IRS Issues Regulations on Tangible Property Repairs

The Internal Revenue Service has released a long-awaited set of temporary and proposed tangible property repair regulations that could have a significant impact on a wide array of industries.

Utilities, telecommunications companies, manufacturers, retailers, real estate companies and other types of businesses could be affected. The temporary and proposed tangible property regulations under Section 263(a) of the Tax Code were issued in temporary form, so affected taxpayers are required to comply with them.

Many parts of the regulations impose a Section 481(a) adjustment. In addition to clarifying and expanding the current standards under 263(a) for repairs and improvements, the temporary regulations cover a broad range of other tangible property acquisition issues, including a definition of materials and supplies, and a de minimis capitalization threshold, according to an analysis by Ernst & Young. The temporary regulations also provide guidance under Section 168 and amend the general asset account regulations.

An important part of the regulations addresses whether repairs to tangible property or capital are alternatively currently deductible. Other aspects of the regulations address different issues such as how the retirement of components of tangible property are to be taken into account, such as buildings, manufacturing equipment and other equipment used in a business.

The regulations have been in the works for at least seven years. The IRS issued a notice in 2004 indicating that it planned to issue guidance on the matter after a number of cases had gone to court. In 2006, the IRS issued the first set of proposed regulations addressing the treatment of tangible property, and in 2008 the Service re-proposed the regulations.

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IRS Released Guidance on Foreign Financial Asset Reporting

IR-2011-117, Dec. 14, 2011

The Internal Revenue released a new information reporting form that taxpayers will use starting this coming tax filing season to report specified foreign financial assets for tax year 2011.

Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.

The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.

Form 8938 is not required of individuals who do not have an income tax return filing requirement.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts). 

Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification.  A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. Special statute of limitation rules apply to Form 8938, which are also explained in the instructions.

Form 8938, the form’s instructions, regulations implementing this new foreign asset reporting, and other information to help taxpayers determine if they are required to file Form 8938 can be found on the FATCA page of irs.gov.

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IRS Stuck with $153.3M in Undelivered Tax Refunds

The Internal Revenue Service said that it has $153.3 million in undelivered tax refund checks waiting to be sent to 99,123 taxpayers across the country.

In what has turned into an annual ritual for the service, the IRS said it has a fortune waiting in its coffers that could not be delivered to taxpayers because of mailing address errors. Taxpayers can still claim their refunds, though, and can probably use a little help from their accountants. The average size of an undelivered refund check this year is $1,547, which makes a nice stocking stuffer for the holidays.

Taxpayers who believe their refund check may have been inadvertently returned to the IRS as undelivered should use the “Where’s My Refund?” tool on IRS.gov.  The tool will provide the status of their refund and, in some cases, instructions on how to resolve the delivery problems with the IRS and the local post office.

Taxpayers checking on the status of their still-pending refunds over the phone will receive instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-(800) 829-1954.

The IRS also strongly encourages taxpayers to file their tax returns electronically, because e-file is supposed to eliminate the risk of lost paper returns. The agency has also begun requiring most professional tax preparers to file electronically.

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Plan Now to Get Full Benefit of Saver’s Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement

Issue Number:    IR-2011-121

Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2011 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2011 tax return. People have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2012 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

  • Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;
  • Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and
  • Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax-year 2009, the most recent year for which complete figures are available, saver’s credits totaling just over $1 billion were claimed on just over 6.25 million individual income tax returns. Saver’s credits claimed on these returns averaged $202 for joint filers, $159 for heads of household and $121 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

  • Eligible taxpayers must be at least 18 years of age.
  • Anyone claimed as a dependent on someone else’s return cannot take the credit.
  • A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
  • Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return. Form 8880 and its instructions have details on making this computation.
  • Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on IRS.gov.

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IRS Updates Tax Guide for Next Tax Season

The Internal Revenue Service has published a revised tax guide to help taxpayers get the most out of various tax breaks.

Publication 17, “Your Federal Income Tax,” includes details on taking advantage of a wide array of tax benefits, such as the American Opportunity Credit for parents and college students, and the Child Tax Credit and the expanded Earned Income Tax Credit for low- and moderate-income workers. The 303-page downloadable guide offers more than 5,000 interactive links to help taxpayers get answers to their questions.

Publication 17 has been published annually by the IRS since the 1940s and has been available on the IRS’s Web site since 1996. As in prior years, the publication is packed with basic tax-filing information and tips on which income to report and how to report it, as well as how to calculate capital gains and losses, claim dependents, choose the standard deduction versus itemized deductions, and use IRAs to save for retirement.

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IRS Offers Year-End Tax-Saving Tips

The Internal Revenue Service is offering some tips to help taxpayers lower their 2011 taxes before the calendar page changes to 2012.

1.      Make Charitable Contributions – If you itemize deductions, your donations must be made to qualified charities no later than Dec. 31 to be deductible for 2011. You must have a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations.

2.      Install Energy-Efficient Home Improvements – You still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits. Installing energy efficient improvements such as insulation, new windows and water heaters to your main home can provide up to $500 in tax savings.

3.      Consider a Portfolio Adjustment – Check your investments for gains and losses and consider sales by Dec. 31. You may normally deduct capital losses up to the amount of capital gains, plus $3,000 from other income.

4.      Contribute the Maximum to Retirement Accounts – Elective deferrals you make to employer-sponsored 401(k) plans or similar workplace retirement programs for 2011 must be made by Dec. 31.

