Tag: Internal Revenue Service

Taxpayer Makes Offer, But IRS Refused

James E. Caan, the movie actor most famous for playing Sonny Corleone in The Godfather, got into IRS trouble regarding the attempted tax-free rollover of his IRA.

Caan had two IRA accounts at UBS, a multinational investment bank and financial services company. One account held cash, mutual funds and exchange-traded funds (ETF) and the other account held a partnership interest in a hedge fund called P&A Multi-Sector Fund, L.P.

Because the hedge fund was a non-publicly traded investment, UBS required Caan to provide UBS with the year-end fair market value to prepare IRS Form 5498. Caan never provided the fair market value as of December 31, 2014. UBS issued a number of notices and warnings to Caan and finally on November 25, 2015, UBS resigned as custodian of the P&A Interest. UBS issued Caan a 2015 Form 1099-R reporting a distribution of $1,910,903, which was the value of the P&A Interest, used as of December 31, 2013. Caan’s 2015 tax return reported the distribution as nontaxable.

In June 2015, Caan’s investment advisor Michael Margiotta resigned from UBS and began working for Merrill Lynch. In October 2015, Margiotta got all UBS IRA assets to transfer to a Merrill Lynch IRA, except for the P&A Interest. The P&A Interest was ineligible to transfer through the Automated Customer Account Transfer Service. In December 2016, Mr. Margiotta directed the P&A Fund to liquidate the P&A Interest and the cash was transferred to Caan’s Merrill Lynch IRA in three separate wires between January 23 and June 21, 2017.

In April 2018, the IRS issued a Notice of Deficiency for the 2015 tax year asserting that distribution of the P&A Interest was taxable. On July 27, 2018, Caan requested a private letter ruling asking the IRS to waive the requirement that a rollover of an IRA distribution be made within 60 days. In September 2018, the IRS declined to issue the ruling.

Caan died July 6, 2022. In the Estate of Caan v. Commissioner, 161 T.C. No. 6 (October 18, 2023), the Tax Court ruled that Caan was not eligible for a tax-free IRA rollover of the P&A Interest for three reasons. First, to be a nontaxable rollover the taxpayer may not change the character of any noncash distributed property, but here, the P&A Interest was changed to cash before being rolled-over. Second, the contribution of the cash occurred long after the 60-day deadline. Third, only one rollover contribution is allowed in any one-year period, but Caan had three contributions. The Court also determined the 2015 fair market value of the P&A Interest.

Finally, the Tax Court determined that it has jurisdiction to review the IRS denial of the 60-day waiver request and that the applicable standard of review is an abuse of discretion. The Court ruled there was no abuse of discretion because Caan changed the character of the rollover property and even if the IRS waived the 60-day requirement, the rollover would still not be tax-free.

The case highlights some of the potential dangers in holding non-traditional, non-publicly traded assets in an IRA.

© 2023 Chuhak & Tecson P.C.
For more news on IRA rollovers, visit the NLR Tax section.

What Taxpayers in the U.S. and Abroad Need to Know about FBAR Compliance

United States taxpayers have an obligation to report their foreign financial accounts (i.e., offshore or foreign bank accounts) to the federal government. While there are thresholds that apply, these thresholds are relatively low, so most offshore account holders will need to file reports on an annual basis. One of these reports is the Report of Foreign Bank and Financial Accounts, more commonly known as an FBAR (Foreign Bank Account Report).

For U.S. taxpayers, FBAR compliance is extremely important. This is true for taxpayers residing both domestically and overseas. The FBAR is required for US citizens because foreign banks don’t have the same reporting obligations as US-based institutions. Noncompliance in reporting foreign bank accounts can lead to civil or criminal penalties; and, in many cases, failure to file an FBAR will lead to an examination of the taxpayer’s other recent tax filings as well.

“The obligation to file an FBAR applies to most U.S. taxpayers with offshore bank accounts. While many taxpayers are unaware of the FBAR filing requirement, this unawareness is not an excuse for noncompliance. Taxpayers with delinquent FBARs can face substantial penalties regardless of why they have failed to file.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

Technically, FBARs are due on Tax Day along with taxpayers’ annual income tax returns. However, all taxpayers receive an automatic extension to October 15—with no need to file a request and no risk of incurring additional penalties.

10 Key Facts about FBAR Compliance for U.S. Taxpayers

As the extended October 15 FBAR deadline is fast approaching, here is an overview of what taxpayers in the U.S. and abroad need to know:

1. The FBAR Filing Requirement Applies to U.S. Taxpayers Who Hold Foreign Financial Accounts

The FBAR filing requirement applies to U.S. taxpayers who hold foreign financial accounts. It also applies to taxpayers who have “signature or other authority” over these foreign accounts. These obligations exist under the federal Bank Secrecy Act (BSA). Taxpayers covered under the BSA must file FBARs with the Financial Crimes Enforcement Network (FinCEN) annually.

