IRS Reconsiders Rules on Use of Smart Cards for Transit

The Internal Revenue Service is asking for public comments on whether it needs to change its guidance on the use of smart cards, debit cards, credit cards and other electronic media to provide pretax transportation fringe benefits.

 

Notice 2012-38 solicits public comments on what additional guidance may be needed after Rev. Rul. 2006-57, which provides guidance on the use of such cards and electronic media to provide qualified transportation fringes under Sections 132(a)(5) and (f) of the Tax Code, became effective on Jan. 1, 2012. The notice requests public comments on a number of issues surrounding an employer’s provision of transit benefits in light of changes in technology in transit benefit administration.

Section 132(f)(3) of the Code generally allows employers to use cash reimbursement arrangements to provide employees with qualified transportation fringe benefits. This section, however, prohibits use of such arrangements to provide transit benefits “if a voucher or similar item which may be exchanged only for a transit pass” is “readily available.” A voucher or similar item is not readily available if the entity providing it imposes restrictions that effectively prevent the employer from obtaining vouchers appropriate for distribution to employees.

The Treasury Department and the IRS said they have become aware that changes in fare media and in transit benefit administration may have created the need for guidance in addition to the guidance issued concerning the specific situations described in Rev. Rul. 2006-57. Developments in technology, an increase in the number of transit systems and third parties providing electronic media for transit use, and the trend away from use of paper fare media provide a basis for concluding that the four situations described in Rev. Rul. 2006-57 may not cover the full range of available electronic media for providing fare media.

The Treasury and the IRS are requesting comments on how electronic media may meet the statutory requirements under Section 132(f) for providing transit benefits, either as vouchers or transit passes or through bona fide cash reimbursement arrangements in a manner other than those described in situations one through four in Rev. Rul. 2006-57.

The Treasury and the IRS are also requesting comments on the availability of terminal-restricted cards and any other electronic media qualifying as vouchers or transit passes for the purposes of determining whether such items are readily available and, therefore, cash reimbursement arrangements for providing transit benefits should be prohibited.

Finally, the Treasury and the IRS request comments on the challenges that employers encounter in transitioning from paper transit passes or vouchers to electronic media that qualify as vouchers or transit passes, or from cash reimbursement arrangements to electronic media qualifying as transit passes or vouchers.

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Credit Helps Small Employers Provide Health Care Coverage

Issue Number:    IR-2012-56

Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for the small business health care tax credit. Enacted two years ago, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.

Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014. Targeted to small employers that primarily employ low-and moderate-income workers, the maximum credit, in tax-years 2010 through 2013, is 35 percent of premiums paid by small businesses and 25 percent of premiums paid by tax-exempt organizations, increasing to 50 percent and 35 percent, respectively, in 2014.

Small businesses claim the credit on their income tax return using Form 8941 and Form 3800. Tax-exempt organizations also use Form 8941 and then claim the credit on Form 990-T.

The recently-revamped Small Business Health Care Tax Credit page on IRS.gov is packed with information and resources designed to help small employers see if they qualify for the credit and then figure it correctly. These include a step-by-step guide for determining eligibility, examples of typical tax savings under various scenarios, answers to frequently-asked questions, a YouTube video and a webinar.

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Tax Court: No Cancellation of Debt Income Despite Form 1099-C

The Tax Court, in a recent summary opinion, ruled that an individual did not have cancellation of debt income in the year that a collection agency issued him a Form 1099-C and stopped its automated collection efforts.

 

The IRS determined a deficiency in David Stewart’s 2008 income tax of $2,138, based on a Form 1099-C issued by the collection agency. The underlying debt was incurred on a credit card obligation in 1994, and was defaulted on in 1996. Maryland Bank National Association (MBNA) charged off the debt that same year.

Portfolio Recovery Associates, LLC, acquired the defaulted account in late 2007, and began making automated attempts to collect payments. Stewart wrote PRA, demanding that it cease its automated collection activities. Once PRA received the letter, it stopped attempts at collection and issued Stewart a Form 1099-C, Cancellation of Debt, which reported $8,570 in COD income for taxable year 2008.

