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Tax Alerts

ACA advance payments filing/reconciliation deadlines approaching

The IRS is reminding individuals, through HCTT-2016-68, that if they received advance payment of the Code Sec. 36B premium assistance tax credit under the Affordable Care Act (ACA), they are to file a 2015 return and reconcile advance payments with the actual credit to maintain eligibility in 2017. The deadline for taxpayers on extension is October 17, 2016. However, the IRS urges affected taxpayers to not wait but to file as soon as possible to protect their eligibility for the credit in the future.

The Code Sec. 36B credit helps offset the cost of health insurance obtained through the ACA Health Insurance Marketplace. The credit is payable in advance, with taxpayers choosing to receive a monthly basis to coincide with the payment of insurance premiums. If the credit was paid in advance, Form 8962, Premium Tax Credit, must be filed to reconcile the advance credit amount with the actual credit amount. Taxpayers who choose to forgo advance payments can claim the full benefit of the credit when they file their returns. Taxpayers who received too much in advance payments are generally required to repay the excess, subject to certain repayment caps for qualified taxpayers.

The IRS has explained that affected taxpayers are receiving letters that urge them to file their 2015 federal tax return along with Form 8962 within 30 days of the date of the letter. Taxpayers who already filed their 2015 return with Form 8962 can disregard the letter.

IRS issues final regulations for defining marriage post-Obergefell

The IRS has issued final regulations to reflect the Supreme Court holdings of Obergefell v. Hodges, 2015-1 USTC ¶50,357 and United States v. Windsor, 2013-2 USTC ¶50,400. The regulations define terms in the Tax Code describing the marital status of taxpayers for federal tax purposes, providing that the terms “spouse,” “husband” and “wife" mean an individual lawfully married to another individual, and the term “husband and wife” means two individuals lawfully married to each other.

The final regulations provide a general rule for recognizing a domestic marriage for federal tax purposes and a separate rule for recognizing foreign marriages for federal tax purposes. A marriage of two individuals is recognized for federal tax purposes if the marriage is recognized by the state, possession, or territory of the U.S. in which the marriage is entered into, regardless of the married couple’s place of domicile.

In addition, the final regulations provide a specific rule for foreign marriages. Two individuals entering into a relationship denominated as marriage under the laws of a foreign jurisdiction are married for federal tax purposes if the relationship would be recognized as marriage under the laws of at least one state, possession, or territory of the U.S.

The IRS has noted that guidance does not distinguish between civil marriages and common-law marriages of same-sex couples; therefore, same-sex couples in common-law marriages may rely on current guidance for the purpose of filing and amending returns. However, the IRS has declined to treat domestic partnerships, civil unions, and similar formal relationships as marriage for federal tax purposes.

IRS’s debt collection program needs improvement, GAO reports

The Government Accountability Office (GAO) has reported that the IRS should address its Field Collection Program, as it lacks clearly defined and measurable objectives that support the program’s mission. In addition, the GAO noted that the Field Collection Program has provided insufficient guidance to group managers on the use of professional judgment in case selection.

The IRS Field Collection Program uses automated processes to categorize unpaid tax on unfiled tax return cases, after which group managers select the cases for debt collection, GAO reported. In addition, the program’s mission is to apply the tax laws with integrity and fairness to all.

The GAO found that the lack of clearly defined and communicated objectives negatively impacted aspects of the field collection case selection processes, to include the IRS’s ability to measure the program’s performance, assess risks to the achievement of objectives, and assess the continued effectiveness of automated processes. Additionally, GAO reported, that although managers balance a number of considerations when selecting field collection cases, the lack of adequate procedures to guide group managers’ use of judgment in selecting cases for collection did not support the program’s mission of applying the tax law with integrity and fairness to all.

The GAO recommended that the IRS develop, document and communicate program and case selection objectives. In addition, GAO recommended that the IRS develop, document and communicate control procedures guidance for group managers to exercise professional judgment in case selection.

IRS plans to end paper processing at three locations

The IRS has announced in a September 14, 2016 statement, that it will cease the processing of paper returns at three IRS campuses over the coming years. The three affected locations are Covington, Ky., Fresno, Calif., and Austin, Texas. The IRS has attributed the change to the growth of electronic filing.

