t an eligible “qualified appraiser” because he was not only the donor and the taxpayer claiming the deductions, but also the donee in his capacity of trustee of the charitable remainder trust which was the recipient.

Nor would the Court accept the taxpayers’ argument that even though they may not have followed the “letter of the law” in documenting their claimed donations, their deductions should be upheld because they “substantially complied” with the rules!

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.