The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

Distributions for Emergency Personal Expenses

Code Sec. 72(t)(2)(I) provides an exception to the 10 percent additional tax for a distribution from an applicable eligible retirement plan to an individual for emergency personal expenses. The term "emergency personal expense distribution" means any distribution made from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The IRS specifically noted that emergency expenses could be related to: medical care; accident or loss of property due to casualty; imminent foreclosure or eviction from a primary residence; the need to pay for burial or funeral expenses; auto repairs; or any other necessary emergency personal expenses.

The IRS provides that a plan administrator or IRA custodian may rely on a written certification from the employee or IRA owner that they are eligible for an emergency personal expense distribution. Furthermore, the IRS provides that an emergency personal expense distribution is not treated as a rollover distribution and thus is not subject to mandatory 20% withholding. However, the distribution is subject to withholding, the IRS said. If the emergency personal expense distribution is repaid, it is treated as if the individual received the distribution and transferred it to an eligible retirement plan within 60 days of distribution.

If an otherwise eligible retirement plan does not offer emergency personal expense distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is an emergency personal expense distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Distributions to Domestic Abuse Victims

Code Sec. 72(t)(2)(K) provides an exception to the 10 percent additional tax for an eligible distribution to a domestic abuse victim (domestic abuse victim distribution). The guidance defines a"domesticabusevictimdistribution" as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. "Domesticabuse" is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.

As with distributions for emergency personal expenses, a retirement plan may rely on an employee’s written certification that they qualify for a domestic abuse victim distribution. Similarly, if an otherwise eligible retirement plan does not offer domestic abuse victim distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is a domestic abuse victim distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Request for Comments

The Treasury Department and the IRS invite comments on the guidance, and specifically on whether the Secretary should adopt regulations providing exceptions to the rule that a plan administrator may rely on an employee’s certification relating to emergency personal expense distributions and procedures to address cases of employee misrepresentation. Comments should be submitted in writing on or before October 7, 2024, and should include a reference to Notice 2024-55.

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

Specifically targeted by this new tax compliance effort are partnership basis shifting transactions. In these transactions, a single business that operates through many different legal entities (related parties) enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability. These basis shifting transactions allow closely related parties to avoid taxes.

The use of these abusive transactions grew during a period of severe underfunding for the IRS. As such, the audit rates for these increasingly complex structures fell significantly. It is estimated that these abusive transactions, which cut across a wide variety of industries and individuals, could potentially cost taxpayers more than $50 billion over a 10-year period, according to an IRS News Release.

"Using Inflation Reduction Act funding, we are working to reverse more than a decade of declining audits among the highest income taxpayers, as well as complex partnerships and corporations," IRS Commissioner Danny Werfel said during a press call discussing the new effort on June 14, 2024.

"This announcement signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long," said IRS Commissioner Danny Werfel. "We are building teams and adding expertise inside the agency so we can reverse long-term compliance declines that have allowed high-income taxpayers and corporations to hide behind complexity to avoid paying taxes. Billions are at stake here".

This multi-stage regulatory effort announced by the Treasury and IRS includes the following guidance designed to stop the use of basis shifting transactions that use related-party partnerships to avoid taxes:

• proposed regulations under existing regulatory authority to stop related parties in complex partnership structures from shifting the tax basis of their assets amongst each other to take abusive deductions or reduce gains when the asset is sold;

• proposed regulation to require taxpayers and their material advisers to report if they and their clients are participating in abusive partnership basis shifting transactions; and

• a Revenue Rulingproviding that certain related-party partnership transactions involving basis shifting lack economic substance.

"Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit," said U.S. Secretary of the Treasury Janet L. Yellen.

In the June 14, 2024, press call, Commissioner Danny Werfel also noted that there will be an increase in audits of large partnerships with average assets over $10 billion dollars and larger organizational changes taking place to support compliance efforts, including the creation of a new associate office that will focus exclusively on partnerships, S corporations, trusts, and estates.

By Catherine S. Agdeppa, Content Management Analyst

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

The concept was promoted by multiple witnesses testifying during a recent Senate Finance Committee hearing on the subject of child savings accounts and other tax advantaged accounts that would benefit children. It also is the subject of a recently released report from The Tax Foundation.

Rather than push new limited-use savings accounts, "policymakers may want to consider enacting a more comprehensive savings program such as a universalsavingsaccount," Veronique de Rugy, a research fellow at George Mason University, testified before the committee during the May 21, 2024, hearing. "Universalsavingsaccounts will allow workers to save in one simple account from which they would withdraw without penalty for any expected or unexpected events throughout their lifetime."

She noted that, like other more focused savings accounts, like health savings accounts, it would have "the benefit of sheltering some income from the punishing double taxation that our code imposes."

De Rugy added that universal savings accounts "have a benefit that they do not discourage savings for those who are concerned that the conditions for withdrawals would stop them from addressing an emergency in their family."

Adam Michel, director of tax policy studies at the Cato Institute, who also promoted the idea of universal savings accounts. He said these accounts "would allow families to save for their kids or any of life’s other priorities. The flexibility of these accounts make them best suited for lower and middle income Americans."

He also noted that they are promoting savings in countries that have implemented them, including Canada and United Kingdom.