Paper return processing is to cease in Covington in 2019. In 2021, paper return processing will discontinue in Fresno and in 2024 in Austin. After 2024, only two locations will process paper returns. According to the IRS, approximately 7,200 employees will have their jobs phased-out. The agency reported that the Kansas City, Mo., site will focus on individual returns, and the Ogden, Utah location will focus on business returns.

The IRS has projected that ending paper processing in the three locations will result in cost savings of $266 million. Annual savings in subsequent years are projected to be roughly $53 million. The National Treasury Employees Union (NTEU), which represents IRS employees, reported that other operations, including Accounts Management, Compliance, Call-Sites and automated Collection System, will continue in the three locations.

IRS to expand access to installment agreements

The IRS wants to make it as easy as possible for pay your taxes, even if you cannot pay immediately. To that end, the IRS has just announced that it is testing expanded criteria for streamlined processing of taxpayer requests for installment agreements. During the test, which is scheduled to run through September 30, 2017, more taxpayers will qualify to have their installment agreement request processed in a streamlined manner. Based on test results, the expanded criteria for streamlined processing of installment agreement requests may be made permanent, according to the IRS.

During the test, expanded criteria for streamlined processing will be applied to installment agreement requests submitted to Small Business/Self Employed (SB/SE) Campus Collection Operations, which includes the Automated Collection System (ACS). However, expanded criteria will not be applied to installment agreement requests submitted to Wage and Investment (W&I) Accounts Management, SB/SE Field Collection or through the Online Payment Agreement application.

One expanded criterion being tested immediately is accelerated processing of installment agreements for individual taxpayers with an assessed balance of tax, penalty and interest between $50,000 and $100,000. "This will occur if the taxpayers' proposed monthly payment is the greater of their total assessed balance divided by 84—or—the amount necessary to fully satisfy the liability by the Collection Statute Expiration Date," said the IRS.

Additional information on the expanded test criteria will be made available in the coming weeks, according to the IRS. The IRS noted that, under existing criteria, approximately 90 percent of individual taxpayers with a balance due qualify to use the IRS’s Online Payment Agreement application. Of course, the IRS will continue to charge a fee to enter into an installment agreement; and interest and penalties will continue to accrue.

GSA announces per diem rates for federal employee travel in fiscal year 2017

The General Services Administration (GSA) has announced its fiscal year (FY) 2017 Continental U.S. (CONUS) per diem reimbursement rates. The GSA is often a predictor of the per diem rates that will be set by the IRS, which is slated to release its annual special per diem rates and guidance for taxpayers later in 2016. The FY 2017 rates apply to travel on or after October 1, 2016, and run through September 30, 2017.

The CONUS per diem rate comprises three allowances. These allowances are: the standard lodging allowance; the meals allowance; and the incidental expense allowance. While the standard lodging rate will increase to $91, the GSA made no changes to the meals and incidental expense rate, which is currently set at $51.

IRS allows double mortgage interest deduction limit to unmarried homeowners

The IRS has announced that it will not dispute the holding of in a federal appeals court decision regarding the limit on mortgage interest deductions under Code Sec. 163 (Voss, CA-9, 2015-2 ustc ¶50,427). The court had found that when two or more unmarried taxpayers own a qualifying residence, certain limits on the deduction apply per taxpayer, rather than per residence. As a result, the unmarried co-owners could take a larger interest deduction than if the limit applied per residence.


Home mortgage interest is deductible if it is paid or accrues on either acquisition indebtedness or home equity indebtedness secured by a qualified residence. A taxpayer can have two qualified residences: the taxpayer’s principal residence, and one other home used by the taxpayer as a residence that is not rented to others.

Acquisition debt is debt used to acquire, construct or substantially improve a qualified residence, provided the debt is secured by the residence. The deduction for acquisition debt is limited to interest paid on the first $1 million of debt (or $500,000 for a married taxpayer filing separately). For both acquisition debt and home equity debt, married taxpayers are treated as one taxpayer, with one limit.

Home equity debt is debt secured by the qualified residence, to the extent the debt does not exceed the difference between the fair market value of the residence and the amount of acquisition debt on the residence. The deduction for home equity debt is limited to interest paid on the first $100,000 of debt.

