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IRS Periods of Limitation on Refunds, Assessment of Tax, and Collection

Statutes of limitation prescribe a period of limitation for the bringing of certain types of action. There are three such statutes of limitation that come into play when dealing with the Internal Revenue Service. These limitations periods relate to tax refunds, IRS examination and assessment, and IRS collections.

How long do you have to file a claim for refund?

Under IRC 6511(a), a taxpayer has three years from the date of filing a tax return to claim a credit or refund, or two years from the date the tax was paid, whichever is later. If a taxpayer files his/her return or makes payment prior to the date prescribed for doing so, the return or payment is considered filed or paid on that last day for doing so. Further, for claims for refund not filed within the three year period, the amount of the refund is limited to the portion of the tax that was paid within the two years preceding the filing of the claim. IRC 6511(b). There are exceptions to these general rules, however, and you should consult with a tax attorney to see if those exceptions apply in your case.

The IRS estimates that it has $1.4 billion in refunds for taxpayers that did not file an income tax return (Form 1040) for the 2015 tax year. In order to be entitled to their refunds, most taxpayers must file their 2015 return no later than April 15, 2019. If the 2015 tax return is not filed by that date, the tax refund will become property of the U.S. Treasury.

How long does the IRS have to audit your return?

Generally speaking, the IRS has three years from the due date of your tax return or three years from the date it was filed, whichever is later, to audit your return and make an assessment. However, there are exceptions that may apply to extend the audit period:

If there is a substantial omission of gross income, then the IRS has six years to make an assessment. A substantial omission of gross income is one that amounts to more than 25 percent of the amount reported on the tax return.
If the additional tax is related to undisclosed foreign financial assets and the omitted income is more than $5,000, the IRS has six years to make an assessment.
The statute of limitation is open indefinitely if the taxpayer has filed a false or fraudulent tax return.

Keep in mind, the statute of limitation on assessment does not start to run until a tax return has been filed. If a tax return has not been filed, the statute for assessment remains open.

How long can the IRS collect a tax liability?

Generally speaking, the statute of limitation for the IRS to collect on a tax debt, plus penalties and interest, is 10 years from the date of assessment. Note that this is 10 years from the date of the assessment, not 10 years from the due date of the return. In addition, this 10-year period can be suspended under certain circumstances, including:

if the taxpayer has filed for bankruptcy protection, plus an additional six months
if the taxpayer resides outside of the US for at least six months
if the taxpayer files a request for a collection due process hearing
if the taxpayer files a claim for innocent spouse relief
if the taxpayer files for an offer-in compromise (OIC)
while there is a pending installment agreement request

Finally, the IRS can take action to collect beyond the 10-year limitation period by filing suit to reduce the assessments to judgment.

This post was written by Angelique M. Neal of Varnum LLP.

IRS Notice Offers Good News for State Colleges and Universities (at Least for Now)

In January 2019, the Internal Revenue Service (IRS) issued Notice 2019-09, which provides interim guidance for Section 4960 of the Internal Revenue Code of 1986. As a reminder, Section 4960 imposes an excise tax of 21 percent on compensation paid to a covered employee in excess of $1 million and on any excess parachute payments paid to a covered employee. A “covered employee” is one of the organization’s top-five highest-paid individuals for years beginning after December 31, 2016. An organization must determine its covered employees each year, and once an individual becomes a covered employee, that individual will remain a covered employee for all future years.

Of particular interest to state colleges and universities is the answer to Q–5 of the notice. It provides that the Section 4960 excise tax does not apply to a governmental entity (including a state college or university) that is not tax-exempt under Section 501(a) and does not exclude income under Section 115(l). What does this mean? Basically, if an institution does not rely on either of those statutory exemptions from taxation, the institution will not be subject to the excise tax provisions of Section 4960. This exclusion from Section 4960 means the institution could compensate its athletic coaches (or other covered employees) in excess of the $1 million threshold and not be subject to the 21 percent excise tax.

As we discussed previously, some institutions rely on political subdivision status for tax purposes. Importantly, the notice also provides that any institution relying on its political subdivision status to avoid taxation, as opposed to relying on either of the above-mentioned exemptions, will be subject to the Section 4960 excise tax if the institution is “related” to any entity that does rely on either of the exemptions.

Although the IRS’s guidance is helpful in determining Section 4960’s application to state colleges and universities, it appears not to reflect “Congressional intent.” On January 2, 2019, the Committee on Ways and Means of the U.S. House of Representatives released a draft technical corrections bill that seeks to correct “technical and clerical” issues in the Tax Cuts and Jobs Act of 2017. The corrections bill seeks to clarify Section 4960’s application by stating that any college or university that is an agency or instrumentality of any government or any political subdivision, or that is owned or operated by a government or political subdivision, is subject to Section 4960. Given the current state of affairs in Washington, D.C., we are not confident that the corrections bill’s expanded application to state colleges and universities will ever come to fruition.

This post was written by Robert S. Ellerbrock, III and Taylor Bracewell of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

Impact of Government Shutdown on IRS Collections

The government shutdown has impacted many government offices, including the Internal Revenue Service. After the longest government shutdown in history, IRS employees returned to work on January 28, 2019, in most offices across the country. Unfortunately, due to extreme weather conditions in parts of the US, including Michigan, local offices were closed most days during this first week of the IRS reopening. If a taxpayer has outstanding balances with the IRS, the lingering question is what impact did the shutdown have on IRS collections.