While the FBAR filing requirement applies to most types of foreign financial accounts, there are exceptions. For example, FBAR compliance is not required with respect to accounts:

  • Owned by governmental entities
  • Owned by foreign financial institutions
  • Held at U.S. military banking facilities
  • Held in individual retirement accounts (IRAs)
  •  Held in certain other retirement plans

FinCEN has publicly taken the position that accounts solely holding cryptocurrency also do not qualify as foreign financial accounts for purposes of FBAR compliance. However, FinCEN has also stated that it “intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding [FBARs] to include virtual currency as a type of reportable account.” As a result, U.S. taxpayers who hold cryptocurrency overseas should continue to review FinCEN’s regulatory announcements to determine if their offshore cryptocurrency accounts will trigger FBAR compliance obligations in the future.

2. The FBAR Reporting Threshold is $10,000

The requirement to file an FBAR applies only to U.S. taxpayers whose foreign financial accounts exceed $10,000 during the relevant tax year. This is an aggregate threshold, meaning that it applies to all foreign financial accounts jointly, and the obligation to file an FBAR is triggered if the aggregate value of a taxpayer’s foreign financial accounts exceeds the $10,000 threshold at any point and for any length of time.

3. U.S. Taxpayers Must File Their FBARs Online

A person residing in the United States who has a financial interest in or signatory power over a foreign financial account is required to file an FBAR if the total value of the foreign financial accounts at any time during the calendar year exceeds $10,000. While U.S. taxpayers have the option to e-file their annual income tax returns, taxpayers must file their FBARs online. Taxpayers can do so through FinCEN’s website.

4. The IRS Enforces FBAR Compliance

Even though U.S. taxpayers must file their FBARs with FinCEN, the Internal Revenue Service (IRS) is responsible for enforcing FBAR compliance. This means that taxpayers that fail to meet their FBAR filing obligations must be prepared to deal with the IRS when it uncovers their delinquent filings. It also means that delinquent filers must follow the IRS’s procedures for coming into voluntary compliance to avoid unnecessary penalties—as discussed in greater detail below.

5. FBAR Filers May Also Need to File IRS Form 8938

In addition to filing an annual FBAR, U.S. taxpayers who own foreign financial accounts may also need to file IRS Form 8938. The obligation to file this form applies to U.S. taxpayers who own foreign financial assets (not solely foreign financial accounts) that exceed the thresholds established under the Foreign Account Tax Compliance Act (FATCA).

6. There are Special Mechanisms for Filing Delinquent FBARs

When individuals learn that they are at risk of facing an IRS audit or investigation due to failure to file an FBAR, their first instinct is often to file any and all delinquent FBARs right away.

However, this is not the IRS’s preferred approach, and it can expose taxpayers to penalties and interest unnecessarily.

The IRS offers two primary mechanisms for U.S. taxpayers to correct FBAR filing deficiencies—one for civil violations and one for criminal violations. The primary mechanism for correcting civil violations is to make a “streamlined filing,” while taxpayers who are at risk for criminal prosecution must make a “voluntary disclosure” to IRS Criminal Investigation (IRS CI).

As the IRS explains, the option to make a streamlined filing is “available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.” The ability to make this certification of non- willfulness is critical. If a taxpayer falsely certifies to non-willfulness (or if the IRS determines that a taxpayer’s certification is fraudulent), the IRS can reject the taxpayer’s streamlined filing and pursue criminal enforcement action.

For those who have willfully failed to file FBARs, coming into compliance generally involves using IRS CI’s Voluntary Disclosure Practice (VDP). As stated by IRS CI, “If you have willfully failed to comply with tax or tax-related obligations, submitting a voluntary disclosure may be a means to resolve your non-compliance and limit exposure to criminal prosecution.” However, as IRS CI also states, “[a] voluntary disclosure will not automatically guarantee immunity from prosecution.”

With this in mind, when seeking to correct past FBAR filing failures, U.S. taxpayers need to make informed and strategic decisions. To do so, they should rely on the advice of experienced legal counsel. While streamlined filings and voluntary disclosures both provide protection from prosecution, they offer protection under different circumstances, and taxpayers must follow a stringent set of procedures to secure the available protections.

7. Failure to File an FBAR Can Lead to Civil or Criminal Prosecution

One of the key requirements for securing protection under the IRS’s streamlined filing compliance procedures or the VDP is that the taxpayer must not already be the subject of an IRS audit or investigation. When facing audits and investigations related to FBAR noncompliance, taxpayers must assert strategic defenses focused on avoiding civil or criminal prosecution.

Both the BSA and FATCA provide federal prosecutors with the ability to pursue civil or criminal charges. Typically, civil cases focus on unintentional violations, while prosecutors pursue criminal charges in cases involving intentional efforts to conceal foreign financial assets from the U.S. government. However, prosecutors may choose to pursue civil charges for “willful” violations as well; and, in some cases, asserting a strategic defense will involve focusing on keeping a taxpayer’s case civil in nature.

8. The Penalties for FBAR Non-Compliance Can Be Substantial

Why is it important to keep an FBAR non-compliance case civil? The simple answer is that in civil cases prison time isn’t on the table. Under the BSA, U.S. taxpayers charged with intentionally failing to file an FBAR can face a criminal fine of up to $250,000 and up to five years of federal imprisonment.

