New Form 8960: Not as Simple as It May Seem

We have known about the new “net investment income tax” for a while now, anticipating its impact for the 2013 tax year.  IRS has just released a draft of the form on which this new tax will be calculated (Form 8960) and related draft instructions.  While the one page form appears innocuous enough, folks had better start familiarizing themselves with the nineteen pages of instructions (which include, by the way, five complex worksheets) and the concepts associated with just what is and what is not gross investment income, not to mention just what are the appropriate deductions in measuring the net taxable amount.  On the surface, many are probably thinking it’s just a simple matter of multiplying the taxpayer’s interest, dividends and gains by 3.8% and adding the result to the tax liability.

As usual, nothing which stems from the Internal Revenue Code and the related IRS regulations is ever that simple.

Check IRS You Tube Videos as Tax Season Commencement Nears

IRS has announced they will start accepting 2013 returns on January 31, and is doing what they can to help folks get in line for their refunds as early as possible.  Among others, consider these specific videos which taxpayers may access ( to help them get their returns in order:

  • Assistance in finding free help from certified volunteers conversant with the electronic tax return filing process
  • Information regarding the requirements for filing tax returns, including income limits and age, and reasons why taxpayers may want to file even if they don’t have to
  • Tips on how to protect personal information and avoid becoming a tax scam victim
  • Information regarding which financial and tax files to keep and for how long

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.