While it will take some time for the IRS to resume normal operations, on January 29, 2019 the IRS issued a number of FAQs to assist taxpayers and tax professionals with collection issues that were affected by the shutdown.

Things to Keep in Mind

IRS revenue officers were furloughed during the shutdown. Meaning that they were put on a leave of absence that prohibited them from performing their duties. If you were working with a revenue officer to resolve your balance due account, the officer will be reviewing inventory and should be reaching out to taxpayers within the next week or so. If an appointment was missed, it should be rescheduled. If a payment or information was due during the shutdown, you should have that payment and/or information ready and available when contacted so that you can move your case toward resolution.

The government shutdown did not affect federal tax law as it relates to the filing of returns and the making of payments to the IRS. Thus, penalties for failure to file, failure to pay, federal tax deposit penalties and estimated tax payment penalties may still apply. Further, since compliance is critical for all collection alternatives, including installment agreements, offers-in-compromise, and currently not collectible status, your collection alternative can be subject to default procedures.

The government shutdown did not affect statutory deadlines for filing timely appeals from enforced collection actions, including the time frame within which to request a Collection Due Process Hearing from the issuance of a Final Notice of Intent to Levy or from a Notice of Federal Tax Lien Filing. Thus, you may find yourself in jeopardy of levy action on income and financial assets.

This post was written by Angelique M. Neal of Varnum LLP.

Read more news on the IRS and other Tax issues on the NLR Tax Type of Law Page.

IRS Issues Proposed Regulations for Qualified Opportunity Zone Funds

Treasury issued long-awaited Proposed Regulations and a Revenue Ruling today (October 19, 2018) regarding key issues involved with investing in and forming Qualified Opportunity Zone Funds (“OZ Fund”) and the OZ Fund’s investments in Opportunity Zone Businesses (“OZ Business”). Although the Proposed Regulations do not answer all of our key questions, Treasury did provide generally taxpayer friendly guidance to the issues discussed below. These Regulations are only proposed, and are therefore subject to further revisions based on comments received by Treasury. However, Treasury has provided that taxpayers can rely on many of these proposed rules, provided that the taxpayer applies the rule in its entirety and in a consistent manner.