But, even in civil cases, a finding of FBAR noncompliance can still lead to substantial penalties. For non-willful violations, taxpayers can face fines of up to $10,000 per violation. For willful violations prosecuted civilly, taxpayers can face fines of up to 50% of the undisclosed account value or $100,000, whichever is greater (subject to a maximum penalty of 100% of the account value).

9. U.S. Taxpayers Who Have Questions or Concerns about FBAR Compliance Should Seek Help

Given the substantial risks of FBAR non-compliance, U.S. taxpayers who have questions or concerns about compliance should seek help promptly. They should consult with an experienced attorney, and they should work closely with their attorney to make informed decisions about their next steps.

10. FBAR Filers Must Keep Records On-Hand

Finally, in addition to filing their FBARS with FinCEN online, U.S. taxpayers who are subject to the BSA must also comply with the statute’s recordkeeping requirements. Minimally, taxpayers must retain the following records for each account they disclose on an FBAR:

  • Account number
  • Account type
  • Name on the account
  • Name and address of the foreign bank holding the account
  • Maximum value of the account during the relevant tax year

According to the IRS, “the law doesn’t specify the type of document to keep with this information,” and taxpayers typically “must keep these records for five years from the due date of the FBAR.”

Article By Dr. Nick Oberheiden of Oberheiden P.C.

For more tax law legal news, click here to visit the National Law Review.

Oberheiden P.C. © 2022

IRS Announces 2023 Increases to Estate and Gift Tax Exclusions

The Internal Revenue Service recently announced the 2023 cost of living adjustments for the estate and gift tax exclusion amounts.

Gift Tax Exclusion Amount:

The annual gift tax exclusion is the amount (“Gift Tax Exclusion Amount”) an individual may gift to any number of persons without incurring a gift tax or reporting obligation. The Gift Tax Exclusion Amount will increase from $16,000 to $17,000 in 2023 (a combined $34,000 for married couples). The Gift Tax Exclusion Amount renews annually, so an individual who gifted $16,000 to someone in 2022 may gift $17,000 to that same person in 2023, without any reporting obligation. However, for any gift above the $17,000 in 2023, the individual making the gift must report it to the IRS.

Example A: A single person gives her two children $17,000 each in 2023. Each gift falls within the Gift Tax Exclusion Amount so the gifting individual will not have to pay any gift tax or notify the IRS. A married couple could give $34,000 to each child, with the same effect.

Example B: Compare a single person who wants to give her only child $20,000 in 2023. The person who gave the gift must notify the IRS of the $3,000 gift because it exceeds the $17,000 Gift Tax Exclusion Amount.

Estate Tax Exclusion Amount:

The estate tax exclusion is the amount (“Estate Tax Exclusion Amount”) an individual can transfer estate tax-free upon his or her death. The Estate Tax Exclusion Amount will increase from $12,060,000 to $12,920,000 in 2023 (a combined $25,840,000 for married couples).

Example A: A single person with two children passes away in 2023 owning $12,920,000 in assets. The deceased person’s two children will inherit the full $12,920,000 as no estate tax is owed.

Example B:  A single person with two children passes away in 2023 owning $20,000,000 in assets. The decedent’s estate will owe tax on the assets owned that exceeded the $12,920,000 Estate Tax Exclusion Amount ($20,000,000 – $12,920,000 = $7,080,000). The current estate tax rate is approximately 40% which means the decedent’s estate will owe estate taxes in the amount of $2,832,000 ($7,080,000 x 40%).

© 2022 Miller, Canfield, Paddock and Stone PLC
For more Tax Law News, click here to visit the National Law Review.

IRS and Treasury Department Release Initial Guidance for Labor Requirements under Inflation Reduction Act

On November 30, 2022, the IRS and the Treasury Department published Notice 2022-61 (the Notice) in the Federal Register. The Notice provides guidance regarding the prevailing wage requirements (the Prevailing Wage Requirements) and the apprenticeship requirements (the Apprenticeship Requirements and, together with the Prevailing Wage Requirements, the Labor Requirements), which a taxpayer must satisfy to be eligible for increased amounts of the following clean energy tax credits under the Internal Revenue Code of 1986 (the Code), as amended by the Inflation Reduction Act of 2022 (the “IRA”):

  • the alternative fuel vehicle refueling property credit under Section 30C of the Code (the Vehicle Refueling PC);
  • the production tax credit under section 45 of the Code (the PTC);
  • the energy efficiency home credit under section 45L of the Code;
  • the carbon sequestration tax credit under section 45Q of the Code (the Section 45Q Credit);
  • the nuclear power production tax credit under section 45U of the Code;
  • the hydrogen production tax credit under section 45V of the Code (the Hydrogen PTC);
  • the clean electricity production tax credit under section 45Y of the Code (the Clean Electricity PTC);
  • the clean fuel production tax credit under section 45Z of the Code;
  • the investment tax credit under section 48 of the Code (the ITC);
  • the advanced energy project tax credit under section 48C of the Code; and
  • the clean electricity production tax credit under section 48E of the Code (the Clean Electricity ITC).[1]

We discussed the IRA, including the Labor Requirements, in a previous update.