"For example, almost 60 percent of Canadians own tax-free savingsaccounts," Michel said. "And more than half of those account holders earned the equivalent of about $37,000 a year. These accounts have helped increase savings and support the rest of the Canadian savings ecosystem."

De Rugy noted that in countries that have implemented it, they function like a Roth account in that money that has already been taxed can be put into it and not penalized or taxed upon withdrawal.

Michel also noted that the if the tax benefits extend to corporations as they do with deposits to employee health savings accounts, "to the extent that you lower the corporate income tax, you’re going to encourage a different additional investment into savings by those entities."

Simulating The Universal Savings Account Impact

The Tax Foundation in its report simulated how a universal savings account could work, based on how they are implemented in Canada. The simulation assumed the accounts could go active in 2025 for adults aged 18 years or older.

On a post-tax basis, individuals would be allowed to contribute up to $9,100 on a post-tax basis annually, with that cap indexed for inflation. Any unused "contribution room" would be allowed to be carried forward. Earnings would be allowed to grow tax-free and withdrawals would be allowed for any purpose without penalty or further taxation. Any withdrawal would be added back to that year’s contribution room and that would be eligible for carryover as well.

"The fiscal cost of this USA policy would be offset by ending the tax advantage of contributions to HSAs beginning in 2025," the report states. "As such, future contributions to HSAs would be given normal tax treatment, i.e. included in taxable income and subject to payroll tax with subsequent returns on contributions also included in taxable income."

In this scenario, the Tax Foundation report estimates that "this policy change would on net raise tax revenue by about $110 billion over the 10-year budget window."

As for the impact on taxpayers, the "after-tax income would fall by about 0.1 percent in 2025 and by a smaller amount in 2034, reflecting the net tax increase in those years," the report states. "Over the long run, and accounting for economic impacts, taxpayers across every quintile would see a small increase in after-tax income on average, but the top 5 percent of earners would continue to see a small decrease in after-tax income on average."

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

In a report issued June 5, 2024, the federal government watchdog noted that while the agency uses AI to improve the efficiency and selection of audit cases to help identify noncompliance, "IRS has not completed its documentation of several elements of its AI sample selection models, such as key components and technical specifications."

GAO noted that the IRS began using AI in a pilot in tax year 2019 for sampling tax returns for NRP audits. The current plan is to use AI to create a sample size of 4,000 returns to measure compliance and help inform tax gap estimates, although GAO expressed concerns about the accuracy of the estimates with that sample size.

"For example, NRP historically included more than 2,500 returns that claimed the Earned Income Tax Credit, but the redesigned sample has included less than 500 of these returns annually," the report stated.

IRS told GAO that it "is exploring ways to combine operational audit data with NRP audit data when developing its taxgapestimates. IRS officials also told us that if IRS can reliably combine these data for taxgap analysis, IRS might be better positioned to identify emerging trends in noncompliance and reduce the uncertainty of the estimates due to the small sample size."

The report also highlighted the fact that the agency "has multiple documents that collectively provide technical details and justifications for the design of the AI models. However, no set of documents contains complete information and IRS analyst could use to run or update the models, and several key documents are in draft form."

"Completing documentation would help IRS retain organizational knowledge, ensure the models are implemented consistently, and make the process more transparent to future users," the report stated.

By Gregory Twachtman, Washington News Editor

Before the fast-approaching new year, it’s important to take some time and reflect on year-end tax planning. The weeks pass quickly and the arrival of January 1, 2015 will close the doors to some tax planning strategies and opportunities. Fortunately, there is still time for a careful review of your year-end tax planning strategy.

Before the fast-approaching new year, it’s important to take some time and reflect on year-end tax planning. The weeks pass quickly and the arrival of January 1, 2015 will close the doors to some tax planning strategies and opportunities. Fortunately, there is still time for a careful review of your year-end tax planning strategy.

Traditional year-end planning techniques

For many individuals, a look at traditional year-end tax planning techniques is a good starting point. Spreading the recognition of certain income between 2014 and 2015 is one technique. Individuals need to take into account any possible changes in their income tax bracket. The individual income tax rates for 2014 are unchanged from 2013: 10, 15, 25, 28, 33, 35 and 39.6 percent. Each taxable income bracket is indexed for inflation. The starting points for the 39.6 percent bracket for 2014 are $406,750 for unmarried individuals; $457,600 for married couples filing a joint return and surviving spouses; $432,200 for heads of households; and $228,800 for married couples filing separate returns. For 2014, the top tax rate for qualified capital gains and qualified dividends is 20 percent.

For the second year, individuals also need to plan for potential net investment income (NII) tax liability. The NII tax applies to taxpayers with certain types of income and who fall within the thresholds for liability. Again, spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions are strategies to consider.

Tax extenders

Many individuals are surprised to learn that some very popular and widely-used tax incentives are temporary. If you claimed the higher education tuition deduction on your 2013 return, you cannot claim it in your 2014 return because the deduction expired after 2013. The same is true for the state and local sales tax deduction, the teachers’ classroom expense deduction, the Code Sec. 25C residential energy credit, transit benefits parity, and more. All of these tax breaks expired after 2013 and unless they are extended by Congress, you will not be able to claim them on your 2014 returns.