Treatment of Land. Land is excluded from the requirement that the original use of opportunity zone property commence with the OZ Fund or that the OZ Fund substantially improve the property, alleviating fears that land could only be a “bad” asset. Very favorably, if the OZ Fund purchases an existing building and the underlying land, the OZ Fund is only required to substantially improve (“double the basis”) the building. The cost of the land is disregarded for this purpose.
Treatment of Capital Gains of Partnerships and other Pass-Thru Entities. Partners have 180 days from the end of the partnership’s taxable year to invest in an OZ Fund. Accordingly, capital gains recognized by a partnership early in 2018 (or even very late 2017) may still be eligible for investment in OZ Funds, even if 180 days have passed. A partnership has the option of either investing capital gains in an OZ Fund itself or allocating the gain to its partners, thereby permitting the partners the opportunity to invest their distribute share of the gain in an OZ Fund. If desired, the partner has the option to select the 180-day period starting from the date of the partnership’s sale of the property.
Treatment of Working Capital. The Proposed Regulations provide a working capital safe harbor for investments in OZ businesses that acquire, construct, or rehabilitate tangible business property. An OZ business can hold the working capital for a period of up to 31 months if there is a written plan that identifies the working capital as held for the acquisition, construction, or substantial improvement of tangible property in an opportunity zone and such written plan identifies a schedule of expenditures. This alleviates the concern that cash invested by an OZ Fund in an OZ business would be a “bad asset” for the OZ business. Working capital can be held in cash, cash equivalents, or debt instruments with a term of 18 months or less.
Only 70% of an OZ Business’ Tangible Assets Need to be OZ Property. An OZ Fund that invests directly in assets must have 90 percent of its assets be qualifying OZ Property. Qualifying property includes an investment into an OZ Business. An OZ Business only needs to have “Substantially all” of its tangible assets consist of qualifying OZ Property. The Proposed Regulations define, for this purpose only, “substantially all” as 70 percent of the OZ Business’ tangible assets. This is critical in allowing investors in non-real estate businesses to take advantage of the opportunity zone benefits. The Proposed Regulations provide alternative methods for determining compliance with the “substantially all” test, based either on the values in an applicable financial statement of the OZ business, or, if the business does not have an applicable financial statement, applying the methodology used by its Fund investors (who hold at least 5 percent of the OZ business) for determining their compliance with the 90 percent asset test.
The OZ Fund Can Borrow Money. The Proposed Regulations provide that deemed contributions of money derived from a partner’s share of partnership debt do not create a separate, non-qualifying investment in the OZ Fund. There had been concern that the proportion of the investment relating to money borrowed by the Fund would result in a non-qualifying investment. The Proposed Regulations do indicate that Treasury is considering an anti-abuse rule for investments that may be considered abusive. In addition, the Proposed Regulations imply that partners in OZ Funds do get outside basis for amounts borrowed by the OZ Fund, thereby potentially permitting the investors to take advantage of OZ Fund losses.
“Gains” are Limited to Gains Treated as Capital Gain. Treasury has specifically limited the OZ Fund benefits to gain that “is treated as a capital gain” for Federal income tax purposes. Although this provision could have been clarified better, we think that “treated as a capital gain” is intended to include Section 1231 gains (special rules apply gains from hedging/straddles).
Special Allocations are Permitted. Investors must receive an equity interest in an OZ Fund. For OZ Funds organized as partnerships, the Proposed Regulations specifically permit special allocations. Depending on whether additional limits are placed on special allocations, this may permit a certain amount of “carried interest” to be paired with an equity investment for OZ Fund service providers.
Early Disposition of OZ Fund interest. If an OZ Fund investor sells all of its interest in an OZ Fund before the end of deferral in 2026, the OZ Fund investor can maintain the original gain deferral by reinvesting the proceeds into a new OZ Fund within 180 days. This allows an investor to get out of a bad deal without losing the deferral benefits. Note that the Proposed Regulations specifically deferred until future Regulations issues involved when the OZ fund itself sells OZ Fund property. These issues include what a “reasonable period of time” is for the OZ Fund to reinvest in qualifying assets and what the potential income tax consequences to the Fund and its investors of such a sale of OZ Fund property by the OZ Fund.
Valuation of Assets for Purposes of the 90% Test. For purposes of determining whether a Fund holds 90 percent of its assets in qualified opportunity zone property, the Proposed Regulations require the Fund to use asset values reported on an applicable financial statement of the Fund. Applicable financial statements are prepared in accordance with U.S. GAAP and either: (1) filed with a federal agency besides the IRS (which includes the SEC); or (2) are audited and used to make decisions by the taxpayer. If a Fund does not have an applicable financial statement, the Fund must use its cost in acquiring the assets for the calculation. Treasury is seeking comments as to whether adjusted basis or another valuation method is a better measurement than cost.
90% Asset Test Testing Dates. The Proposed Regulations provide for the possibility that an OZ Fund formed late in the taxable year could have to fully comply with the asset tests by the end of that year. The law requires that an Oz Fund invest 90 percent of its assets in qualified opportunity zone business property, measured as the average of two Testing Dates. The first testing date is the last day of the 6th month following formation, and the second Testing Date is the last day of the taxable year. For example, if a calendar-year fund selects April as its first month as an OZ Fund, then its first testing dates are the end of September and the end of December. However, if a Fund is formed in the last half of the taxable year, then it will have only one testing date, which may be soon after formation. This creates the possibility that an OZ Fund formed in December only has until the end of December to fully comply. We are hoping that the final Regulations will provide more time for the OZ Fund to initially comply.
Limited Liability Companies (LLCs) Can Be OZ Funds. So long as the LLC is taxed as a partnership or a corporation, an LLC can be an OZ Fund.

The Proposed Regulations are generally favorable to investors, and so we expect that Opportunity Zone investments will really take off. Based on the 70 percent “substantially all” rule for OZ Businesses, we expect that Opportunity Zone investments will not be limited to real estate investors. In addition, we think Opportunity Zone investments are more likely to be structured with OZ Funds owning OZ businesses rather than the OZ Fund owning assets directly, because of the working capital safe harbor, the substantially all test, and the testing dates for OZ Funds.

This post was written by Korb Maxwell Jeffrey A. Goldman and S. Patrick O’Bryan of Polsinelli PC.

Overview of the Tax Cuts and Jobs Act

On December 27th, 2017 President Trump signed into law what is the most consequential tax reform in thirty years, by signing the Tax Cuts and Jobs Act (the “Act”). Most business changes took effect after December 31, 2017, some changes were effective immediately and others, like expensing of capital expenditures, had specialized retroactive effective dates. The following is an overview of the Act:

Individual Income and Transfer Taxes

For individuals, the new law reduces tax brackets, curbs the effect of the Alternative Minimum Tax, alters some tax credits, simplifies many returns by increasing the standard deduction, and increases the amount of property that can pass free of the estate, gift and generation skipping transfer tax. One area untouched by the new law is the adjustment to tax basis for capital assets upon death, allowing for “step-up” or “step-down” depending upon the cost basis vs. the value at date of death. Please see the following summary explanations:

Rates. Beginning in 2018, the highest individual income tax rate was reduced from 39.6% to 37%. Other rate adjustments are illustrated in this table:

Rate	Unmarried Individuals, Taxable Income Over	Married Individuals Filing Jointly, Taxable Income Over	Heads of Households, Taxable Income Over
10%	$0	$0	$0
12%	$9,525	$19,050	$13,600
22%	$38,700	$77,400	$51,800
24%	$82,500	$165,000	$82,500
32%	$157,500	$315,000	$157,500
35%	$200,000	$400,000	$200,000
37%	$500,000	$600,000	$500,000

Standard Deduction and Personal Exemptions. Beginning in 2018, the doubling of the standard deduction and curtailment of state and local taxes and mortgage interest deductions have the effect of simplifying many returns by eliminating the complexity associated with the preparation of Schedule A. Elimination of personal exemptions and limits on deductions for those who itemize will dramatically change the benefit to individuals of the deductions for mortgage interest, state income and property taxes and charitable contributions.
Credits. The new legislation creates a patch-work quilt of how many tax credits are treated. For example, the American Opportunities Tax Credit for education remained untouched, but other credits were modified.
Alternative Minimum Tax. Fewer individual taxpayers will be subject to this tax as a result of the increase of the exemption to just over $109,000 (indexed).
Estate, Gift and Generation Skipping Tax Exemptions. Beginning in 2018 and through 2025, these exemptions have been doubled to $11.2 million per person, and indexed to inflation.