Start of Sixty-Day Period

The IRA provides an exemption from the Labor Requirements (the Exemption) for projects and facilities otherwise eligible for the Vehicle Refueling PC, the PTC, the Section 45Q Credit, the Hydrogen PTC, the Clean Electricity PTC, the ITC, and the Clean Electricity ITC, in each case, that begin construction before the sixtieth (60th) day after guidance is released with respect to the Labor Requirements.[2] The Notice provides that it serves as the published guidance that begins such sixty (60)-day period for purposes of the Exemption.

The version of the Notice that was published in the Federal Register on November 30, 2022, provides that the sixtieth (60th) day after the date of publication is January 30, 2023. January 30, 2023, however, is the sixty-first (61st) day after November 30, 2023; January 29, 2023 is the sixtieth (60th) day. Currently, it is unclear whether the Notice erroneously designated January 30, 2023 as the sixtieth (60th) day or whether the additional day to begin construction and qualify for the Exemption was intended, possibly because January 29, 2023 falls on a Sunday. In any event, unless and until clarification is provided, we expect conservative taxpayers planning to rely on the Exemption to start construction on creditable projects and facilities before January 29, 2023, rather than before January 30, 2023.[3]

Beginning Construction for Purposes of the Exemption

The Notice describes the requirements for a project or facility to be deemed to begin construction for purposes of the Exemption. As was widely expected, for purposes of the PTC, the ITC, and the Section 45Q Credit, the Notice adopts the requirements for beginning of construction contained in previous IRS notices (the Prior Notices).[4] Under the Prior Notices, construction of a project or facility is deemed to begin when physical work of a significant nature begins (the Physical Work Test) or, under a safe harbor, when five percent or more of the total cost of the project or facility is incurred under the principles of section 461 of the Code (the Five Percent Safe Harbor). In addition, in order for a project or facility to be deemed to begin construction in a particular year, the taxpayer must demonstrate either continuous construction or continuous efforts until the project or facility is completed (the Continuity Requirement). Under a safe harbor contained in the Prior Notices, projects and facilities that are placed in service no more than four calendar years after the calendar year during which construction of the project or facility began generally are deemed to satisfy the continuous construction or continuous efforts requirement (the Continuity Safe Harbor).[5]

In the case of a project or facility otherwise eligible for the newly-created Vehicle Refueling PC, Hydrogen PTC, Clean Electricity PTC, or Clean Electricity ITC, the Notice provides that:

  • “principles similar to those under Notice 2013-29” will apply for purposes of determining whether the project or facility satisfies the Physical Work Test or the Five Percent Safe Harbor, and a taxpayer satisfying either test will be deemed to have begun construction on the project or facility;
  • “principles similar to those under” the Prior Notices will apply for purposes of determining whether the project or facility satisfies the Continuity Requirement; and
  • “principles similar to those provided under section 3 Notice 2016-31” will apply for purposes of determining whether the project or facility satisfies the Continuity Safe Harbor, with the Notice specifying that the safe harbor period is four (4) years.

Taxpayers and commentators have observed that the existing guidance in the Prior Notices is not, in all cases, a good fit for the newly-created clean energy tax credits. Additional guidance will likely be required to ensure that the principles of the Prior Notices may be applied efficiently and seamlessly to the newly-created tax credits.

Prevailing Wage Determinations

The Notice provides that, for purposes of the Prevailing Wage Requirements, prevailing wages will vary by the geographic area of the project or facility, the type of construction to be performed, and the classifications of the labor to be performed with respect to the construction, alteration, or repair work. Taxpayers may rely on wage determinations published by the Secretary of Labor on www.sam.gov to establish the relevant prevailing wages for a project or facility. If, however, the Secretary of Labor has not published a prevailing wage determination for a particular geographic area or type of project or facility on www.sam.gov, or one or more types of labor classifications that will be performed on the project or facility is not listed, the Notice provides that the taxpayer must contact the Department of Labor (the “DOL”) Wage and Hour Division via email requesting a wage determination based on various facts and circumstances, including the location of and the type of construction and labor to be performed on the project or facility in question. After review, the DOL will notify the taxpayer as to the labor classifications and wage rates to be used for the geographic area in which the facility is located and the relevant types of work.

Taxpayers and commentators have observed that the Notice provides no insight as to the DOL’s decision-making process. For instance, the Notice does not describe the criteria that the DOL will use to make a prevailing wage determination; it does not offer any type of appeal process; and, it does not indicate the DOL’s anticipated response time to taxpayers. The lack of guidance on these topics has created significant uncertainty around the Prevailing Wage Requirements, particularly given that published wage determinations are lacking for many geographical areas.