Businesses are also affected. A lengthy list of business-oriented tax breaks expired after 2013. They include the Work Opportunity Tax Credit (WOTC), research tax credit, Indian employment credit, employer wage credit for military reservists, special incentives for biodiesel and renewable fuels, tax credits for energy-efficient homes and appliances, and more.

The good news is that Congress is likely to extend these tax breaks, probably for two years, and make the extension retroactive to January 1, 2014. That means taxpayers can claim these incentives on their 2014 returns. One hurdle is when Congress will act. In past years, lawmakers waited until very late in the year, or even until the start of the new year, to vote on an extension of these incentives. Late extension puts extra pressure on the IRS to quickly reprogram its return processing systems. Most likely, the IRS will have to delay the start of the filing season. Our office will keep you posted of developments.

Retirement savings

In 2014, the Tax Court surprised many with its decision that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained (Bobrow, TC Memo. 2014-21). The one-year limitation is not specific to any single IRA maintained by a taxpayer, but instead applies to all IRAs maintained by the taxpayer. The IRS, in turn, announced that it would change its rules to reflect the court’s decision.

The key point to keep in mind is that the Bobrow decision affects only IRA-to-IRA rollovers. The decision does not limit trustee-to-trustee transfers.

Affordable Care Act

Individuals who obtain health insurance through the Affordable Care Act Marketplace (and the federal government estimates they number seven million) have special tax planning considerations, especially if they are eligible for the Code Sec. 36B premium assistance tax credit. The credit is payable in advance to insurers and it appears that most taxpayers have elected this option. These individuals must reconcile the amount paid in advance with the amount of the actual credit computed when they file their tax returns. Changes in circumstances, such as an increase or decrease in income, marriage, birth or adoption of a child, and so on, may affect the amount of the actual credit.

Remember that the Affordable Care Act requires individuals to have minimum essential coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return. Many individuals will qualify for an exemption if they are covered under employer-sponsored coverage. Individuals covered by Medicare also are exempt.

If you have any questions about year-end planning, please contact our office.

Taxpayers will receive some modest relief for the 2015 tax year, thanks to the mandatory annual inflation-adjustments provided under the Tax Code. When there is inflation, indexing of brackets lowers tax bills by including more of people’s incomes in lower brackets—for example by placing taxpayers’ income in the existing 15-percent bracket, rather than the existing 25-percent bracket.

Taxpayers will receive some modest relief for the 2015 tax year, thanks to the mandatory annual inflation-adjustments provided under the Tax Code. When there is inflation, indexing of brackets lowers tax bills by including more of people’s incomes in lower brackets—for example by placing taxpayers’ income in the existing 15-percent bracket, rather than the existing 25-percent bracket.

Wolters Kluwer, CCH has used the formulas specified in the Tax Code and the Department of Labor’s newly-released Consumer Price Index (all urban) for August 2014 to project the inflation-adjusted figures for 2015. (The list provided below is not exhaustive.) The IRS is expected to issue the official figures by December 2014.

2015 tax schedules

Married Filing Jointly (and Surviving Spouses)

Head of Household

Single (Other than Heads of Household and Surviving Spouses)

Married Filing Separate

Estates and Trusts

2015 personal exemption

For 2015, personal exemptions will increase to $4,000, up from $3,950 in 2014. The phase out of the personal exemption for higher income taxpayers will begin after taxpayers pass the same income thresholds set forth for the limitation on itemized deductions, detailed below.

The personal exemption will completely phase out when income surpasses the following levels: $432,400 (married joint filers); $406,550 (Heads of household); $380,750 (unmarried taxpayers); and $216,200 (married filing separate).

2015 standard deduction

For 2015, the standard deduction will be as follows: $6,300 for unmarried taxpayers and married separate filers (up from $6,200 in 2014). For married joint filers, the standard deduction will rise to $12,600, up from $12,400 in 2014. For heads of household, the standard deduction will be $9,250, up from $9,100 in 2014.

The 2015 standard deduction for an individual claimed as a dependent on another taxpayer’s return is either $1,050 or $350 plus the dependent’s earned income, whichever is greater.

The additional standard deduction for the blind and aged increases for married taxpayers to $1,250, up from $1,200 in 2014. For unmarried, aged, or blind taxpayers, the amount of the additional standard deduction remains $1,550.

Limitation on itemized deductions

For higher income taxpayers who itemize their deductions, the limitation on itemized deductions for 2015 will be imposed at the following income levels:

• For married couples filing joint returns or surviving spouses, the income threshold will be $309,900, up from $305,050 for 2014.
• For heads of household, the threshold will be $284,050, up from $279,650 in 2014.
• For single taxpayers, the threshold will be $258,250, up from $254,200 in 2014.
• For married taxpayers filing separate returns, the 2015 threshold will be $154,950, up from $152,525 for 2014.

AMT exemptions

Wolters Kluwer, CCH projects that, for 2015, the AMT exemption for married joint filers and surviving spouses will be $83,400 (up from $82,100 in 2014). For heads of household and unmarried single filers, the exemption will be $53,600 (up from $52,800 in 2014). For married separate filers, the exemption will be $41,700, up from ($41,050 in 2014). For estates and trusts, the exemption will be $23,800 (up from $23,500 in 2014.)