Basis Adjustment at Death. This adjustment, often mistakenly referred to as “step-up basis”, remains unchanged. Property owned at death will be afforded a new basis equal to the value of such property at date of death. Adjusting the basis at date of death may mean the basis is increased, but can also result in a decrease in basis as happened for some deaths occurring during our last recession.

Provisions of Tax Cuts and Jobs Act Affecting Businesses

In addition to the changes impacting individual taxpayers, the Act included a substantial revision to the tax laws governing businesses. These changes begin with a reduction of the corporate tax rate to a flat 21% (down from a maximum of 35%) and permit unlimited expensing of capital expenditures, repeal the corporate Alternative Minimum Tax and change the deductions available to businesses. A substantial difference between the individual and business tax law changes is that some of the business changes are permanent (i.e. corporate tax rate), while others are temporary (immediate expense treatment for capital expenditures).

Tax Rate. The new law creates a flat 21% income tax rate for C Corporations to replace the marginal rate bracket system which had imposed tax rates between 15% and 35%.
Corporate Dividends. The dividends received deduction which allowed a C corporation to deduct 70 or 80 percent of dividends received from another C corporation has been reduced to a deduction of either 50 or 65 percent (the higher rate is available where the stock of the dividend paying corporation is owned at least 20% by the corporation receiving the dividend).
AMT. The corporate Alternative Minimum Tax has been repealed for tax years beginning after December 31, 2017.
Section 179 Expensing Business Capital Assets. Internal Revenue Code Section 179 allows a business to deduct the cost of certain “qualifying property” in the year of purchase in lieu of depreciating the expense over time. The Act allows a year of purchase deduction of up to an inflation indexed $1 million (increased from $500,000) with a total capital investment limitation of $2.5 million. While these changes provide businesses with increased deductions, they have little meaning given the new 100% year of purchase deduction for capital expenditures available under amended Code Section 168(k).
Section 168(k) Accelerated Depreciation. The Act allows a 100% deduction of the basis of “qualifying property” acquired and placed in service after September 27, 2017 and before January 1, 2023. Qualifying property generally includes depreciable tangible property with a cost recovery period of 20 years or less, computer software not acquired upon purchase of a business and nonresidential leasehold improvements.

The bonus depreciation deduction is then reduced to 80% in 2023 and drops by an additional 20% after each subsequent two year period until disappearing entirely for periods beginning January 1, 2027. The allowed deduction percentages are applied on a slightly extended time frame for certain property with longer production periods. In addition to increasing the available deduction, the Act also allows used property to qualify for the deduction. After a phase-out beginning in 2023, this provision lapses after December 31, 2026.
Business Interest. Net business interest will not be deductible in excess of 30% of the “adjusted taxable income” of a business. For 2018 through 2021, adjusted taxable income will be determined without consideration of depreciation, amortization, depletion or the 20% qualified business income deductions. In 2022 and thereafter, the 30% limit will be applied to taxable income after deductions for depreciation and amortization. An exemption from the 30% limitation exists for taxpayers with annual gross receipts (determined by reference to the three preceding years) of $25 million or less. Disallowed business interest can be carried forward indefinitely. If a taxpayer’s full 30% adjusted taxable income limit is not met with respect to one business, the unused limitation amount can be applied to another business of the taxpayer which otherwise would have excess interest that is nondeductible after application of the 30% adjusted taxable income limit to that business.
Net Operating Losses. Generally, the two year NOL carryback has been repealed. While the losses can be carried forward indefinitely, the deduction will generally be limited to 80% of taxable income.
Other.
- Domestic Production Activities Deduction has been repealed.
- Like Kind Exchanges are limited to real property.
- Fringe Benefits. Entertainment expenses and transportation fringe benefits (including parking) are no longer deductible. The 50% meals expense deduction is expanded to include on premises cafeterias of employers.
- Penalties and Fines. Certain specifically identified restitution payments may be deductible.
- Sexual Harassment Payments. No deduction will be allowed for amounts paid for or in connection with settlement of sexual harassment or abuse claims if such payments are subject to nondisclosure agreements.

Provisions of Tax Cuts and Jobs Act Affecting Pass-Through Entities and Sole Proprietorships

Before the Act passed, the pass-through of business income from a partnership or S corporation meant a lower overall tax rate would be paid on company income (compared to C corporations) as such income was not subject to double taxation and a lower overall income tax rate generally applied. However, with the reduction of the corporate income tax rate to a flat 21%, and individual rates that reach up to 37%, pass-through entities and sole proprietorships could face a higher tax burden than their C corporation counterparts.

