IRS Comes to Its Senses on Mexico Land Trusts

Recall that whether an organization is an “entity,” separate from its owners for Federal tax purposes doesn’t depend on whether the organization is recognized as an entity under local law.

The term “trust” refers to an arrangement under which trustees take title to property for the purpose of protecting or conserving it for the benefit of the trust beneficiaries.  For quite some time, the Mexican Federal Constitution has prohibited non-Mexican persons from directly holding title to residential real estate in areas of Mexico located within 100 kilometers of its inland borders, or 50 kilometers of its coastline, though they may hold residential real property (often just a personal residence and not even rental or business property) in a “Mexico Land Trust,” also referred to as a “fideicomiso,” with a Mexican bank after obtaining the requisite civil permits.

The question has long been pondered whether such arrangements, for U.S. purposes, mandated the filing of Forms 3520/3520-A (Annual Return to Report Transactions With Foreign Trusts/Annual Information Return of Foreign Trust With U.S. Owner).

Finally, IRS propounds (in Rev Rule 2013-14) that in general these Mexico Land Trusts are not trusts under the definitions in the IRS regulations, and the individual U.S. person owner is treated as such for U.S. tax purposes.

Whistleblowers Sequestered!

The IRS has generally referred to persons who submit information (regarding malingering taxpayers) under IRC Section 7623 as “informants,” more colloquially as “whistleblowers,” subject to operations of the “Whistleblower Office,” which administers the rules regarding how much of a reward to which a whistleblower may be entitled.

So, along come the “sequester” rules, pursuant to which Congress mandated that various government expenditures will have to be reduced.  So, guess what:  whistleblowers, too, will have to grin and bear sequester until at least September 30, 2013 (unless Congress acts sooner to change the rule), which means that whistleblower payments, just like other government expenditures, are subject to a hair cut – of 8.7% in this instance!

No Payment Means No Deduction

A recent Tax Court decision (Hargreaves) states the obvious, but is a good reminder for all.

The Court ruled that a married couple could not deduct mortgage interest that was added to the principal of their negative amortization loan, because they were cash basis taxpayers and, quite obviously, didn’t actually “pay” the amount in question.

Under the cash receipts and disbursements method of accounting, amounts representing allowable deductions generally must be taken into account for the tax year in which paid.

The delivery of a promissory note to satisfy an interest obligation, without an accompanying discharge of the note, is a mere promise to pay and not actually a payment in cash or its equivalent.

The good news in this case is that, contrary to what the IRS asserted, no 20% accuracy-related penalty was appropriate, according to the Court, which found that the taxpayer made a reasonable attempt to comply with the law and acted in good faith.

Internet Sales Tax Reform

As it looks more and more like Congress will enact some sort of Internet sales tax mandate (thereby forcing Internet business to become sales tax collectors for all states), the arguments advanced by Americans for Tax Reform seem logical, and should not be dismissed:

  • Slippery slope – Opens the door for further government intervention into the Internet and for states to reach across their borders for other taxes.
  • Too confusing – Small businesses would be forced to accommodate over 9,000 highly variable state and local tax codes and be required to settle disputes with out-of-state revenue boards, potentially in out-of-state courts.
  • Discourages tax competition – Rather than competing to lower taxes and attract businesses, states will compete to raise taxes on residents of other states.
  • Expands state tax authority – State governments will be able to tax across their borders despite clear legal and judicial precedent arguing otherwise.

May 15 Looms for Exempt Org Filers

Calendar year exempt organizations (generally Form 990-series filers) must file their 2012 returns (or extension requests) by May 15 – and, importantly, organizations will see their federal tax exemptions automatically revoked if they have not filed their annual information returns for three consecutive years.

Small exempt orgs (average annual receipts of $50,000 or less) may file an electronic notice called a Form 990-N (e-postcard) which asks merely a few basic questions.  Organizations  whose average annual receipts exceed $50,000 must file Form 990 or Form 990-EZ (Form 990-PF in the case of private foundations).