For a child to whom the so-called “kiddie tax” under Code Sec. 1(g) applies, the exemption amount for AMT purposes may not exceed the sum of the child’s earned income for the tax year, plus $7,400 (up from $7,250 for 2014).

Other adjusted amounts

IRA Contributions. The maximum amount of deductible contributions that can be made to an IRA will remain the same for 2015, at $5,500 (or $6,500 for taxpayers eligible to make catch-up contributions). The income phase out ranges increase, however. For 2015, the allowable amount of deductible IRA contributions will phase out for married joint filers whose income is between $98,000 and $118,000 (if both spouses are covered by a retirement plan at work). If only one spouse is covered by a retirement plan at work, the phase out range is from $183,000 to $193,000.

For heads of household and unmarried filers who are covered by a retirement plan at work, the 2015 income phase out range for deductible IRA contributions is $61,000 to $71,000, up from $60,000 to $70,000 for 2014.

Education Savings Bond Interest Exclusion. When U.S. savings bonds are redeemed to pay expenses for higher education, the interest may be excluded from income if the taxpayer’s income is below a certain range. For 2015, the phase-out range for single filers will be from $77,200 to $92,200 (up from $76,000 to $91,000 for 2014). For joint filers the 2015 phase-out range will be $115,750 to $145,750 (up from $113,950 to $143,950 for 2014).

Phase-out of Student Loan Interest Deduction. For 2015, the $2,500 student loan interest deduction will phase out for married joint filers with income between $130,000 and $160,000, the same as for 2014. The 2015 deduction will phase out for single taxpayers with income between $65,000 to $80,000.

Medical Savings Accounts. The minimum–maximum range for premiums used to determine whether a medical savings account (MSA) is tied to a high deductible health plan for 2015 will be $2,200–$3,300 for self-only coverage (up from $2,200 to $3,250 for 2014) and $4,450 to $6,650 for family coverage (up from $4,350 to $6,550 for 2014).

Self-only coverage plans are subject to a $4,450 maximum amount for annual out-of-pocket costs (up from $4,350 for 2014). Family coverage plans have a $8,150 annual limit (up $8,000 for 2014).

Limitation on Flexible Spending Arrangements (FSAs). The limitation on the amount of salary reductions an employee may elect to contribute to a cafeteria plan under an FSA increases to $2,550 for 2015, up $50 from the limit for 2014 and 2013.

Qualified Transportation Fringe Benefits. For 2015, the monthly cap on the exclusion for transit passes and for commuter highway vehicles will be $130, the same as it was for 2014 (parity between transit and parking benefits expired at the end of 2013). The monthly cap on qualified parking benefits will be $250, the same as for 2014.

Estate and Gift Tax. The gift tax annual exemption will remain the same for 2015, at $14,000. However, the estate and gift tax applicable exclusion will increase from $5,340,000 in 2014 to $5,430,000 for 2015.

Gifts to Noncitizen Spouses. The first $147,000 of gifts made in 2015 to a spouse who is not a U.S. citizen will not be included in taxable gifts, up $2,000 from $145,000 in 2014.

Foreign Earned Income/Housing. The amount of the 2015 foreign earned income exclusion under Code Sec. 911 will be $100,800, up from $99,200 for 2014. The maximum foreign earned income housing deduction for 2015 will be $30,240, up from $29,760 for 2014.

As January 1, 2015 draws closer, many employers are gearing up for the “employer mandate” under the Affordable Care Act. For 2015, there is special transition relief for mid-size employers. Small employers (employers with fewer than 50 full-time employees, including full-time equivalent employees) are always exempt from the employer mandate and related employer reporting.

As January 1, 2015 draws closer, many employers are gearing up for the “employer mandate” under the Affordable Care Act. For 2015, there is special transition relief for mid-size employers. Small employers (employers with fewer than 50 full-time employees, including full-time equivalent employees) are always exempt from the employer mandate and related employer reporting.

Employer mandate

Under Code Sec. 4980H, an applicable large employer must make a shared responsibility payment if either:

• The employer does not offer or offers coverage to less than 95 percent (70 percent in 2015) of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage and one or more full-time employee is certified to the employer as having received a Code Sec. 36B premium assistance tax credit or cost-sharing reduction (“Section 4980H(a) liability”); or
• The employer offers to all or at least 95 percent of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and one or more full-time employees is certified to the employer as having received a Code Sec. 36B premium assistance tax credit or cost-sharing reduction (“Section 4980H(b) liability”).

For purposes of the employer mandate shared responsibility provisions, an employee is a full-time employee for a calendar month if he or she averages at least 30 hours of service per week. Under final regulations issued by the IRS earlier this year, for purposes of determining full-time employee status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week.

The IRS has provided two methods for determining whether a worker is a full-time employee: the monthly measurement method and the look-back measurement method. The monthly measurement method allows an employer to determine each employee’s status by counting the employee’s hours of service for each month. The look-back measurement method allows employers to determine the status of an employee as a full-time employee during a future period, based upon the hours of service of the employee in a prior period.