Example. John owns a personal residence that he bought for $200,000. He took out a loan of $175,000 to buy the residence (acquisition indebtedness). The value of the home appreciates to $300,000. He later takes out a home equity loan (HEL) of $100,000 on the residence. The difference between the value of the home ($300,000) and the acquisition debt ($175,000) is $125,000. Because the amount of the HEL ($100,000) does not exceed $125,000, all of the interest paid on the HEL is deductible.

The IRS has ruled that debt incurred by a taxpayer to buy, construct or improve the home (normally, acquisition debt), can be treated as home equity debt to the extent it exceeds the $1 million limit on acquisition debt. Thus, interest paid on the debt above $1 million will be deductible. The amount of home equity debt is still subject to the $100,000 limit, but the taxpayer could claim interest paid on $1.1 million of debt.

Voss decision

In Voss, two individuals were domestic partners. They purchased two residences with mortgages that totaled $2.4 million. They also obtained an HEL of $300,000. Thus, the total debt was approximately $2.7 million. The unmarried taxpayers filed separate returns. Each taxpayer claimed home mortgage interest deductions on $1.1 million of debt, or a total of $2.2 million of debt.

The IRS at first determined that the $1.1 million debt limit applied per residence, not per taxpayer. The total interest deduction was limited to all interest paid on the debt, multiplied by a limitation “ratio” of $1.1 million divided by the entire mortgage amount ($2.7 million). The Tax Court agreed with limits determined by the IRS.

On appeal, the Ninth Circuit reversed. It concluded that the limits applied separately to unmarried taxpayers on a per-taxpayer basis, not a per-residence basis. Thus, unlike married taxpayers, separate limits applied to taxpayers such as the unmarried co-owners of the two properties.

The IRS has now acquiesced in the Voss decision. It will allow unmarried taxpayers to each claim interest deductions on $1.1 million of debt. It remains uncertain whether Congress will address this position, which now favors (or some say, “rewards”) unmarried individuals living together, at least above a certain income level in which mortgage debt exceeds the $1.1 million limit.


New scams target taxpayers and tax professionals

The IRS has warned taxpayers of automated phone scam telephone calls and new tactics used by scammers demanding tax payments on gift cards. This summer has seen a significant increase in the frequency of these calls. IRS Commissioner John Koskinen warned that scammers are becoming more sophisticated and using more automated means of communication in an effort to reach the largest number of victims possible.

The IRS explained that the fake, automated calls claim to be a taxpayer’s final warning before legal action is taken. The calls are often accompanied with threats to arrest, deport, or revoke the driver’s license of the victim for failure to make the purported payment. Once a victim calls back, impersonators demand payments on iTunes and other gift cards to settle tax bills.

The IRS has reported that these phone scams have been increasing in both number and type. In addition to scams seeking payment via gift cards, criminals are also demanding payment for a nonexistent “federal student tax,” soliciting W-2 information from payroll professionals, pretending to be from the tax preparation industry, and purposing to “verify” return information over the phone.

In addition, there is a new scam that targets tax professionals. The scam implements a phishing scheme that requests tax professionals to download and install a software update via a link included in an e-mail. In actuality, the IRS explained, the downloaded software is a program designed to track key strokes, a common tactic used by cybercriminals to steal login information, passwords and other sensitive data.

The IRS reminds individual taxpayers that it will never demand immediate payment over the phone, nor call about a tax obligation without having first mailed a bill. Additionally, the IRS reminds tax professionals to avoid clicking on links or opening attachments contained in e-mails and to ensure that they run security scans to search for viruses and malware.

No deduction for "general knowledge" expenses; but executive MBA was deductible

A married couple, a college professor and a librarian, failed to persuade the Tax Court that their deductions for home internet service, cell phones, satellite television, and other items were deductible. The court rejected their argument that these expenses were necessary for the pursuit of "general knowledge" (Tanzi, TC Memo 2016-148). In another recent Tax Court decision, however, the court allowed a finance and accounting professional to deduct amounts he paid for an Executive Master of Business Administration (EMBA) program (A. Kopaigora, TC Summary Opinion 2016-35). He showed that his courses improved his managerial and leadership skills, appropriate and helpful in his position as a business manager.