Certain Defined Terms under the Prevailing Wage Requirements

The Notice provides definitions for certain key terms that are relevant to the Prevailing Wage Requirements, including:

  • Employ. A taxpayer, contractor, or subcontractor is considered to “employ” an individual if the individual performs services for the taxpayer, contractor, or subcontractor in exchange for remuneration. Individuals otherwise classified as independent contractors for federal income tax purposes are deemed to be employed for this purpose and therefore their compensation generally would be subject to the Prevailing Wage Requirements.
  • Wages. The term “wages” includes both hourly wages and bona fide fringe benefits.
  • Construction, Alteration, or Repair. The term “construction, alteration, or repair” means all types of work (including altering, remodeling, installing, painting, decorating, and manufacturing) done on a particular project or facility. Based on this definition, it appears that off-site work, including off-site work used to satisfy the Physical Work Test or the Five Percent Safe Harbor, should not constitute “construction, alteration, or repair” and therefore should not be subject to the Prevailing Wage Requirements. It is not clear, however, whether “construction, alteration, or repair” should be read to include routine operation and maintenance (“O&M”) work on a project or facility.

The Good Faith Exception to the Apprenticeship Requirements

The IRA provides an exception to the Apprenticeship Requirements for taxpayers that make good faith attempts to satisfy the Apprenticeship Requirements but fail to do so due to certain circumstances outside of their control (the Good Faith Exception). The Notice provides that, for purposes of the Good Faith Exception, a taxpayer will be considered to have made a good faith effort to request qualified apprentices if the taxpayer (1) requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry and (2) maintains sufficient books and records establishing the taxpayer’s request of qualified apprentices from a registered apprenticeship program and the program’s denial of the request or lack of response to the request, as applicable.

Certain Defined Terms under the Apprenticeship Requirements

The Notice provides definitions for certain key terms that are relevant to the Apprenticeship Requirements, including:

  • Employ. The Notice provides the same definition for “employ” as under the Prevailing Wage Requirements.
  • Journeyworker. The term “journeyworker” means a worker who has attained a level of skill, abilities, and competencies recognized within an industry as having mastered the skills and competencies required for the relevant occupation.
  • Apprentice-to-Journeyworker Ratio. The term “apprentice-to-journeyworker ratio” means a numeric ratio of apprentices to journeyworkers consistent with proper supervision, training, safety, and continuity of employment, and applicable provisions in collective bargaining agreements, except where the ratios are expressly prohibited by the collective bargaining agreements.
  • Construction, Alteration, or Repair. The Notice provides the same definition for “construction, alteration, or repair” as under the Apprenticeship Requirements. This suggests that, like the Prevailing Wage Requirements, off-site work is not subject to the Apprenticeship Requirements. In addition, the same open question regarding O&M work under the Prevailing Wage Requirements applies for purposes of the Apprenticeship Requirements as well.

Record-Keeping Requirements

The Notice requires that taxpayers maintain and preserve sufficient records in accordance with the general recordkeeping requirements under section 6001 of the Code and the accompanying Treasury Regulations to establish that the Prevailing Wage Requirements and Apprenticeship Requirements have been satisfied. This includes books of account or records for work performed by contractors or subcontractors of the taxpayer.

Other Relevant Resources

The DOL has published a series of Frequently Asked Questions with respect to the Labor Requirements on its website. In addition, the DOL has published additional resources with respect to the Apprenticeship Requirements, including Frequently Asked Questions, on its Apprenticeship USA platform. It is generally understood that, in the case of any conflict between the information on these websites and the information in the Notice, the Notice should control.

[1] The Labor Requirements also are applicable to the energy-efficient commercial buildings deduction under section 179D of the Code.

[2] The IRA provides a separate exemption from the Labor Requirements projects or facilities otherwise eligible for the ITC or the PTC with a maximum net output of less than one megawatt.

[3] Interestingly, the DOL online resources described below observe that projects and facilities that begin construction on or after January 29, 2023 are not eligible for the Exemption, which appears to recognize that January 29, 2023, and not January 30, 2023, is the sixtieth (60th) after publication of the Notice.

[4] Notice 2013-29, 2013-20 I.R.B. 1085; Notice 2013-60, 2013-44 I.R.B. 431; Notice 2014-46, 2014-36 I.R.B. 541; Notice 2015-25, 2015-13 I.R.B. 814; Notice 2016-31, 2016-23 I.R.B. 1025; Notice 2017-04, 2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; Notice 2019-43, 2019-31 I.R.B. 487; Notice 2020-41, 2020-25 I.R.B. 954; Notice 2021-5, 2021-3 I.R.B. 479; and Notice 2021-41, 2021-29 I.R.B. 17.

[5] In response to procurement, construction, and similar delays attributable to the COVID-19 pandemic, the length of the safe harbor period was extended beyond four (4) years for projects or facilities for which construction began in 2016, 2017, 2018, 2019, or 2020, which we discussed in a previous update.

Article By Elizabeth L. McGinley, Steven J. Lorch, Don J. Lonczak, and Michael A. Recchia of Bracewell LLP

For more labor and employment legal news, click here to visit the National Law Review.