In its notice of deficiency, the IRS increased Stewart’s income by that amount, and Stewart filed a petition in Tax Court. The IRS contended that Stewart’s debt was discharged in 2008 when the Form 1099-C was issued, whereas Stewart argued that the debt was discharged long before then.

The court, noting that a debt is discharged the moment it becomes clear that it will never be repaid, acknowledged that it is often impossible to find only one event that clearly establishes the moment at which a debt is discharged, such as pinpointing the moment when property has been abandoned.

One of the identifiable events under which debt is considered discharged under the regulations is the expiration of a 36-month nonpayment testing period, which the Tax Court said expired in 1999. Therefore, the court found that Stewart had no COD income in 2008.

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Expanded Tax Credit for Hiring Veterans

Issue Number:    IR-2012-56

A law change enacted late last year now provides an expanded Work Opportunity Tax Credit (WOTC) to employers that hire eligible unemployed veterans. The credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors, including the length of the veteran’s unemployment before hire, hours a veteran works and the amount of first-year wages paid. Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.

Certification requirements apply to these new hires. Normally, an eligible employer must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But under a special rule, employers have until June 19, 2012, to complete and file this form for veterans hired on or after Nov. 22, 2011, and before May 22, 2012. The 28-day rule will again apply to eligible veterans hired on or after May 22. This form can be faxed or electronically transmitted to the state workforce agency, as long as the agency is able to receive the certification forms that way.

Businesses claim the credit on their income tax return using Form 5884 and Form 3800. A separate claim procedure using Form 5884-C applies to eligible tax-exempt organizations. Details are on IRS.gov.

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For Small Business Week, IRS Spotlights Expanded Tax Credit for Hiring Veterans, Credit for Providing Health Care Coverage to Employees and Tax Relief

Issue Number:    IR-2012-56

WASHINGTON — The Internal Revenue Service is marking Small Business Week, May 20 to 26, by encouraging small business owners to check out two key tax credits and a special relief program that could provide significant tax benefits during 2012.

Both the expanded credit for hiring veterans and the credit for employer-provided health care coverage can provide tax savings to eligible small businesses when they file their 2012 federal income tax returns. In addition, substantial relief from past payroll tax obligations is available to eligible employers who agree to reclassify their workers as employees in the future.

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IRS Announces 43 Small Offices to Close, Others to be Consolidated; Agency Sheds More than One Million Square Feet of Office Space

Issue Number:    IR-2012-54

WASHINGTON — The Internal Revenue Service today announced a sweeping office space and rent reduction initiative that over the next 2 years will close 43 smaller offices and reduce space in many larger facilities. These measures will save more than 40 million in taxpayer dollars. Coupled with space reductions last year, the initiative will slash total IRS office space by more than one million square feet.

“Given today’s tight budget environment, we have to be willing to make the tough but responsible calls to save taxpayer dollars,” said IRS Commissioner Doug Shulman.  “Cutting and consolidating our real estate is a responsible way we can save money. It’s an important addition to our growing portfolio of cost-saving measures.”

To ensure that the agency uses rental space as efficiently and effectively as possible, the IRS will:

  • Close 43 smaller offices.       These are offices without taxpayer assistance centers and currently have      fewer than 25 employees.
  • Consolidate multiple offices      within the same commuting area.
  • Explore innovative ways to do      more with existing space, such as desk sharing and increased telecommuting.

None of the offices being closed under this initiative are walk-in taxpayer assistance centers. Because of the nature of the work performed in these offices, the IRS anticipates minimal taxpayer impact as a result of these closures.

This cost-cutting initiative is projected to save $17.2 million in annual rental costs in fiscal 2012 and $23.5 million in fiscal 2013. These are permanent reductions in space and rent so these savings will be realized in future years as well.

The initiative will cut space by 715,000 square feet in fiscal 2012 and 230,000 square feet in fiscal 2013. This is on top of a 105,000-square-foot reduction in fiscal 2011.

The IRS has more than 650 offices around the country. Today’s initiative supplements space saving projects over the past seven years that are now yielding $70 million annually in rental savings. This is part of a broader Administration effort which has cut government real estate costs by over $1.5 billion and is on track to exceed the President’s directive to save $3 billion by the end of the year.