To address the disparate effects of the flat 21% C corporation income tax rate, the Act allows owners of pass-through entities and sole proprietorships a deduction equal to 20% of their “qualified business income” subject to certain limitations. The calculation of what constitutes the qualified business income deduction amount is complex as are the applicable limitations. For example, upon sale of substantially all of the assets of a business, it is likely the 20% qualified business deduction will be significantly limited. Going forward, an analysis of the comparative tax savings as a C corporation or a pass-through entity will be appropriate for all businesses looking to maximize tax savings.

One further complication of the 20% qualified business deduction is that it is currently not applicable in calculating the state tax liability of most businesses. For example, the 20% deduction is currently inapplicable to the state income tax liabilities of Wisconsin businesses.

Family Owned Businesses

With the higher estate and gift tax exemptions and retention of the basis adjustment at death provisions of the tax law, the transfer of family owned businesses will need to re-focus, as follows:

Entrepreneurial families may prioritize family governance issues over estate tax issues for many businesses in transition. The changes to the valuation rules from August of 2016 have now been neutralized, and higher exemptions allow more effective estate tax freeze types of transactions.
Changes to how pass-through entities are taxed will re-position family businesses to place more emphasis on leasing entities, intellectual property licensing and real estate rental arrangements.
With corporate income tax rates reduced, the resurgence of a “management company” or “family office” may take center stage to house key employees who desire different classes of equity and debt ownership, unique compensation arrangements and generous employee benefits. However, IRS rules regarding how management agreements are negotiated and operate will need to be addressed before venturing into this area.

Buying and Selling Businesses

For those clients engaged in buying or selling businesses, the most powerful aspects of the bill have to do with changes to how capital expenditures are taxed, the loss of state and local tax deductions (individuals) and the lower corporate tax rates. We are making the following general observations on the effect of the new law on business sale transactions:

Even after the so-called “double tax” stigma associated with the regular corporate tax regime, when all aspects are considered, pass through entities are less attractive for many buyers and sellers. For example, a C corporation can deduct state and local taxes, while shareholders of S corporations, non-corporate owners of LLCs and individual sole proprietors cannot. This negative consequence is amplified by the fact that the 20% qualified business income deduction will not be available for state income tax purposes in most states, including Wisconsin.
Because many business valuations are based on income streams that do not consider taxes, those valuations do not reflect the effect of the now lower income tax rates for those businesses. However, lower tax rates should result in more cash flow to the buyers of those businesses, thereby increasing their internal rate of return on invested capital. The result will be that higher valuations will apply in the future because of the tax benefits of the new tax law.
Under the new law, buyers of tangible business assets, certain software and leasehold improvements can deduct their cost, in full, in the year of purchase. This means capital intensive businesses will enjoy significantly reduced effective tax rates and, therefore, higher values than previously applicable. More important, however, is that the buyer of a business can fully deduct the cost of all tangible assets in the year of purchase. The result will be that buyers of substantially all of the assets of a business will likely have little taxable income (and therefore less tax liability) for several years after the purchase of the business.
As a result of the 100% deduction of tangible assets purchased on the sale of a business and the lack of any changes to the capital gain and qualifying dividend tax rates, we believe that asset purchases will become more beneficial than stock purchases to buyers who seek to minimize transactional taxes, while stock sales will be more beneficial to sellers.
The new tax law limits the deductibility of business interest to 30% of adjusted taxable income. This means buyers using debt financing may not be able to fully deduct interest on the debt used to purchase a business. As a rule of thumb, the interest limitation will become applicable whenever the debt to cash flow ratio is higher than the ratio of the effective interest rate to 30%. Note that starting in 2022, the 30% limitation is applied to adjusted taxable income after deducting depreciation and amortization. Therefore, if you are going to buy a business, the time to do it is before the 30% limit becomes more stringent in 2022.

Compensation and Benefits Changes in the Tax Cuts and Jobs Act

Section 162(m). Internal Revenue Code Section 162(m) imposes a $1 million cap on the deduction for compensation paid to certain officers of public companies. Before the Act, there was an exception to the deduction limit for compensation that was “performance-based” if certain conditions were met. The Act eliminates the exception for performance-based compensation. Performance-based compensation paid pursuant to a written binding contract in effect on November 2, 2017 will continue to be outside of the $1 million deductibility cap, if the contract is not materially modified on or after that date.
Excise Tax on Excess Compensation for Executives of Tax-Exempt Organizations. The Act imposes a new excise tax on “excessive” compensation paid to certain employees of certain tax-exempt organizations. The excise tax is 21% of the sum of:
- any excess parachute payment paid to a covered employee; and
- remuneration (other than an excess parachute payment) in excess of $1 million paid to a covered employee for a taxable year (remuneration is treated as paid when there is no longer a substantial risk of forfeiture).

Covered employees are the five highest compensated employees for the year, and any other person who was a covered employee for any prior tax year beginning after 2016. Certain payments to licensed nurses, doctors and veterinarians are excluded.

A “parachute payment” is a payment that is contingent on the employee’s separation from service, the present value of which is at least three times the “base amount” (i.e., average annual compensation includible in the employee’s gross income for five years ending before the employee’s separation from employment). If a parachute payment is paid, the excise tax applies to the amount of the payment that exceeds the base amount.