© 2022 Bracewell LLP

Your Horse May Be Subject to IRS Seizure

The Internal Revenue Service (IRS) has broad powers to seize assets in payment of outstanding taxes including income tax, excise tax, employment tax, and estate and gift tax. Assets the IRS can seize in exercise of its levy power are those that constitute “property or rights to property” of the taxpayer as defined under local law. Equine industry assets that could be subject to seizure include real estate, equipment, and the horses themselves, although horses valued below $10,090 are exempt from levy. For example, in 2012 the IRS seized hundreds of horses to collect a tax debt from a defendant convicted of stealing millions of dollars in city funds. The defendant used the funds to finance the breeding and showing of American quarter horses. The government auctioned off more than 400 of the seized horses to pay the defendant’s outstanding federal tax obligation.

But because animals require food and veterinary care and could die, the IRS has specific procedures relating to the seizure of livestock, such as horses. If the horses are considered “perishable goods,” section 6336 of the Internal Revenue Code (the Code), which provides the statutory requirements for disposing of perishable goods, will apply. Under section 6336, if it is determined that the seized property is liable to perish, the IRS must appraise the value of the property and either return it to the owner or put it up for immediate sale. The Internal Revenue Manual (IRM) provides further guidance on what constitutes perishable property. IRM 5.10.1.7 (12-20-2019) says that the property must be tangible personal property and have a short life expectancy or limited shelf life.

Prior to July 1, 2019, the definition of perishable goods included property that may “become greatly reduced in price or value by keeping, or that such property cannot be kept without great expense.” Horses would seem to fit within either or both of these categories. Now, under the revised definition of perishable goods, a collection officer would have to show that the horse had a short life expectancy.

A revenue officer seeking to seize perishable property must determine that the property cannot be kept and sold at a public sale under normal sale time frames set forth in section 6335 of the Code. Despite the change in the definition of perishable goods in 2019, the IRM suggests that examples of property likely to perish “may be food, flowers, plants or livestock [emphasis added].” Once the revenue officer determines that the property is perishable, he must secure approval of this finding. The determination is subject to high-level IRS review and planning, including an estimate of the expected net sale proceeds to be received from a forced sale. If the revenue officer concludes that the property is not perishable, sale of the seized property must proceed under normal procedures and within the time frames set forth in the Code.

A recent Bloomberg news article reported that the U.S. government had seized a 15-year-old Holsteiner that had been purchased for $750,000. The horse was a champion show jumper. As might be expected, the cost of maintaining the horse was high. IRS agents determined it would cost $45,000-$50,000 a year to feed the horse, not including the medical costs it might incur. The IRS also learned the value of the horse had dropped sharply from its $750,000 purchase price. Thus, in an unusual deal, the government sold the horse to the taxpayer’s daughter (for whom it had been purchased originally) for $25,000.

The considerations, planning, coordination, documentation, and approval of these types of sales may discourage a revenue officer from seizing perishable property like horses where other assets may be levied more easily. Nonetheless, sometimes the IRS will take action to seize a horse perceived to be valuable, like with the Holsteiner, even if it is not deemed perishable under the Code definition.

Article By Barbara T. Kaplan and Scott E. Fink of Greenberg Traurig, LLP

For more tax law legal news, click here to visit the National Law Review.

©2022 Greenberg Traurig, LLP. All rights reserved.

IRS Announces New Director of Whistleblower Office

On May 12, the U.S. Internal Revenue Service (IRS) announced that John W. Hinman will serve as the Director of the IRS Whistleblower Office. Hinman will oversee the agency’s highly successful whistleblower award program. Since 2007, the IRS has awarded whistleblowers over $1 billion based on the collection of over $6 billion in back taxes, interest, penalties, and criminal fines and sanctions.

“We hope that as the director Mr. Hinman will have an open door policy for whistleblowers and their advocates,” said leading whistleblower attorney Stephen M. Kohn of Kohn, Kohn & Colapinto. “We look forward to working with the new director to ensure that the incredibly important tax whistleblower program properly deters fraudsters and incentivizes whistleblowers to step forward. We hope that processes are put into place that speed-up the final determinations in reward cases,” added Kohn, who also serves as the Board of Directors of the National Whistleblower Center.

The IRS Whistleblower Program has been an immense success since it was established in 2006. For example, the program incentivized the whistleblowing of Bradley Birkenfeld, the UBS banker turned whistleblower whose disclosures helped lead to the dismantling of the Swiss banking system as it existed. However, the program has recently been plagued by a number of issues, including massive delays in the issuance of whistleblower awards. According to the IRS Whistleblower Office’s most recent annual report to Congress, the IRS currently takes 10.79 years to process a whistleblower case, leading to a backlog of over 23,000 cases.

Prior to his new appointment, Hinman served as Director of Field Operations for Transfer Pricing Practice in the IRS’s LB&I Division. According to the IRS, in this position, he “oversaw field operations of the Transfer Pricing Practice economists, revenue agents, and tax law specialists who focus on complex transfer pricing issues of multinational business enterprises.” Hinman will take over as Director of the IRS Whistleblower Office from Lee D. Martin, who left the agency on April 9 to serve as the Director of the Directorate of Whistleblower Protection Programs at the Occupational Safety and Health Administration (OSHA).

