Don't be surprised by Affordable Care Act Penalties

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August 2014 Client Newsletter

It was day two of the IRS Nationwide Tax Forum last month. I was attending the session dealing with the new regulations concerning matching health care premium credits to clients tax returns to health insurance premiums paid during 2014.  Coincidentally two appellate courts the same day issued conflicting decisions concerning the constitutionality of health care premium credits.   Big front page stuff that day.  Do you think there was even a mention about the decisions by the IRS counsel making the presentation?  Nope.  No time for questions either.  By the way the IRS just released a statement that taxpayers should ignore the decisions and continue as if there was not a decision.   

At the IRS exempt organization presentation, the subject of intense pressure from Congress because of IRS’ failure to approve certain “tea party” applications for tax exempt status because they were “tea party” organizations, the IRS representative wasn’t prepared to answer any, even the easiest procedural questions, after her presentation.  Of the four questions time allowed, her response was always the same, “I am not prepared to answer any questions at this time, you can call our customer service for more information.”  After the fourth in a row ‘I am not prepared to answer your questions’ response, the audience laughed very loudly and quickly dispersed. I just shook my head and the fellow tax geek next to me said, “You gotta be kidding.”  Why ask the audience for questions if you not prepared to answer any of them. You really can’t make this stuff up.

Of the last ten or so IRS Nationwide Tax Forums I have attended, last month’s was not the greatest.  In fact I would rate it rather poorly.  The quality of the speakers has declined rapidly the last couple of years.  There is nothing more thrilling than listening to the speaker read everything off the presentation screens, offering no real insight into the subject, just reading the powerpoint presentation.  A session I attended concerning passive income limitations, not exactly the most exciting subject granted, was so poorly presented that the guy in the row in front of me fell asleep within the first ten minutes and was snoring rather loudly.  Nobody seemed to notice, maybe they were sleeping as well.      

Remember last month I predicted that the center of discussion would be the IRS email scandal. Well I was wrong. It became very apparent, very quickly, that I was in the no criticism of the IRS zone this year.  Not even a whimper about the challenges that IRS is facing with the demands of the health care legislation enforcement coming online this year and even more budget cutbacks.  This is a distinct change from the previous years when IRS speakers were more than willing to share the problems the agency was facing, offering tax practitioners tips about how to overcome the problems and asking for our cooperation and patience.

Without becoming Mr. Negative here, there is always something that you pick up which is why I will still be going back to learn what the latest emphasis from mother IRS is going to be.  You really want me to.

Here is some points covered in the conference that I found interesting.

• By statute, that means the law is very specific, if you owe $5,000 or less to the IRS you can automatically establish a payment agreement that will pay off the liability in 72 months or less.  The thresholds for the establishment of online, that means virtually automatic, have been increased in some instances to $50,000.  
• Failure to pay payroll tax withholding continues to be a focus of the collection division, but even in cases where you many owe up to $25,000 in trust fund taxes you can also set up a two year payment agreement online.  Not paying the payroll tax trust funds are considered “most egregious” of all penalties, thus the most attention from the collection division.
• The reality of the IRS today, less funding, less people, and more stuff to do.  The answer is more online collection opportunities.
• On your 2014 return if you received some sort of health care insurance assistance you will have to reconcile that assistance on your return. Obamacare has completely changed the tax return you will be filing this year.  Several new forms will be required to file your return this year including form 1095A issued by the health insurance marketplace and form 8962 Premium Tax Credit.  Both forms are about to finalized this month.  IRS is still working on it.  Even if you have no income tax liability this year and traditionally have not been required to file a tax return, you will this year because of form 8962.  This 8962 form will be required whether you are filing 1040EZ, short form 1040A, or long form 1040 if you received assistance/health insurance premium credit this year.  Divorce and lack of marriage has complicated the filing of form 8962 and who is entitled to take the credit.
• The popularity of the S Corporation or Small Business Corporations continues to grow.  This year more than 70% of the 4.1 million tax returns filed in the United States will be S Corporation returns.  68% of those 4.1 million tax returns had problems.  And that problem was little or no compensation paid to officers.
• The amount of compensation paid to stockholders/employees/officers of S Corporations continue to be the focus of IRS enforcement.  The lack of compliance by many S Corporation officers to take what is called a “reasonable compensation” has generated yet another IRS form, 1125E.  On form 1125E we are required to report the names, social security, address, percentage of ownership and amount of compensation your corporation paid to its officers/shareholders.  
• How do you know if the IRS is getting serious about S Corporation officer reasonable salary compliance?  They are now penalizing tax preparers for their lack of “education” to their clients about the reasonable compensation requirements. Late this month we will be sending all S Corporation clients a very important letter about the importance of reasonable employee compensation to officers. By the way there has been 25 cases filed in Tax Court since 2008 concerning the reasonable compensation issue and the IRS has won every single one of them.
• The IRS has backed off the home office deduction in the last couple of years, even issuing a safe harbor per diem to help us.  They are now recommending that we issue a 1099 form from the corporation to the shareholder for rent expense paid by the corporation.
• The IRS has focused in the last year on advertising expense audits.  Apparently there has been a tendency of some taxpayers to throw everything but the kitchen sink in the advertising expense category.  Also don’t forget if you give an employee more than $25.00 as a gift, you have to include it on their W-2 forms.  
• There are more than 50 different tax provisions that have expired this year.  The prediction is another last minute fix by Congress in November or December causing yet another delayed tax season. Some things never change I guess.

More to come about the forum next month, including a real good idea called My IRA and the crazy, boy is this going to be trouble, way the Obamacare employer mandate is going to be enforced by IRS and why it just may be Mission Impossible.

New regulations issued in July make it easier to deduct S corporation losses

An issue concerning the deductibility of  suspended S Corporation losses just got a little clearer.



From Forbes.com
 
So essentially, you took 3,500 words to explain that if 1) I can’t generate debt basis in an S corporation merely be guaranteeing debt of the S corporation, and 2) if I have a related party that is loaning money to my loss S corporation, the best way to fix the problem and give myself debt basis in the S corporation is to have the loaning related party distribute the note receivable to me? That is some quality, succinct writing.



Read more at forbes.com