Check out IRS Form 8868 if your organization needs a filing extension by May 15.

IRS Sequester Timing

Acting IRS Commissioner Steven Miller recently informed agency employees that official “furlough” notices are forthcoming.  Five dates from May through August have been announced, with the possibility of two more days in August or September.  Agency operations will be entirely shut down on these dates, which are:

  • May 24
  • June 14
  • July 5
  • July 22
  • August 30

The White House Office of Management and Budget has said that the following broad areas of IRS discretionary activity are subject to a 5% “across the board” reduction in spending through September 30:

  • Enforcement ($267 million)
  • Operations Support ($199 million)
  • Taxpayer Service ($114 million)
  • Business Systems Modernization ($17 million)

IRS Allows Penalty Relief Because of Late Tax Season Start

IRS has announced late-payment penalty relief to individuals and businesses which requested a tax return filing extension because of the need to attach certain forms to their returns, which forms weren’t actually published by the government until as late as March of this year, resulting from the late Congressional action on the “fiscal cliff” arguments.

The relief applies to the late-payment penalty (0.5% per month) charged on tax payments made after the regular filing deadline.

Taxpayers using forms claiming such tax benefits as depreciation deductions and a variety of business credits qualify for this relief. A complete list of eligible forms may be found in Notice 2013-24.

Taxpayers qualify for this relief if they filed a timely extension, estimating the tax they thought they would owe, and paying the tax by the extension date, following up with actual return filing by the extended due date.

IRS Hip to Social Media

As April 15 nears, and many taxpayers scramble for answers from the IRS in connection with filing their returns, more opportunities for contact with Uncle Sam exist that in the past, to include:

  • IRS2Go – a free mobile app through which you can find out about your refund status, and other tax news updates.  This is available for the iPhone, iTouch or Android mobile devices.
  • YouTube – IRS offers video tax tips on a variety of subjects.
  • Twitter – Tweets from @IRSnews provide tax-related announcements and daily tax tips.
  • Podcasts – IRS has short audio recordings that offer one tax-related topic per podcast, available on iTunes or through the IRS Multimedia Center (at www.irs.gov).
  • Tumblr – A microblogging platform where users can access IRS tax tips, videos, and podcasts.  Tumblr can be accessed from your browser, smartphone, tablet or desktop.

IRS Tough on Identity Theft

IRS announced, last week, a nationwide expansion of its program designed to help law enforcement obtain tax return data vital to their local efforts in investigating and prosecuting cases of identity theft.

Federal law imposes restrictions on sharing of taxpayer information, including information that can be shared with state and local law enforcement. IRS has a program, though, which allows taxpayers the option to permit information to be shared with state and local law enforcement specifically to assist law enforcement officials with their efforts in pursuing identity thieves.

In January of this year, IRS conducted a very successful identity theft enforcement “sweep.” This nationwide effort against identity theft suspects led to 734 enforcement actions, including 298 indictments, complaints and arrests. During fiscal year 2012, IRS efforts led to 2,400 other enforcement actions against identity thieves.

IRS Offers Penalty Relief Because of Late Start to Filing Season

Because of Congressional delays, the particulars regarding some of the 2012 tax matters with which we are now all dealing weren’t known until early January of this year. As such, some IRS forms couldn’t be finalized and processed until later in the game than usual. IRS, therefore, recognizes that the delayed issuance and processing of some forms may have impacted the ability of some taxpayers to timely estimate and pay their 2012 tax liability when requesting a filing extension.

So, taxpayers who can demonstrate “reasonable cause” and lack of willful neglect will not be snagged for the late filing penalty if their extension payment comes up short because of the unavailability of a whole raft of IRS forms, including, among a long list of others:

  • Form 3800 – General Business Credit
  • Form 5695 – Residential Energy Credits
  • Form 8582 – Passive Activity Loss Limitations

Check out IRS Notice 2013-24.