Geoff Schweller also contributed to this article.

Copyright Kohn, Kohn & Colapinto, LLP 2022. All Rights Reserved.
For more articles about whistleblowers, visit the NLR White Collar Crime & Consumer Rights section.

Cost of Living Adjustments for 2017 from Internal Revenue Service

The Internal Revenue Service has announced the 2017 cost of living adjustments to various limits. The adjusted amounts generally apply for plan years beginning in 2017. Some of the adjusted amounts, however, apply to calendar year 2017.

Employee Benefit Plans
Plan Year 2017 2016
401(k), 403(b), 457 deferral limit $18,000 $18,000
Catch-up contribution limit (age 50 or older by end of 2016) $6,000 $6,000
Annual compensation limit $270,000 $265,000
Annual benefits payable under defined benefit plans $215,000 $210,000
Annual allocations to accounts in defined contribution plans $54,000

(but not more than 100% of compensation)

 $53,000

(but not more than 100% of compensation)
Highly compensated employee Compensation more than $120,000 in 2016 plan year Compensation more than $120,000 in 2015 plan year

 

Health Savings Accounts
Calendar Year 2017 2016
Maximum contribution

  • Family
  • Self
  • $6,750
  • $3,400
  • $6,750
    $3,350
Catch-up contribution (participants who are 55 by end of year)
  • $1,000
  • $1,000
Minimum deductible

  • Family
  • Self
  • $2,600
  • $1,300
  • $2,600
  • $1,300
Maximum out-of-pocket

  • Family
  • Self
  • $13,100
  • $6,550
  • $13,100
    $6,550

 

Social Security
Calendar Year 2017 2016
Taxable wage base $127,200 $118,500
Maximum earnings without loss of benefit  

 

  
  • Under full retirement age
  • $1,410/mo. ($16,920/yr.)
  • $1,310/mo. ($15,720/yr.)
  • Year you reach full retirement age
  • $3,740/mo. up to mo. of full retirement age ($44,880/yr.)
  • $3,490/mo. up to mo. of full retirement age ($41,880/yr.)

 

Social Security Retirement Age
Year of Birth Retirement Age
Prior to 1938 Age 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943 – 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67
ARTICLE BY Jeffrey A. DeVree, Thomas H. Bergh, Larry J. Titley, John D. Arendshorst, Katie K. Wilbur & Kristy L. De Vos of
Varnum LLP

© 2016 Varnum LLP

IRS Tax Treatment of Wellness Program Benefits

Business people doing yoga on floor in office

The IRS Office of Chief Counsel recently released a memorandum providing guidance on the proper tax treatment of workplace wellness programs. Workplace wellness programs cover a range of plans and strategies adopted by employers to counter rising healthcare costs by promoting healthier lifestyles and providing employees with preventive care. These programs take many forms and can encompass everything from providing certain medical care regardless of enrollment in health coverage, to free gym passes for employees, to incentivized participation- based weight loss programs. Due to the wide variation in such plans the proper tax treatment can be complicated. However, the following points from the IRS memo can help business owners operating or considering a wellness program evaluate their tax treatment.

First, the memo confirmed that coverage in employer-provided wellness programs that provide medical care is generally not included in an employee’s gross income under section 106(a), which specifically excludes employer-provided coverage under an accident or health plan from employee gross income. 26 USC § 213(d)(1)(A) defines medical care as amounts paid for “the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,” transportation for such care, qualified long term care services, and insurance (including amounts paid as premiums).

Second, it was made clear that any section 213(d) medical care provided by the program is excluded from the employee’s gross income under section 105(b), which permits an employee to exclude amounts received through employer-provided accident or health insurance if it is paid to reimburse expenses incurred by the employee for medical care for personal injuries and sickness. The memo emphasized that 105(b) only applies to money paid specifically to reimburse the employee for expenses incurred by him for the prescribed medical care. This means that the exclusion in 105(b) does not apply to money that the employee would receive through a wellness program irrespective of any expenses he incurred for medical care. 26 CFR 1.105-2.

Third, any rewards, incentives or other benefits provided by the wellness program that are not medical care as defined by section 213(d) must be included in an employee’s gross income. This means that cash prizes given to employees as incentives to participate in a wellness program are part of the employee’s gross income and may not be excluded by the employer. However, non-money awards or incentives might be excludable if they qualify as de minimis fringe benefits (ones that are so small and infrequent that accounting for them is unreasonable or impracticable). 26 USC § 132(a)(4). The memo gives the example of a t-shirt provided as part of a wellness program as such an excludable fringe benefit, and notes that money is never a de minimis fringe benefit.

Fourth, payment of gym memberships or reimbursement of gym fees is a cash benefit, even when received through the wellness program, and must be included in gross income. This is because cash rewards paid as part of the wellness program do not qualify as reimbursements of medical care and cannot be a fringe benefit.