5.      Make a Qualified Charitable Distribution – If you are age 70½ or over, the qualified charitable distribution (QCD) allows you to make a distribution paid directly from your individual retirement account to a qualified charity, and exclude the amount from gross income. The maximum annual exclusion for QCDs is $100,000.

6.      Don’t Overlook the Small Business Health Care Tax Credit – If you are a small employer who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35 percent of the premiums paid.

And here is one final tip to remember: you should always save receipts and records related to your taxes. Good recordkeeping is a must because you need records to prepare your tax return, and it will help you to file quickly and accurately next year.

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Small Business Owners Struggling with Finances

 

A new survey finds that 77 percent of business owners say they started their companies to provide for their families, yet less than half of them feel confident with their current financial situation.

More than a quarter (28 percent) of the over 1,600 business owners in the U.S. surveyed by Massachusetts Mutual Life Insurance Company for its study, Business Owner Perspectives: 2011 Insights in an Uncertain Economy, said that it is all they can do to keep up with everyday business expenses, let alone think too much about their future.

The study examined business owners’ thoughts about both their personal and business finances. MassMutual also surveyed multicultural and women business owners.

Almost 40 percent of business owners who participated in the study said they plan to retire at age 66 or older, but only a third have formal retirement income strategies in place mapping out how to manage their income during retirement. Less than half of the survey respondents were confident they were doing a good job of preparing financially for their retirement.

Lacking a plan, especially in a family-run business, can cause stress for family members and even cost employees their jobs. For instance, 38 percent of those surveyed said they would leave the business to a child, yet a child may be unwilling or unable to properly manage the business, forcing a sale at an unfavorable time or even forcing the business to close.

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IRS End to Tax Form Mailings Burdened Millions of Taxpayers

The Internal Revenue Service saved about $14.19 million by not mailing out tax form packages this year, but the elimination of the mailings increased the burden on approximately 6 million taxpayers who needed to obtain the forms themselves, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, found that the IRS’s estimate that it had saved about $8.25 million as of July 27 by not mailing out the form packages was incorrect. TIGTA determined that the IRS overestimated its postage and printing savings by $2.08 million. On the other hand, the IRS did not include $8.02 million in savings realized by processing more tax returns electronically. In addition, the data the IRS used to identify taxpayers who would have received a tax year 2010 tax package and notify them they would not be receiving one were inaccurate.

 

Eliminating individual tax package mailings increased the burden for a number of taxpayers, including those who complained they could not locate the forms they needed or did not know which forms to use.

Taxpayers who did not receive Tax Year 2010 tax packages reported difficulties in obtaining forms, schedules and instructions. In addition to making it more difficult for taxpayers to voluntary comply with tax laws and file their tax returns, the IRS estimated it took the average taxpayer 15 minutes to obtain the forms they needed to file a tax return if they did not receive them in the mail. That translated into approximately 1.5 million additional hours in taxpayer burden for the nearly 6 million taxpayers who received a Notice 1400 and still elected to file a paper tax return without the assistance of tax return preparation software or a paid tax return preparer.

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IRS Overhauls Employee Plan Determination Letters

The Internal Revenue Service has made several important changes to its determination letter program for employee retirement plans.

In Announcement 2011-82, the IRS said that the changes, which will take effect in 2012, would eliminate features of the determination letter program that are of limited utility to benefit plan sponsors in comparison with the burdens they impose. The changes also are expected to improve the IRS’s efficiency by reducing the time it takes to process determination letter applications. Under these modified procedures, many employers will no longer need to apply for determination letters.

The changes to the determination letter filing procedures eliminate elective demonstrations regarding coverage and nondiscrimination requirements and provide that only employers that have made limited modifications to a pre-approved volume submitter plan may file Form 5307, “Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans.” 

The changes to the determination letter filing procedures eliminate elective demonstrations regarding coverage and nondiscrimination requirements and provide that only employers that have made limited modifications to a pre-approved volume submitter plan may file Form 5307, “Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans.” 

In conjunction with that last change, the IRS said it expects to revise the language of opinion and advisory letters to clarify the circumstances in which these letters are equivalent to a determination letter.

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IRS Extends Tax-Exempt Filing Deadline to March 30

The Internal Revenue Service has given tax-exempt organizations with January and February filing due dates a temporary reprieve until March 30, 2012 to file their annual returns.

The IRS said it is granting the extension because the portion of the e-file system that processes electronically filed returns of tax-exempt organizations will be off-line in January and February. However, the agency said the rest of the e-file system would continue to operate normally. As usual, it is urging all individuals and businesses to use electronic filing rather than paper.

The extension generally applies to tax-exempt organizations whose normal filing deadline is either Jan. 17 or Feb. 15, 2012. Ordinarily, those deadlines would apply to organizations with a fiscal year that ended on Aug. 31 or Sept. 30, 2011, respectively. The extension also applies to organizations that have already obtained an initial three-month filing extension and now have an extended filing deadline that falls on either Jan. 17 or Feb. 15, 2012. The majority of tax-exempt organizations will be unaffected by the extension because they operate on a calendar-year basis and have a May 15 filing deadline.

The extension applies to affected organizations that file Forms 990, 990-EZ, 990-PF, or 1120-POL. However, the IRS said that Form 990-N filers would not be affected. No form needs to be filed to get the March 30 extension.

In order to avoid receiving a late filing penalty notice, the IRS a reasonable cause statement should be attached to the tax return. If organizations receive late-filing penalty notices, they should contact the IRS to abate the penalties. The IRS is encouraging these organizations to consider either e-filing early—before the end of December—or wait until March to file electronically.

Further details are available in Notice 2012-4, which was posted Friday on IRS.gov

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