In September 2014, the IRS clarified the look-back method in certain circumstances. The IRS described application of the look-back method where an employee moves from one measurement period to another (for example, an employee moves from an hourly position to which a 12-month measurement period applies to a salaried position to which a 6-month measurement period applies). The IRS also described situations where an employer changes the measurement method applicable to employees within a permissible category (for example, an employer changes the measurement period for all hourly employees for the next calendar year from a 6-month to a 12-month measurement period).

Transition relief for mid-size employers

Mid-size employers are exempt from the Code Sec. 4980H employer mandate for 2015 under special transition relief. Employers qualify as mid-size if they employ on average at least 50 full-time employees, including full-time equivalents, but fewer than 100 full-time employees, including full-time equivalents.

The IRS has placed some restrictions on this transition relief for mid-size employers. During the period beginning on February 9, 2014, and ending on December 31, 2014, the employer that reduces the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition is ineligible for the transition relief. A reduction in workforce size or overall hours of service for bona fide business reasons will not be considered to have been made in order to satisfy the workforce size condition, the IRS explained.

Information reporting

Code Sec. 6056 requires certain employers to report to the IRS information about the health insurance, if any, they offer to employees. The IRS has posted draft forms and instructions about Code Sec. 6056 reporting on its website: Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.

Information reporting encompasses (among other things):

• The employer’s name, address, and employer identification number;
• The calendar year for which information is being reported;
• A certification as to whether the employer offered to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan;
• The number, address and Social Security/taxpayer identification number of all full-time employees;
• The number of full-time employees eligible for coverage under the employer’s plan; and
• The employee’s share of the lowest cost monthly premium for self-only coverage providing minimum value offered to that full-time employee.

Code Sec. 6056 reporting for 2015 is mandatory. Although mid-size employers may be exempt from the employer mandate, they are not exempt from Code Sec. 6056 reporting for 2015. The IRS is requiring all Code Sec. 6056 information returns to be filed no later than February 28 (March 31 if filed electronically) of the year immediately following the calendar year to which the return relates.

Please contact our office if you have any questions about preparing for the employer mandate and Code Sec. 6056 reporting.

Every year the IRS publishes a list of projects that are currently on its agenda. For example, the IRS may indicate through this list that it is working on a new set of procedures relating to claiming business expenses. The new 2014–2015 IRS Priority Guidance Plan, just released this September, has indicated that IRS is working on guidance relating to whether employer-provided meals offered on company premises are taxable as income to the employee. In the Priority Guidance Plan’s Employee Benefits Section B.3, the IRS listed: "Guidance under §§119 and 132 regarding employer-provided meals" in its list of projects for the upcoming year.

Every year the IRS publishes a list of projects that are currently on its agenda. For example, the IRS may indicate through this list that it is working on a new set of procedures relating to claiming business expenses. The new 2014–2015 IRS Priority Guidance Plan, just released this September, has indicated that IRS is working on guidance relating to whether employer-provided meals offered on company premises are taxable as income to the employee. In the Priority Guidance Plan’s Employee Benefits Section B.3, the IRS listed: "Guidance under §§119 and 132 regarding employer-provided meals" in its list of projects for the upcoming year.

This could be significant for many employees who could potentially have to report as taxable income what they formerly thought were free meals provided by their employer. Currently, an employer may offer meals to employees on the work premises as a tax-free perk, if the meals are provided for the employer’s convenience. The question of whether the meals are provided for the convenience of the employer is determined, however, on the basis of all the facts and circumstances. Clearer guidance from the IRS may signal that in the future, examiners will pay closer attention to meals provided by employers.

Background

A growing trend among employers is to provide free gourmet meals to their employees. Employers argue this is for their convenience, which if true would make the meals non-taxable. But in some instances the IRS and others have posited that such meals more closely resemble income.

The Tax Code currently sets forth some basic guidelines for how to determine whether meals are being provided “for the convenience of the employer.” First of all, an employment contract or state statute are not determinative of whether the meals are intended as compensation. Secondly, the meals must be provided for a substantial noncompensatory business reason.

Factors indicating that meals are furnished for the convenience of the employer include:

• A short time available for lunch due to legitimate business reasons and not just to shorten the work day;
• The need for availability of employees for emergencies;
• Insufficient other eating facilities nearby; and
• A standard charge for meals regardless of whether they are eaten.

The IRS has also noted in its existing regulations that meals provided simply to promote morale or goodwill of employees, to attract new employees or as a means of providing additional compensation are not considered to be furnished for the convenience of the employer.

Examples

The IRS’s current regulations contain examples of meals that the IRS has considered to be legitimately provided to employees, tax-free, because they are provided for the employer’s conveniences. These include:

• Meals provided by a bank to its bank tellers to retain them on the premises during the lunch hour because the bank's peak workload occurs during the normal lunch period; and
• Meals provided to casino workers, who are required to eat their meals on the premises in order to minimize the security searches they undergo as they come and go, and to ensure that staff does not succumb to the temptations of nearby casinos rather than promptly returning to work.

Conversely, meals provided by a restaurant to a waitress on her days off are not tax-free because they are perks and not for the employer’s convenience.