Court’s analyses

The court found that the couple’s use of the Internet in the pursuit of "general knowledge" was not an ordinary and necessary business expense for a college professor and librarian. It is more in the nature of a personal expense, the court held. The court also found that the expenses for cell phones were not deductible. The taxpayers failed to show to what extent they used the cell phones for business purposes and the court could not, on the evidence before it, estimate and allocate an appropriate amount for a deduction. Further, the court found that the satellite television and professional library expenses were not deductible.

The taxpayer trying to deduct the cost of an executive MBA program, however, had better luck with the Tax Court. He was a well-established finance and accounting business manager at an airport hotel before beginning his EMBA program and he took courses that improved his managerial and leadership skills, skills that were appropriate and helpful in his position as a business manager. Moreover, he continued to be established in this business when his employment was abruptly terminated because he actively sought employment within the corporate finance and accounting fields while he finished his degree. Although the taxpayer was hired by another company soon after he graduated, he performed duties that were substantially similar to those of his former job and nothing in the record suggested that the degree was a prerequisite for the job. In addition, the courses the taxpayer took did not qualify him for a new trade or business because, according to the court, he was not qualified to perform new tasks or activities with the conferral of his degree.

Tax Court gives expansive interpretation of "collected proceeds" for whistleblower awards

The Tax Court has held that under Code sec. 7623(b), criminal fines and civil forfeitures are “collected proceeds” for calculating whistleblower awards. In so doing, the court rejected the IRS’s arguments to limit collected proceeds to amounts assessed and collected under Title 26.

In the case, the whistleblowers, a married couple, sought an award from the IRS under Code Sec. 7623(b). The IRS collected some $74 million from the wayward taxpayer, com­prising tax restitution of $20 million; criminal fines of $22 million; civil forfeitures of $15 million; and relin­quishment of all claims to $16 million previously forfeited. The whistleblowers and IRS agreed that the couple agreed that the couple was entitled to an award, and that it would be 24 percent of the collected proceeds. However, they disagreed on the amount of the collected proceeds.

To determine what constituted collected proceeds, the court looked to the language of Code Sec. 7623(b). Code Sec. 7623(b) provides that a whistleblower will receive an award of at least 15 percent but not more than 30 percent of the collected proceeds, including penalties, interest, additions to tax, and additional amounts. According to the IRS, only those pro­ceeds assessed and collected under a pro­vision of Title 26 may be used to pay a whistleblower award. The IRS argued that criminal fines cannot be treated as collected proceeds. The whistleblowers countered that the entire amount collected from the taxpayer constituted collected proceeds.

The court rejected the IRS’s argument that criminal fines cannot be treated as collected proceeds, citing that it was well within the power of Congress to limit such awards to taxes and other amounts assessed and collected by the IRS, but chose otherwise. Accordingly, term collected proceeds encompasses the total amount brought in by the government, including criminal fines. Similarly, the term collect­ed proceeds encompasses civil forfeitures, the court held.

NTA cautions that IRS “Future State” leaves out many taxpayers

National Taxpayer Advocate Nina Olson, in her mid-year report to Congress, expressed her continuing concerns about the IRS’s “Future State” initiative (IR-2016-97). In addition, she highlighted improvements in IRS customer service.

Olson conveyed to lawmakers that the Future State initiative will hinder many taxpayers in their ability to interact with the IRS in the way that the initiative envisions. The Future State initiative is largely one that requires online interaction with the IRS. Olson stated that there are many taxpayers who lack internet access, who cannot complete the authentication process required for online communication, who do not trust the security of the IRS systems, or who prefer to speak with an IRS employee. Olson expressed concern that, as a result, taxpayer needs may go unmet under the Future State initiative.

In addition, Olson noted in the mid-year report that customer service levels “improved” to 73 percent during the 2016 filing season. For comparison, during the 2015 filing season, the IRS answered 37 percent of taxpayer calls.