Extended Rollover Deadline for “Qualified Plan Loan Offsets.” Prior to the Act, a participant in a qualified retirement plan who wanted to roll over a “plan loan offset” (an offset to his or her plan account due to a default on a loan taken from the account) to another plan or IRA had only 60 days to do so. The Act gives a longer period of time to roll over a “qualified plan loan offset,” which is a plan loan offset that occurs solely because of the termination of the plan or failure to make payments due to severance from employment. Participants will have until the due date of the tax return for the year in which the qualified plan loan offset occurs.
Reduction of Individual Mandate Penalty. The Affordable Care Act generally imposes a penalty (the “individual shared responsibility payment”) on all individuals who can afford health insurance but who do not have coverage. The Act reduces the amount of the individual shared responsibility payment to $0, effective January 1, 2019.
Section 83(i) – Taxation of Qualified Stock. The Act adds a new Section 83(i) to allow certain employees of non-publicly traded companies to defer the tax that would otherwise apply with respect to “qualified stock.” Qualified stock is stock issued in connection with the exercise of an option or in settlement of a Restricted Stock Unit (“RSU”), if the options or RSUs were granted during a calendar year in which the corporation was an “eligible corporation.” An eligible corporation is a non-publicly traded company with a written plan under which at least 80% of its U.S. employees are granted options or RSUs with the same rights and privileges. Certain employees, including any current or former CEO or CFO, and anyone who is (or was in the prior 10 years) a 1% owner or one of the four highest paid officers of the company, are excluded from the ability to elect a Section 83(i) deferral.

This post was written by Robert A. Mathers, Robert B. Teuber of von Briesen & Roper, s.c.

It’s Time for Tax-Exempt Entities to Restate Their 403(b) Plans

Under a new IRS program, tax-exempt entities who sponsor 403(b) retirement plans can adopt pre-approved documents that include determination letters that confirm the tax-qualified status of their plans. Plan sponsors need to adopt pre-approved plans before March 31, 2020, in order to qualify for the program.

Under a 403(b) plan, eligible employees can elect to make pre-tax contributions towards the cost of their own retirement benefits. The accumulated savings is most often used to purchase an annuity when the participant retires. Until now, a plan sponsor could not receive a determination from the IRS that its 403(b) plan satisfied all applicable tax requirements.

However, on January 13, 2017, the IRS announced the opening of a “remedial amendment period” under which plan sponsors can adopt pre-approved plan documents retroactively to the later of January 1, 2010, or the date that the plan was first adopted. Various entities such as insurance companies, financial service providers and companies that sell standardized retirement plan documents have already received approval of their forms of 403(b) plan documents. Most plan documents can be customized to reflect the terms of an existing 403(b) plan. The IRS will not review or provide determination letters for individually designed 403(b) plan documents.

By adopting a pre-approved document that has a determination letter, a 403(b) plan sponsor can protect against an assertion (for example, in the course of an IRS audit) that its plan document is not tax-qualified and that the plan sponsor and participants are not eligible to receive the tax benefits afforded under the Code. Therefore, it is highly recommended that sponsors of 403(b) plans adopt an IRS-approved plan document before March 31, 2020. Although the deadline for adoption is almost three years away, plan sponsors should begin discussions with their legal counsel regarding the conversion of their current documents to a pre-approved plan.

*Katharine’s license application in the State of Wisconsin is pending.

This post was written by Katharine G. Shaw and Bruce B. Deadman of Davis & Kuelthau, s.c.

For more legal analysis, go to The National Law Review

Hurricane Harvey Client Alert: Tax Filing and Payment Deadlines Extended for Victims

Victims of Hurricane Harvey in some designated areas now have until January 31, 2018 to file certain federal tax returns and make payments.

On August 28, 2017, the US Internal Revenue Service (IRS) announced in a news release that it would postpone various individual and business federal tax return filing and payment deadlines that were to occur on or after August 23, 2017 until January 31, 2018 for certain persons affected by Hurricane Harvey. Specifically, this extension applies to taxpayers located in areas designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance.^[1] Any taxpayer with an IRS address of record located within these designated areas will automatically receive the extension. Taxpayers in areas that are later added as qualifying for individual assistance by FEMA will automatically receive the extension as well. Additionally, taxpayers who are outside of the designated area but have necessary records needed to meet deadlines located in a designated area may qualify for the extension, but must contact the IRS to determine eligibility for relief.

As noted above, the specific relief announced by the IRS extends federal tax return filing and payment deadlines for individuals and businesses with original deadlines that would have occurred starting on August 23, 2017 to January 31, 2018. In other words, individuals and businesses will have until January 31, 2018 to file federal tax returns and make federal tax payments that have either an original or extended due date during this period. For individuals, the extension covers 2016 income tax returns that received “automatic” filing extensions until October 16, 2017; however, tax payments associated with these returns are not eligible for the extension because the payments were originally due on April 18, 2017. Additionally, the extension applies to the September 15, 2017 and January 16, 2018 deadlines for making quarterly estimated tax payments. For businesses, the extension covers the October 31, 2017 deadline for quarterly payroll and excise tax returns. Notably, the IRS announcement also states that the IRS will waive late-deposit penalties for federal payroll and excise tax deposits that are normally due on or after August 23, 2017 and prior to September 7, 2017, as long as the deposits are made by September 7, 2017.