Under the modified accelerated cost recovery system (MACRS) (which is more commonly known as depreciation), a half-year timing (i.e., averaging) convention generally applies to the depreciation deduction for most assets during anytime within the year in which they are purchased. That is, whether you purchase a business asset in January or in December, it’s treated for depreciation purposes as being purchased on July 1st. However, a taxpayer who places more than 40 percent of its depreciable property (excluding residential rental property and nonresidential real property) into service during the last three months of the tax year must use a mid-quarter convention – decidedly less advantageous. Because of the 40 percent rule, the purchase of a vehicle or other equipment in the last month of the tax year might, in itself, trigger imposition of the mid-quarter convention. Businesses should keep in mind the 40 percent rule especially for year-end tax planning purposes.

Under the modified accelerated cost recovery system (MACRS) (which is more commonly known as depreciation), a half-year timing (i.e., averaging) convention generally applies to the depreciation deduction for most assets during anytime within the year in which they are purchased. That is, whether you purchase a business asset in January or in December, it’s treated for depreciation purposes as being purchased on July 1st. However, a taxpayer who places more than 40 percent of its depreciable property (excluding residential rental property and nonresidential real property) into service during the last three months of the tax year must use a mid-quarter convention – decidedly less advantageous. Because of the 40 percent rule, the purchase of a vehicle or other equipment in the last month of the tax year might, in itself, trigger imposition of the mid-quarter convention. Businesses should keep in mind the 40 percent rule especially for year-end tax planning purposes.

The applicable averaging convention is not elective. Rather, one of three conventions (half-year, mid-month, and mid-quarter) must apply.

Half-year convention. Under this convention, property is treated as placed in service, or disposed, on the midpoint of the tax year. Thus, one-half of the depreciation for the first year of the recovery period is allowed in the tax year in which the property is placed in service, regardless of when the property is placed in service during the tax year. The half-year convention applies to property other than residential rental property, nonresidential real property, and railroad grading and tunnel bores unless the mid-quarter convention applies

Mid-month convention. Under this convention, property is treated as placed in service, or disposed of, on the midpoint of the month. The MACRS deduction is based on the number of months that the property was in service. Thus, one-half month of depreciation is allowed for the month that property is placed in service and for the month of disposition if there is a disposition of property before the end of the recovery period. The mid-month convention applies to residential rental property (including low-income housing), nonresidential real property, and railroad grading and tunnel bores.

Mid-quarter convention. Under this convention, all property (other than the property otherwise excluded) placed in service, or disposed, during any quarter of a tax year is treated as placed in service, or disposed, on the midpoint of the quarter. A quarter is a period of three months. The mid-quarter convention applies to all property (other than residential rental property, nonresidential real property, and railroad grading and tunnel bores) if more than 40 percent of the aggregate bases of such property is placed in service during the last three months of the tax year.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of October 2014.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of October 2014.

October 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 24–26.

October 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 27–30.

October 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 1–3.

October 10
Employees who work for tips. Employees who received $20 or more in tips during September must report them to their employer using Form 4070.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 4–7.

October 15
Individuals. Individuals with automatic 6-month extensions to file their 2013 income tax returns must file Form 1040, 1040A, or 1040EZ, and pay any tax, interest, and penalties due.
Partnerships. Electing large partnerships that obtained a 6-month extension for filing the 2013 calendar year return (Form 1065-B) must now file the return.

October 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 8–10

October 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 11–14

October 22
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 15–17

October 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 18–21

October 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 22–24

October 31
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 25–28

November 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 29–31

Since passage of the Affordable Care Act, several key requirements for employers have been delayed, including reporting of health coverage offered to employees, known as Code Sec. 6056 reporting. As 2015 nears, and the prospects of further delay appear unlikely, employers and the IRS are preparing for the filing of these new information returns.

Since passage of the Affordable Care Act, several key requirements for employers have been delayed, including reporting of health coverage offered to employees, known as Code Sec. 6056 reporting. As 2015 nears, and the prospects of further delay appear unlikely, employers and the IRS are preparing for the filing of these new information returns.

Three related provisions

Three provisions of the Affordable Care Act are closely related: the employer mandate for applicable large employers (ALEs), the Code Sec. 36B premium assistance tax credit and Code Sec. 6056 reporting. To administer the employer mandate and the Code Sec. 36 credit, the IRS must receive information from ALEs, such as the type of health coverage offered, if any, by the ALE, the number of employees, and the cost of coverage.

Who must report?

Not all employers must report under Code Sec. 6056. The most important exception is for employers with fewer than 50 full-time employees, including full-time equivalent employees. These smaller employers are exempt—at all times—from Code Sec. 6056 reporting and the employer mandate.

For 2015, there is also a temporary exemption for some ALEs from the employer mandate only. ALEs are employers that employ on average at least 50 full-time employees, including full-time equivalents but fewer than 100 full-time employees including full-time equivalents. However, mid-size employers must file Code Sec. 6056 information returns for 2015. All other ALEs are subject to the employer mandate for 2015 as well as Code Sec. 6056.

What must be reported?

The IRS has posted draft forms for Code Sec. 6056 reporting on its website: Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. Draft Instructions for these forms are expected to be released in the near future.

ALEs generally must report:

• The employer's name, address, and employer identification number;
• The calendar year for which information is being reported;
• A certification as to whether the employer offered to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan;
• The number, address and Social Security/taxpayer identification number of all full-time employees;
• The number of full-time employees eligible for coverage under the employer's plan; and
• The employee's share of the lowest cost monthly premium for self-only coverage providing minimum value offered to that full-time employee.