Tax Court allows patent attorney to take business deductions for car restoration

The Tax Court has found that a taxpayer, a patent attorney by trade, was entitled to substantiated business expense deductions stemming from his automobile restoration business, as he intended to make a profit from the activity (R.B. Main, TC Memo. 2016-127). The taxpayer successfully proved that the primary objective of his automobile activity, the restoration and then sale of 1955 and 1956 Plymouth automobiles, was to make a profit under the standards of Code Sec. 183(b).

The court found that the taxpayer advertised his business online, in-print and at live events. In addition, the taxpayer traveled outside of his home state to acquire cars at bargain prices, as well as contracting with third parties to manufacture parts. Furthermore, the taxpayer abandoned unprofitable projects upon determining that he was incapable of restoring certain cars. The court concluded, “Although his manner of carrying on this activity was unsophisticated, it was businesslike.”

Additionally, the Tax Court determined that time and motive weighed in the taxpayer’s favor. The taxpayer devoted a significant amount of time to his automobile activity, and would handle all material aspects necessary. Moreover, the taxpayer’s patent business was undergoing a downturn in the year in issue, which indicated both that he had the time for a restoration business and that he had an incentive to make car restoration profitable, since, in the future, it may have been his primary source of income.

IRS regulations clarify individual shared responsibility rules, premium assistance tax credit

The IRS continues to offer guidance to flesh out the specifics of the individual shared responsibility requirement and the premium assistance tax credit under the Affordable Care Act. The IRS has issued proposed regulations clarifying certain provisions of the Code Sec. 5000A individual shared responsibility requirement and the Code Sec. 36B premium assistance tax credit (NPRM REG-109086-15). The regulations address opt-out payments, excepted benefits, benchmark plans, and other topics.

In previous guidance, the IRS described how to determine the affordability of an employer’s offer of eligible employer-sponsored coverage if an employer also makes available an out-out payment. In so doing, the IRS determined that it was generally appropriate to treat an opt-out payment that is made available under an unconditional opt-out arrangement in the same manner as a salary reduction contribution for purposes of determining an employee’s required contribution. Although the proposed regulations make no change to this approach, the proposed regulations clarify that conditional opt-out payments are not counted as part of an employee contribution, if the employer requires proof that the employee and his tax dependents have minimum essential group coverage.

In addition, the proposed regulations clarify that for purposes of Code Sec. 36B, an individual is considered eligible for coverage under an eligible employer-sponsored plan only if that plan provides minimum essential coverage. An individual enrolled in or offered a plan consisting solely of excepted benefits is not denied the Code Sec. 36B credit by virtue of that excepted benefits offer or coverage.

The proposed regulations also address benchmark plans and when advance payments of the Code Sec. 36B credit are discontinued due to an enrollee obtaining other minimum essential coverage. The proposed regulations clarify the definition of second-lowest cost silver plan (SLCSP), which is the benchmark plan generally used to determine premium tax credits. In addition, the proposed regulations treat the Nonappropriated Fund Health Benefits Program of the U.S. Department of Defense as an employer-sponsored plan for purposes of determining if an individual is eligible for minimum essential coverage under Code Sec. 36B.

Couple allowed homesale exclusion following birth of second child

The IRS determined that a married couple could take advantage of the reduced maximum exclusion of gain from the sale of their home after the birth of their second child (LTR 201628002). Unforeseen circumstances were found to be the primary reason for the sale.

In general, a taxpayer may exclude up to $250,000 (or $500,000 if married filing jointly) of gain from the sale or exchange of property owned and used by the taxpayer as the principal residence for periods aggregating at least two out of the past five years, as determined by the date of the sale. In the case of an otherwise nonqualifying sale or exchange occurring by reason of a change in place of employment, health or other unforeseen circumstances, a partial exclusion of gain may be available under Code Sec. 121(c).

The taxpayers purchased a two-bedroom condominium at a time when they only had one child. The couple subsequently had another child, moved out of the condominium and sold it.

The IRS relied on a factor analysis in determining whether the facts and circumstances of the sale of the taxpayers’ home suggested that the primary reason for the sale was the occurrence of unforeseen circumstances. Reg. §1.121-3(e)(1) provides that a sale results from unforeseen circumstances if the primary reason for the sale is the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence.