_{[1] When the IRS news release was originally issued on August 28, there were 18 counties in areas designated by FEMA as qualifying for individual assistance. By August 30 (and as of August 31), FEMA had designated another 11 counties, bringing the total counties eligible for this relief up to 29.}

For more legal analysis go to The National Law Review

IRS Dirty Dozen for 2017, Tax Shelters, and Captive Insurance: Attacking Past Problems Using a Voluntary Disclosure Strategy

House, Money, The IRS summarized its annual “Dirty Dozen” List of Tax Scams for 2017 in February. Practitioners and taxpayers should pay particular attention. The IRS is broadcasting their playbook. This list includes two principal types of tax matters: (1) scams that are intended to victimize taxpayers directly, and (2) scams in which taxpayers voluntarily – or unwittingly – agree to participate. The first set of scams includes identity theft, phone scams, and things like solicitations from fake charities. These items often result from direct attacks on taxpayers. The second set of scams typically involves a taxpayer’s voluntary participation, but there often are misunderstandings and reliance questions that can be very important to the resolution of the issue. Whatever the source, each problem creates a set of issues that taxpayers, their CPA advisors, and experienced tax counsel should evaluate very carefully.

Abusive Tax Shelters – Including Captive Insurance – Make the Dirty Dozen List…Again

Key among the scams that make the “Dirty Dozen” list is the abusive tax shelter. Abusive tax shelters have been a perennial target of the IRS for decades, and the IRS annually reaffirms its commitment to uncovering and stopping complex tax avoidance/evasion schemes.

One abusive tax shelter that repeatedly makes itself a topic for the IRS is the captive insurance structure. Captive insurance is a perfect example of a structure that can be fully defensible, fully abusive, or somewhere between the two. In many cases, captive insurance can be a legitimate business activity; however, often an ill-advised taxpayer will implement a plan that is attacked by the IRS as “abusive” because it was not properly designed.

Captive insurance generally is a legitimate, legislatively-approved tax structure. However, the IRS often determines that an abuse has occurred with respect to certain small or “micro” captive insurance companies. Federal tax law allows businesses to create “captive” insurance companies to protect against certain risks. The insured business claims tax deductions for premiums paid for the insurance policies, and the premiums are paid to a captive insurance company that normally is owned by the same owners of the insured business. The captive insurance company, in turn, can elect to be taxed only on the investment income from the pool of premiums, excluding taxable income of up to $1.2 million per year in net premiums.

In the type of structure that is likely to be classified as abusive, promoters persuade closely-held entities to create captive insurance companies. The promoters assist with creating and “selling” “insurance” binders and policies from the captive to the business to cover either ordinary business risks, or implausible risks, and charging high premiums while maintaining market rate commercial coverage with traditional insurers.

The promoted structure often results in premiums equal to the $1.2 million annually to take full advantage of the tax code provision. Underwriting and actuarial substantiation for the insurance premiums often do not exist, and the promoters manage the captive insurance companies in exchange for significant fees.

There are myriad variations of legitimate captive structures, and taxpayers should carefully evaluate any existing or proposed captive insurance program. Like other structures that are designated to be “abusive,” a captive insurance structure can result in a protracted and costly audit – and potentially a criminal investigation – if it is discovered by the IRS.

A clear warning sign to practitioners is when their client is advised to exclude you from analysis or review of the strategy or product.

Taking a Proactive Approach to Tax Issues: Considering a Voluntary Disclosure Strategy

It is the specter of exposure, including both investigations and costly audits, that reminds us of the alternative to simply sitting back and waiting for the government to audit: a voluntary disclosure. A voluntary disclosure may be used to address past reporting, non-reporting, or mis-reporting, and may be a viable strategy for many types of missteps – both the types specifically referenced by the IRS in its “Dirty Dozen,” and other items that create similar audit risks. The voluntary disclosure alternative is not an unconditional surrender, and it is not without risk, but a well thought-out, designed, and implemented voluntary disclosure can minimize costs, penalties, and the time involved in addressing problems. A thoughtfully designed voluntary disclosure strategy can offer material benefits, but it should never be implemented until after there has been comprehensive analysis conducted in an attorney-client privileged environment.

ARTICLE BY Eric M. Nemeth & Wayne D. Roberts of Varnum LLP

New Partnership Tax Audit Rules: Ready or Not, Here They Come!

On November 2, 2015, the Bipartisan Budget Act of 2015, (the Act), H.R. 1314, 114 Congress/Public Law No. 114-74, made significant changes to the rules governing US federal income tax audits of partnerships (New Audit Rules). The New Audit Rules are codified at Internal Revenue Code Sections 6221 through 6241. On August 4, 2016, the IRS released temporary and proposed regulations relating to certain aspects of the New Audit Rules. And, on December 6, 2016, technical corrections to the New Audit Rules (Technical Corrections) were introduced in both the House of Representatives, H.R. 6439, and in the Senate, S. 3506.

The New Audit Rules take effect for taxable years beginning on or after January 1, 2018, and are intended to facilitate Internal Revenue Service (IRS) audits and adjustments with respect to certain types of partnerships. In the wake of the New Audit Rules, all partnerships should evaluate whether their agreements (existing as well as those in the negotiation stages) address the new rules.