Under IRS regulations, Code Sec. 6056 reporting is optional for 2014. Reporting for 2015 is required. Information returns must be filed no later than March 1, 2016 (February 28, 2016, being a Sunday), or March 31, 2016, if filed electronically.

Simplified method

The IRS has provided ALEs with simplified methods of reporting. Employers that provide a "qualifying offer" to any of their full-time employees may be eligible as are employers that offer coverage to a certain percentage of employees. For more details about the simplified method, please contact our office.

Employers that self-insure

The Affordable Care Act also requires every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs, and other entities that provide minimum essential coverage to file information returns. This is known as "Code Sec. 6055 reporting." The IRS has posted draft versions of Form 1094-B, Transmittal of Health Coverage Information Returns, and Form 1095-B, Health Coverage on its website.

Employers that self-insure have a streamlined way to report for purposes of Code Sec. 6055 reporting and Code Sec. 6056 reporting. The top half of Form 1095-C includes information needed for Code Sec. 6056 reporting; the bottom half includes information needed for Code Sec. 6055 reporting.

If you have any questions about Code Sec. 6056 reporting, please contact our office.

As the 2015 filing season approaches, IRS Commissioner John Koskinen is bracing taxpayers for more reductions in customer service unless the agency receives more funding. According to Koskinen, the IRS is facing its biggest challenge in recent years. Koskinen, who spoke at the annual conference of the National Society of Accountants in August, also predicted that taxpayers will have to wait until after the November elections to learn the fate of many popular but expired tax incentives.

As the 2015 filing season approaches, IRS Commissioner John Koskinen is bracing taxpayers for more reductions in customer service unless the agency receives more funding. According to Koskinen, the IRS is facing its biggest challenge in recent years. Koskinen, who spoke at the annual conference of the National Society of Accountants in August, also predicted that taxpayers will have to wait until after the November elections to learn the fate of many popular but expired tax incentives.

Budget pressures

The IRS has experienced budgetary pressures since 2010. The Budget Control Act of 2011 (BCA) imposed across-the-board spending cuts on many federal agencies, including the IRS. Some funding was restored last year. Looking ahead, the House has voted to cut the IRS's budget by $341 million for Fiscal Year (FY) 2015. The Senate has proposed to increase the IRS's budget by $240 million. Even with the proposed increase, IRS officials have said that the agency's budget would still be seven percent below funding levels for FY 2010.

The funding cuts have drawn criticism from senior IRS officials. "Funding reductions have significantly hampered the IRS's ability to carry out its mission," National Taxpayer Advocate Nina Olson told Congress. Olson warned that "underfunding of the IRS poses one of the greatest long-term risks to tax administration today."

Koskinen echoed Olson's concerns. "Congress is starving our revenue-generating operation. If voluntary compliance with the tax code drops by 1 percent, it costs the U.S. government $30 billion per year," he explained. "The IRS annual budget is only $11 billion per year.

Customer service

For many taxpayers, the most visible impact of the budget cuts has been reductions in customer service. Koskinen said that the IRS has cut 5,200 call center employees because of lack of funding. Wait times to speak with the IRS will increase, he predicted. During the 2014 filing season, the IRS's level of customer service was around 72 percent. The level of customer service for the 2015 filing season could fall to as low as 50 percent without adequate funding, Koskinen cautioned.

Koskinen acknowledged that the funding cuts have fueled efficiencies in the agency's operations. The agency has reduced hiring, offered buyouts to long-time employees, and cut travel and training costs. "We are becoming more efficient but there is a limit," he said. "Eventually the effects will show up. We are no longer going to pretend that cutting funding makes no difference."

Tax extenders

Unless extended, a host of expired tax incentives will be unavailable to taxpayers when they file their 2014 returns. These include widely-used incentives, such as the state and local sales tax deduction, the higher education tuition deduction, and transit benefits parity. Businesses also would be impacted, with failure to renew popular incentives, including the research tax credit and the Work Opportunity Tax Credit.

Legislation to extend many of these incentives will likely not be passed by Congress until after the November elections, Koskinen predicted. "Congress needs to understand that the later these are passed and the more complicated they are, the more challenging it is for taxpayers to file accurate returns on time." Koskinen added that the IRS will be challenged to reprogram its return processing systems for renewal of the tax extenders. As a result, the start of the 2015 filing season could be delayed, he said.

Identity theft

Koskinen lauded the agency's work to curb tax-related indentity theft. This initiative is a high-profile one. The IRS has worked with other federal agencies and state and local governments to discover and prosecute identity thieves. The IRS has also upgraded its return processing systems to uncover fraudulent returns and has assigned special identity protection numbers to victims of identity theft. "We rejected 5.7 million suspicious returns last year that may have been tied to identity theft," he said.

To learn more information or for updates, please contact our offices.