The IRS concluded that the birth of the couple’s second child marked the occurrence of an unforeseen circumstance that was the primary reason for the sale of the couple’s condominium. The IRS determined that the suitability of the condominium as their principal residence materially changed. Therefore, the gain on the sale of the condominium could be excluded under the reduced maximum exclusion of gain under Code Sec. 121(c).

IRS outlines new measures to curb tax-related identity theft

The IRS, in conjunction with states and stakeholders in the tax preparation and software industry, intends to take additional steps to protect taxpayers from tax-related identity theft, the agency announced at the 2016 Security Summit. “The IRS is expanding its efforts to collaborate with a group that is absolutely critical to the tax system: the tax return preparer community,” Commissioner John Koskinen told reporters following the 2016 Security Summit.

The IRS and stakeholders are putting new safeguards in place to prevent identity theft. These safeguards will require all individual taxpayers to update their credentials to a minimum eight-digit password and establish security questions. The IRS with its stakeholders will continue the “Taxes. Security. Together” public education campaign. The IRS is also expanding its W-2 Verification Code test, which helps to validate the taxpayer’s identity.

The IRS will receive new data elements from individual returns that will help improve authentication of the taxpayer and identify possible criminal activity. In addition, the IRS plans to create a new Identity Theft Tax Refund Fraud Information Sharing and Analysis Center in 2017.

IRS may prioritize cases for private tax collection

The IRS retains discretion to prioritize cases for assignment to private collection agencies, IRS Chief Counsel has explained in new program manager technical advice (PMTA). The IRS is also expected to announce further details about the latest private collection initiative sometime later this year.

The Fixing America’s Surface Transportation Act of 2015 (FAST Act) requires the IRS to contract with private collection agencies to collect inactive tax receivables. The FAST Act applies to certain cases, including ones that the IRS has removed from its active inventory for lack of resources or inability to locate the taxpayer. Some long-time uncollected cases will also be assigned to private collection agencies.

However, some taxpayer accounts are not to be worked by private collection agencies. These are taxpayer accounts subject to a pending or active offer-in-compromise or installment agreement; classified as an innocent spouse case; or involving a taxpayer identified by the IRS as being deceased, under the age of 18, in a designated combat zone, or a victim of identity theft. Additionally, the IRS may not contract with private collection agencies to handle any taxpayer accounts that are currently under examination, litigation, criminal investigation, or levy; or are currently subject to a proper exercise of a right of appeal. These cases will be worked by IRS personnel.

Chief Counsel noted that the IRS Commissioner has broad powers to administer and enforce the internal revenue laws, including tax collection. Part of the Commissioner's discretionary authority in administering the internal revenue laws is to determine how available resources should best be employed in the overall tax assessment and collection process. This encompasses discretion to determine based on resource allocation which cases are best suited for immediate assignment to private collection agencies, Chief Counsel explained.

Chief Counsel added that during the last private collection initiative, between 2006 and 2009, IRS leadership determined that certain cases were not suitable for assignment to private collection agencies. Generally, cases involving anything more than simple administrative collection functions were not assigned at that time, Chief Counsel observed.

PMTA 2016-002

IRS enhances Get Transcript app to protect taxpayers from fraud

The IRS has upgraded its authentication processes for the popular Get Transcript app. The app had been breached by cybercriminals last year. In response, the IRS has strengthened the app’s security features.

Taxpayers can use the Get Transcript app to view and download certain tax information. The app provides tax return transcript and tax account transcript information. In May 2015, the IRS removed the app from its website after discovering cybercriminals had breached its security protections. Cybercriminals, the IRS reported, gained access to taxpayer data via the app. However, cybercriminals did not breach the agency’s core systems.

To access the upgraded Get Transcript app, taxpayers must have an email address, a text-enabled mobile phone and specific financial account information, such as a credit card number or certain loan numbers, the IRS explained. Taxpayers who registered using the older process will need to re-register and strengthen their authentication to access the upgraded app. New features also enable taxpayers to see the date and time the Get Transcript app was last accessed.

As part of the new multi-factor process, the IRS will send verification, activation or security codes via email and text. Returning users must always receive and enter a text code prior to being able to obtain access, the agency explained. Taxpayers who cannot validate their identities, for example, cannot provide financial verification information or lack access to a mobile phone, should use Get Transcript by Mail, the IRS recommended. Only U.S-based mobile phones may be used and the taxpayer’s name must be associated with the mobile phone account. Landlines may not be used.