The New Audit Rules apply broadly to partnerships with 11 or more partners at any one time during the tax year. A partnership is also subject to the rules if any of its partners is a partnership, a limited liability company which is treated as a partnership or as a disregarded entity (it is expected that additional guidance will be released in the future to allow a “look through” to the regarded member of a disregarded entity, but that guidance has not yet been issued), a trust, a nominee, a nonresident alien or an S corporation. Partnerships with 100 or fewer partners, however, may be eligible to elect out of the New Audit Rules. Recommended Action: The partnership agreement should address the election out and if the election out is intended to be perpetual, the agreement might include a covenant to remain under 100 partners.

The New Audit Rules provide for tax adjustments at the partnership rather than the partner level. Technical Corrections would focus the adjustments to amounts or items relevant in determining the income tax liability of any person (e.g., partnership items, affected items, and computational items). Mechanically, the partnership may cause its current partners to bear the tax liability or may “push out” the tax liability to the persons who were partners during the reviewed year. The election must be made no later than 45 days after receipt of a notice of final partnership adjustment. If the push out election is made, the interest rate on imputed underpayments is determined at the partner level and is 2 percent higher than the rate for imputed underpayments which are not pushed out. Technical Corrections would provide guidance with respect to the push out election for tiered partnerships. Recommended Action: Consider whether the push out election should be mandatory, and if so, amend the partnership agreement accordingly.

The TMP is no more! Under the New Audit Rules, the partnership designates a “partnership representative.” The partnership representative has the sole authority to act on behalf of the partnership in an audit. The partnership and the partners are bound by the actions taken by the partnership representative on behalf of the partnership. The partnership representative does not need to be a partner in the partnership. Recommended Action: Consider amending the partnership agreement to define the standards for selecting, terminating and replacing the partnership representative. Consider amending the partnership agreement to require the partnership representative to consult with the partners with respect to key issues, such as extending the statute of limitations, settling an audit, filing a petition for readjustment and making the push out election.

A partnership may elect to apply the New Audit Rules to any of its partnership returns filed for a partnership taxable year beginning after November 2, 2015, and before January 1, 2018. Temporary Regulations § 301.9901-22T provide time, form and manner for a partnership to elect into the New Audit Rules. Recommended Action: Consider whether there is any benefit to electing to apply the New Audit Rules before the mandatory application date. The benefits of electing early application of the New Audit Rules may include a more efficient audit process and the ability to cause current year partners to bear the tax liability following an adjustment. If your partnership is tiered with partnerships as partners, electing into an entity level tax may obviate the need to issue amended Forms K-1 and having to amend multiple federal and state returns due to an IRS adjustment.

ARTICLE BY Kevin Spencer, Madeline M. Chiampou & Kristen E. Hazel of McDermott Will & Emery

Trump Administration: Tools to Modify Current Tax Guidance

The election of Donald J. Trump as the 45th President of the United States, along with the Republican control of the majority of both the House of Representatives and the Senate, has raised the possibility that current Treasury regulations may be modified or nullified. The Trump Administration can consider one of two methods to do so:

The IRS/Treasury may issue new, and simultaneously withdraw existing, Treasury regulations, or
Congress can act under the Congressional Review Act (“CRA”) to strike down Treasury regulations.

The easier of the two methods for the IRS/Treasury to modify or nullify current Treasury regulations would be to withdraw existing temporary and/or final Treasury regulations and issue new proposed Treasury regulations. In doing so, the IRS/Treasury, similar to other administrative agencies, must satisfy the current interpretations of the Administrative Procedure Act. Typically, this requires a notice and comment period for new proposed Treasury regulations prior to finalization of the Treasury regulations. In addition, the IRS/Treasury generally needs to acknowledge that it is changing its policy when withdrawing the Treasury regulations and state the reasons for the change, though it does not need to prove that its new policy is better than its old policy.

As an alternative, Congress can act under the CRA to strike down Treasury regulations. Under the CRA, Congress may act by passing a joint resolution to disapprove Treasury regulations, although the President can veto the disapproval. From the time a CRA report is submitted, Congress has 60 legislative days to review the rule (60 session days in the case of the Senate and 60 legislative days in the case of the House of Representatives). If an agency rule is promulgated when there are 60 or fewer legislative days remaining in the legislative session, the rule is also subject to review under the CRA in the following Congressional session. Congress may be hesitant to use this approach because once a Treasury regulation has been disapproved, the agency generally cannot issue a rule that is substantially the same. Because of these procedural difficulties, it should not be surprising that the CRA has rarely been used to override administrative regulations.

We can expect the Trump Administration to consider the modification of numerous Treasury regulations, including the recently issued debt-equity regulations under I.R.C. section 385 (view our previous memo here) and the anti-inversion regulations under I.R.C. section 7874 (view our previous memo here), and we would generally expect that it would issue new, and withdraw existing, Treasury regulations to achieve its objectives.

ARTICLE BY Mark P. Howe, Richard M. Nugent, Gary T. Silverstein, Linda Z. Swartz & Edward S. Wei of Cadwalader, Wickersham & Taft LLP