Fifth, where an employee chooses a salary reduction to pay premiums for healthcare coverage and the employer reimburses the employee for some or all of the premium amount under a wellness program, the reimbursement is gross income.

These points laid out in the IRS memo provide a solid foundation for understanding the tax treatment of workplace wellness programs and should be kept in mind by business owners deciding how to structure new wellness plans for their employees, or ensuring the tax compliance of existing plans.

IRS Introduces New Form 1023-EZ to Streamline Applications for 501(c)(3) Tax-Exempt Status

Drinker Biddle Law Firm

On July 1, 2014, the Internal Revenue Service (IRS) launched a new Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, that is intended to enable small charities to more easily apply for recognition of tax-exempt status under Internal Revenue Code Section 501(c)(3). The IRS has described the new form as a “common sense approach” to easing the filing burdens for small organizations and to shorten the time delays associated with IRS processing. Although not expressly stated, the new form is undoubtedly part of the IRS’s current effort to alleviate the huge backlog of pending applications awaiting IRS review.

What’s the general idea behind the new form?

The concept associated with the Form 1023-EZ is that the existing 26-page Form 1023 is simply unnecessary in the case of most small organizations. As designed, the new form becomes effectively a “registration” for exemption, rather than a comprehensive description of an organization’s activities, operations, governance, finances, etc. The IRS has clarified that the new forms will not undergo substantive review by IRS personnel. Rather, the IRS will defer that review until a later date when organizations are up and running; at that point, the IRS will evaluate whether organizations are functioning as described in their original filings.

When the new form was announced in draft form earlier this year, many industry experts voiced concern about foregoing the important educational and compliance opportunities associated with completing the full Form 1023 in its standard form. Others expressed doubt as to whether the IRS would be able to effectively and consistently perform the type of follow-up reviews asserted as the means for ensuring compliance with exemption standards. Nonetheless, the IRS has forged ahead, presumably under pressure to address its internal processing challenges and perhaps to present some much-needed “taxpayer-friendly” news from the Exempt Organizations Division.

Concurrent with issuing the new form, the IRS released Revenue Procedure 2014-40, which sets forth the procedures for using the new form and IRS’s processing of the same.

Who is eligible to use the new form?

The Revenue Procedure describes the scope of organizations that are eligible to use the form, consisting generally of organizations whose annual gross receipts have not exceeded $50,000 during any of the past three years and whose projected gross receipts for the current year and next two years are below that threshold. In addition, eligible organizations may not have total assets exceeding $250,000. Notably, when the draft Form 1023-EZ was initially announced earlier this year, the thresholds were appreciably higher – annual gross receipts of $200,000 or less and assets of $500,000 or less. In setting the final eligibility requirements, the IRS reduced those thresholds, presumably in response to exempt community (and possibly state charity official) voices expressing concern about this new approach being poorly suited to ferreting out actual or intended noncompliance, as discussed above.

The Revenue Procedure goes on to list other criteria that render an applicant ineligible to use the new form, including foreign organizations, successors to for-profit entities, churches, schools, colleges, universities, hospitals, supporting organizations described in IRC Section 509(a)(3), HMOs, ACOs, and entities maintaining donor-advised funds.

Notwithstanding the foregoing restrictions, the IRS has estimated that as many as 70 percent of organizations applying for 501(c)(3) status will be eligible to use the new form.

What does the new form look like?

Anyone who has tackled the process of preparing a Form 1023 in the past will recall the burden associated with wading through the standard 26-page application, which by necessity has traditionally covered a vast range of organizations (by size, scope and character) falling under the umbrella of 501(c)(3) status. By comparison, the new Form 1023-EZ is only three pages long and calls for:

  • Identifying information;
  • Form of entity under applicable state law, including check-box attestations regarding inclusion of appropriate language in pertinent organizational documents;
  • General information regarding the organization’s activities, using NTEE classification codes, check-box attestations regarding compliance with basic exemption requirements, and yes-or-no answers to high-level questions presumably aimed at fleshing out potentially at-risk conduct;
  • A check-box approach for attesting to public charity status; and
  • A check-box approach for organizations seeking reinstatement after losing their exemption due to failure to file annual information returns for three consecutive years.

A copy of the new form is available here. The accompanying instructions can be found here.

How is the new Form 1023-EZ to be filed?

Form 1023-EZ must be filed electronically, using the www.pay.gov website. A $400 user fee applies. Once filed, the IRS process will consist of determining whether an application is complete, meaning that the applicant has provided a response to each line item in the form. If a form is incomplete, the IRS may request additional information accordingly. Once complete, the IRS will accept the form for processing.

What if we have a pending Form 1023 already in the queue at the IRS?

If an organization has already submitted Form 1023 to the IRS, it may nevertheless submit Form 1023-EZ if its Form 1023 has not yet been assigned for review. In that case, the IRS will treat the Form 1023 as withdrawn and will instead process the organization’s Form 1023-EZ.

Corey Kestenberg contributed to this article.

Article By:

Linda S. Moroney
T.J. Sullivan
Taylor A. Romigh
Of:
Drinker Biddle & Reath LLP