IRS Releases Stats

Those of you who are curious about how individuals and businesses are doing financially, according to the IRS, might find it interesting to view the recently-released summer 2013 issue of the Statistics of Income Bulletin.  IRS produces this bulletin on a quarterly basis – articles included within provide recent data available from various tax and information returns filed by U.S. taxpayers.  This most recent bulletin describes, among other things:

  • Average individual W-2 earnings rose slightly from $40,532 in 2008 to $40,892 in 2010.  And something like 65 million taxpayers with W-2 income participated in an employer-sponsored retirement savings plan in 2010, making $209.2 billion in direct contributions for the year.
  • Approximately 23.4 million individual income tax returns reported nonfarm sole proprietorship activity for tax year 2011.  Profits rose to $282.6 billion for the year, a 5.6% increase from 2010.

Payment of Tax, or a Mere Deposit?

When it comes time to send the IRS some dough, folks need to carefully consider their situation and circumstances, relative to whether what they send is actually a payment of tax, or a mere “deposit.”

When IRS receives the money, it has to decide to classify the receipt as one or the other.  If a remittance is determined to be a “deposit,” it is treated as a cash bond, which IRS merely holds, and a taxpayer may seek a refund of the deposit at any time..  But if a remittance is deemed a payment, the taxpayer may only recover the money by timely filing a claim for refund.

In determining whether a remittance is a deposit or a tax payment, courts apply a facts and circumstances test, which particularly includes the taxpayer’s intent in remitting the money.

Check out the recent decision in Leone Syring v. U.S. for how this works, and what happens when the taxpayer doesn’t dot the I’s and cross the T’s.

IRS ‘Obamacare’ Website

Almost everything you wanted to know about the “Affordable Care Act” can be found at a new IRS website on the matter:

Here can be found tax benefits and responsibilities of individuals, employers, and others.  And not only current tax implications are discussed, but also those which will not hit until 2014 and later.

IRS has also issued Publication 5093: Health Care Law Online Resources, for your edification.

Another S-Corp Shareholder Loses on the ‘Salary Versus Distribution’ Question

Pigs get fat, and hogs get slaughtered – an age old maxim proven, once again, in the recent Tax Court Decision in the Glass Blocks Unlimited case.

Seems the corporation made a bunch of payments to its President and sole shareholder, treating none of those payments as salaries or wages, filing no Forms 941 and no Forms W-2 for the years 2007 or 2008, notwithstanding the facts that the shareholder was the corporation’s only officer, its sole full time worker, who performed substantially all of the work necessary to operate the business, including processing orders, collecting payments, arranging shipment of goods, managing inventory, and handling customer relations.  According to the Court, “His services generated all of petitioner’s income.”

In concluding that payments to the shareholder were more correctly “wages,” the Court also didn’t buy the arguments advanced that certain of the corporate distributions represented repayment of loans from the shareholder because, among other things, no promissory notes had been prepared and interest on the “loans” was not required to be paid.

IRS Gets Tough on Blown 60-Day IRA Rollover

In  some instances, IRS has shown mercy to taxpayers who failed to complete an IRA rollover within the requisite 60 day timeframe.

IRS generally considers various factors in determining whether to waive the 60 day rollover requirement, including time elapsed since the distribution, inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, and, significantly, errors committed by a financial institution involved.

In PLR 201328036, however, IRS didn’t buy the assertion of financial institution error in failing to follow verbal instructions issued by the taxpayer.  The moral of the story – in IRA rollover matters and otherwise – taxpayers should provide written instructions to the financial institutions with which they are dealing.

First Time Offender — Penalty May Be Abated

It’s a little known fact that some IRS penalties can be automatically abated for first time offenders.  And IRS has recently updated its policy in this area, after an April, 2013 report from the Treasury Inspector General for Tax Administration (TIGTA), which found that the policy had not been consistently administered, and that few taxpayers qualifying for relief actually request it.

The updated policy requires that a qualifying taxpayer must have filed all currently required returns and paid or arranged to pay any tax due.

Relief is not available for information reporting penalties.  Practitioners can request first time abatement by calling the IRS Practitioner Priority Service (PPS) line at 866-860-4259.

IRS Errs on Interest Calculations

If you received one of those annoying “CP2000” letters from IRS recently, be on notice that the interest they may have charged you on that notice was incorrectly calculated – the amount was too low!

A CP2000 is a standard form letter on which IRS asserts difference(s) between amounts reported by a taxpayer on his return, and amount reported by banks, employers and other payors.  If IRS thinks you owe, they simultaneously bill you for the related interest.  But on notices sent during the last two weeks, IRS’ interest calculations were wrong – and be assured, you will receive another notice with the correct interest amount, says IRS.

Corporate Tax Rate — 35%?

The politicians are often worked up about the high corporate tax rate in the U.S. – 35% is the number you always hear.

But a recent Government Accountability Office (GAO) report points out that the “effective” tax rate paid by corporations can and often does differ from the statutory marginal rates.  GAO notes that the profitable larger U.S. corporations paid federal income taxes for 2010 at an effective rate of 12.6% of the worldwide income they reported on their financial statements.  This is slightly lower than the 13.1% rate based on current federal tax expenses they reported in those financial statements, lower still than the 21% effective rate based on actual taxes and taxable income, and far below the top statutory rate of 35%.  And including foreign, state and local corporate income taxes, these corporations paid income taxes for 2010 at an effective rate of 16.9% of their reported worldwide income.

Taxpayer Beats IRS But Gets No Costs Reimbursed

Code section 7430 generally allows taxpayers who prevail against the IRS in court to be awarded reasonable litigation and administrative costs. But in the Thousand Oaks Residential Care Home I, Inc., et al case, the Tax Court denied any recovery to the taxpayer.

IRS conceded that the taxpayer substantially prevailed with respect to the most significant issues in the case, but nonetheless the IRS was off the hook for cost reimbursement because IRS’ positions were substantially justified. And the Court agreed.

So, even though the taxpayers won the case, the costs of doing so were held to be “on them,” because the IRS did not take an unreasonable position in the matter.

Exactly What is a ‘Partnership’?

Generally speaking, an unincorporated joint venture or other contractual or co-ownership arrangement under which several participants conduct a business or investment activity and split the profits is treated as a partnership for federal tax purposes.

Consider the following eight factors which the courts have looked to relative to the question as to whether a “partnership” literally exists:

  • Agreement of the parties and their conduct in executing its terms
  • Contributions by the parties
  • Control over income and capital and right to take withdrawals
  • Whether parties were co-proprietors with mutual obligations to share losses
  • Whether a venture has been conducted in the joint names of the parties
  • Whether the parties filed partnership returns or otherwise represented to IRS or others that the parties were joint venturers
  • Whether separate books were maintained for the venture
  • Whether the parties exercised mutual control over and assumed mutual responsibilities for the venture

No single factor is conclusive in and of itself, but if more than half the factors indicate partnership status, it may generally be more difficult to defend the proposition that the activity in question is not a partnership for federal tax purposes.