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IRS Provides Automated Tax Data Input for FAFSA Form

Students completing the Free Application for Federal Student Aid form can now skip the time consuming process of copying their tax data onto the form.

 

Similar to scan-and-populate programs used by professional tax return preparers, the IRS Data Retrieval Tool automatically transfers tax data onto the FAFSA form.

Use of the tool not only saves time, but its increased accuracy reduces the likelihood of being selected for verification by the school’s financial aid office.

To use the tool, the applicant must have filed a 2011 tax return, possess a valid Social Security number, have a Federal Student Aid PIN, and have not changed marital status since Dec. 31, 2011.

The tool cannot be used for the 2012 FAFSA application if an amended tax return was filed for 2011; no federal tax return for 2011 was filed; the federal tax filing status on the 2011 return is married filing separately; or a Puerto Rican or other foreign tax return has been filed.

If the IRS Data Retrieval Tool cannot be used and if the college requests verification documentation, it may be necessary to obtain an official transcript form the IRS. To order this, visit www.irs.gov and select Order a Transcript or call the toll-free line at (800) 908-9946.

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Senators Intro Plan to Stop Facebook Co-founder from Avoiding Taxes

Senators Charles Schumer, D-N.Y., and Bob Casey, D-Pa., have unveiled a plan to respond to those like Facebook co-founder Eduardo Saverin, who recently moved to renounce his U.S. citizenship, allegedly to avoid taxes on the profits he is expected to collect from the social networking company’s initial public offering.

Saverin, a partial owner of Facebook, has lived in Singapore since 2009 and renounced his U.S. citizenship in September. The move could help him save a reported $67 million in taxes since Singapore, unlike the U.S., has no capital gains tax. That amount could increase even further as Facebook’s stock price rises. The company went public last Friday, but barely rose above its offering price amid technical problems with the Nasdaq market.

The senators called Saverin’s move an outrage and described a plan to re-impose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country. Their plan would also bar individuals like Saverin from reentering the country so long as they continued to avoid paying their taxes in full.

Schumer and Casey’s proposal is called the Ex-PATRIOT Act (“Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy” Act).

Under the proposal, any expatriate with either a net worth of $2 million or an average income tax liability of at least $148,000 over the last five years will be presumed to have renounced their citizenship for tax avoidance purposes. The individual would then have an opportunity to demonstrate otherwise to the IRS by meeting specific IRS requirements.

If the individual has a legitimate reason for renouncing his or her citizenship, no penalties would apply. But if the IRS found that an individual gave up their passport for substantial tax purposes, then it would prospectively impose a tax on the individual’s future investment gains, no matter where he or she resides. This would eliminate any tax benefit and financial incentive from renouncing one’s citizenship. The rate of this capital gains tax would be 30 percent, in keeping with the rate that is already applied on non-resident aliens for dividends and interest earnings.

So long as the individual avoids these taxes, they would be inadmissible to the United States forever. The Ex-PATRIOT Act would change current law to ensure such an individual could not re-enter the United States after renouncing his or her citizenship. The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 was intended to bar any such individual from re-entering the U.S. However, this statute was written in a manner that inhibits its enforcement.

In 2011, a record number of 1,780 people gave up their U.S. passports—a dramatic rise from the 235 persons who did so in 2008. Yet no individual has ever been barred from returning to the United States based upon a finding of renunciation of citizenship for tax purposes. Without an immigration bar of re-entry, those thousands of individuals who renounce their U.S. citizenship could simply return to the United States for 60 days per year, without any tax responsibility. The Ex-PATRIOT Act would close the doors of the U.S. forever to individuals like Saverin if they continued to avoid paying U.S. taxes.

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Man Arrested for Using Dead Preparer’s Identity to File Tax Returns

An Essex County, N.J., tax return preparer who allegedly filed hundreds of phony federal income tax returns using the identity of a dead return preparer whose business he bought was arrested by federal agents early Thursday morning.