Life expectancies for many Americans have increased to such an extent that most taxpayers who retire at age 65 expect to live for another 20 years or more. Several years ago, a number of insurance companies began to offer a new financial product, often called the longevity annuity or deferred income annuity, which requires upfront payment of a premium in exchange for a guarantee of a certain amount of fixed income starting after the purchaser reaches age 80 or 85. Despite the wisdom behind the longevity annuity, this new type of product did not sell especially well, principally for tax reasons. These roadblocks, however, have largely been removed by new regulations.

Life expectancies for many Americans have increased to such an extent that most taxpayers who retire at age 65 expect to live for another 20 years or more. Several years ago, a number of insurance companies began to offer a new financial product, often called the longevity annuity or deferred income annuity, which requires upfront payment of a premium in exchange for a guarantee of a certain amount of fixed income starting after the purchaser reaches age 80 or 85. Despite the wisdom behind the longevity annuity, this new type of product did not sell especially well, principally for tax reasons. These roadblocks, however, have largely been removed by new regulations.

Treasury and the IRS recently released final regulations (TD 9673) to encourage taxpayers to purchase "qualified longevity annuity contracts" (QLACs) with a portion of their retirement savings held in IRAs or in retirement accounts held under a 401(k), 403(b) or other defined contribution plans that are subject to the rules for required minimum distributions (RMDs). The final regulations are meant to remove or mitigate some of the tax concerns new retirees may face when deciding whether or not to purchase a deferred income annuity.

Longevity Annuities—Generally

Purchase of a longevity annuity provides for a deferred income stream. Although the terms of specific longevity annuity contracts differ from plan to plan, the arrangement generally requires the purchaser to pay the premium as a lump sum to the insurer. The purchaser could be 65 years of age, 55, 50 or some other age, and the insurer would not begin to make payments under the longevity annuity contract until the purchaser had reached the specified age (of no more than 85 years for the tax benefits contained in the final regulations). The amount of the annuity depends on a number of factors, among them: the age at which the contract is purchased; the amount of the premium paid; the contractual interest rate; and the age at which payments begin.

RMDs

Not every individual who reaches retirement age possesses enough spare cash outside of his or her IRAs or other retirement accounts to purchase an income annuity, let alone a longevity annuity that does not begin to pay out for many years. In such cases individuals can purchase an annuity from within an IRA or defined contribution plan account. Prior to the final regulations, however, the RMD rules requiring taxpayers who reach age 70 ½ to begin taking distributions from these accounts would have forced taxpayers to factor the premium amounts into the calculation of their annual taxable distribution. This would have depleted the account funds more quickly than the actual balance, without premium payment, warranted.

QLACs

The final regulations provide that only qualified longevity annuity contracts (QLACs) are eligible for account balance exclusion from the RMD calculation. The regulations define a QLAC as:

• A longevity annuity whose premium payment does not exceed the lesser of $125,000 or 25 percent of the employee’s account balance;
• A contract that provides for payouts to begin no later than the first day of the month following the purchaser’s 85th birthday;
• A contract that does not provide any commutation benefit, cash surrender right, or other similar feature;
• A contract under which any death benefit offered meets the requirements of paragraph A-17(c) of Reg. §1.401(a)(9)-6 (see below for more details);
• A contract that states when issued that it is intended to be a QLAC; and
• A contract that is not a variable contract under Code Sec. 817, an indexed contract, or a similar contract.

The total value of all QLACs held by one person cannot exceed the lesser of $125,000 (indexed for inflation) or 25 percent of all qualified retirement accounts put together. This limitation does not extend to funds held in non-retirement accounts or to funds held in Roth IRAs.

In addition, the amount used to pay the QLAC premium is not taxable when the QLAC is purchased. This means the account holder has a zero basis in the QLAC. Distributions from the QLAC are fully taxable.

Death Benefit

Most longevity annuities do not provide any death benefit for the purchaser's beneficiaries. While some longevity annuity plans do offer a death benefit for the beneficiaries of annuity purchasers who die prematurely, plans that maximize the annuity payment generally provide that the insurer keeps the entire premium amount, plus interest, if the purchaser dies before payouts begin or the contract basis is exhausted.

Return of premium. The final regulations attempt to mitigate some of the risk retirees face when deciding to purchase a QLAC by allowing a QLAC to provide certain death benefits in limited circumstances. Notably, the final regulations add a feature missing from the proposed regulations: return of premium. Under the final rules, a QLAC is authorized to guarantee the return of a purchaser's premium if the purchaser dies before receiving benefits equal to the premium paid.

Surviving spouse. The final regulations provide that, where the purchaser's sole beneficiary under the QLAC is his or her surviving spouse, generally the only benefit permitted to be paid after the purchaser's death is a life annuity that does not exceed 100 percent of the annuity that would have been paid to the employee. The final regulations also allow QLACs to provide the return of premium feature if a surviving spouse who receives a life annuity under the contract dies before the payments equal the premium.

Non-spouse beneficiary/beneficiaries. QLACs may also provide a lifetime annuity to designated non-spouse beneficiaries, but the annuity would likely be reduced. Calculation of an annuity payable to a non-spouse beneficiary would be calculated based on the applicable percentage provided in one of the tables in the final regulations. However, if the QLAC provides a return of premium feature, the applicable percentage that the beneficiary would receive is zero.

Please contact this office if you have any questions on how a qualified longevity annuity might fit into your retirement plans now that the IRS has relaxed some of the rules.