 

Todd P. Halpern, 46, of Livingston, N.J., was charged with one count of tax fraud and one count of identity theft. Halpern was arrested at his home by agents of the FBI and IRS, according to U.S. Attorney Paul J. Fishman’s office.

Halpern was scheduled to make his initial appearance before U.S. Magistrate Judge Michael A. Shipp in Newark federal court.

Halpern prepared and filed 657 fraudulent federal income tax returns with the IRS in 2009 and 2010 using the Electronic Filing Identification Number of a deceased tax return preparer, according to documents filed in the case by the IRS and prosecutors. Halpern prepared and filed the tax returns using stolen identities of actual taxpayers, without their knowledge. The tax returns contained fraudulent income and deduction amounts, which allowed Halpern to receive tax refunds deposited directly into his personal bank account.

In late 2008, Halpern purchased A & V Financial, a tax preparation business located in Guttenberg, N.J., from the widow of the prior owner, V.R., who died in March 2008. Halpern received the company’s computers and all of its client records. As part of the purchase agreement, Halpern was to obtain a new EFIN number in his own name for A & V.

Instead, he continued to file tax returns using V.R.’s EFIN number, even though V.R. was dead, because Halpern’s criminal record prevented him from obtaining an EFIN.

In one case, Halpern prepared and filed a fraudulent 2008 1040 form for an individual identified only as “B.G.” Halpern used the name V.R. at A & V in the preparer portion of the tax return. The tax return contained fraudulent income and deductions, which generated a refund that was directly deposited into Halpern’s personal bank account.

B.G. later told IRS agents she does not file tax returns because she has no income. Her Social Security number appears on her son’s tax returns, because she is a dependent. B.G.’s son used Halpern to prepare his tax returns.

In another case, Halpern prepared and filed a fraudulent 1040 form for an individual identified as “J.P., generating a refund that was deposited directly into Halpern’s bank account.

J.P. later told IRS agents he had never heard of Halpern and did not authorize Halpern to prepare and file his tax returns.

IRS agents determined that $373,938 in refunds from fraudulent tax returns were wired into Halpern’s personal bank account between July 2009 and August 2009. Halpern used these funds to make purchases at Prada, Chanel, Saks Fifth Avenue, and Bloomingdales, to acquire season tickets to the New York Giants, to purchase thousands of dollars in jewelry, gold coins, and silver certificates, to make car payments on multiple luxury vehicles, including a 2007 Cadillac Escalade and a 2008 Lexus GX-470, and to buy car parts for his classic 1957 Chevy Bel Air.

The charges of tax fraud and identity theft are each punishable by a maximum potential penalty of five years in prison and a fine of $250,000.

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House Approves Mobile Workforce Tax Relief Bill

The House passed bipartisan legislation Tuesday to bring tax relief to workers employed in more than one state.

 

The bill, passed by voice vote, was co-sponsored by Congressmen Howard Coble, R-N.C., and Hank Johnson, D-Ga., and was supported by many groups, including the National Taxpayers Union and the National Association of Manufacturers.

 

H.R. 1864, the “Mobile Workforce State Income Tax Simplification Act of 2011,” establishes a 30-day threshold for tax liability and employer withholding. The bill would establish a uniform national standard governing the withholding of state income taxes for nonresident employees.

 

AICPA president and CEO Barry Melancon applauded the bill’s passage in at least one chamber of Congress. “The House’s passage today of H.R. 1864, the Mobile Workforce State Income Tax Simplification Act of 2011, is a critical step toward balancing and streamlining onerous recordkeeping and reporting requirements for workers who are required to file nonresident personal income tax returns because they work temporarily outside their home state,” he said in a statement. “The bill would establish a uniform requirement that non-residents would have to work in a state for more than 30 days before becoming subject to out-of-state income taxes. The uniform standard would improve compliance and still guarantee that state governments could collect the taxes owed to them.

“The AICPA strongly supports H.R. 1864, and we thank the many state CPA societies from across the country who wrote to their members of Congress in support of the bill,” Melancon added. “We also thank Representative Howard Coble, a Republican from North Carolina, and Representative Hank Johnson, a Democrat from Georgia, for their leadership in successfully steering this legislation through the House. We urge the Senate to pass the bill.”

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