IR-2016-85, FS-2016-20

Chief Counsel rules that fine paid to FINRA are not deductible

IRS Chief Counsel has determined that the Financial Industry Regulatory Authority (FINRA) is an entity serving as an agency or instrumentality of the government of the United States. As such, fines paid to FINRA are not tax deductible. Under the Securities Exchange Act, FINRA is required to conduct enforcement and disciplinary proceedings relating to compliance with federal securities laws, regulations, and FINRA rules promulgated pursuant to that statutory and regulatory authority.

Under Code Sec. 162(f), any fine or similar penalty paid to a government for the violation of any law may not be deducted for income tax purposes. For purposes of Code Sec. 162(f), government encompasses the United States government and its agencies and instrumentalities. Key to determining whether an entity is an agency or instrumentality of a government is not only whether the entity has been delegated power to impose fines, but also whether it has the authority of government behind it when it seeks to enforce collection.

Chief Counsel found that FINRA had been delegated the right to exercise part of the sovereign power of a government and has the authority to act with the sanction of that government. Therefore, Chief Counsel concluded, FINRA serves as an agency or instrumentality of the government of the United States. As such, Code Sec. 162(f) bars a deduction for any fine or similar penalty paid to FINRA for the violation of any law.

Chief Counsel Memorandum 201623006

IRS notifies taxpayers of special procedures permitting return of seized assets

The IRS began notifying impacted taxpayers of special procedures permitting the return of seized assets. To be eligible for a return of the assets, taxpayers must show that the underlying funds came from a legal source.

Under the IRS’s former forfeiture procedures, the agency could seize funds from taxpayers allegedly structuring bank transactions, regardless of the intent or source of the funds. Structuring, as used in the Bank Secrecy Act, is identified as a series of transactions that individually total less than $10,000 that are made specifically for the purpose of avoiding reporting requirements for deposits amounting to $10,000 or more.

In May, IRS Commissioner John Koskinen told Congress that the agency would no longer pursue the seizure and forfeiture of funds associated solely with so-called legal source structuring cases barring the existence of exceptional circumstances to justify the seizure and forfeiture. The IRS is notifying taxpayers who may have an interest in assets that were forfeited because they were involved in structuring violations before the change outlined in May. In seeking a return of funds or property seized and forfeited, property owners must establish that the underlying funds came from a legal source and that they did not engage in structuring to conceal criminal activity.

IRS issues guidance on wrongful incarceration exclusion claims

The IRS has provided guidance on how wrongfully-incarcerated individuals are to make claims for a retroactive exclusion from income for any civil damages, restitution or other monetary award received in connection with their wrongful incarceration. The Protecting Americans from Tax Hikes (PATH) Act of 2015, signed into law on December 18, 2015, permits such an exclusion.

Code Sec. 139F dictates the treatment of income resulting from wrongful incarceration. The provision outlines that there are no reporting requirements for receipt of an award qualifying for the wrongfully-incarcerated exclusion. Therefore, new recipients of such awards do not need to report the award on their returns.

For those taxpayers wishing to make retroactive exclusion claims, they must file the requisite forms and supplemental information. The guidance provides further details on who qualifies for the exclusion, types of payments that qualify for the exclusion and the documentation requirements that apply. Accordingly, affected taxpayers are to submit Forms 1040X, along with supplemental documentation, to make claims for wrongful incarceration exclusions.

For retroactive claims pertaining to tax years before December 18, 2015, the deadline for mailing a claim is December 19, 2016. Taxpayers are told to allow up to 16 weeks for the processing of their claims. For more information on the wrongful incarceration income exclusion, visit www.irs.gov.

MI - Prepaid fuel rates announced

The Michigan Department of Treasury has announced that for the period of November 1, 2016 through November 30, 2016, the prepaid sales tax rate for gasoline is decreased from 12.0 cents per gallon to 11.6 cents per gallon. The prepaid rate for diesel fuel is increased from 12.6 cents per gallon to 12.7 cents per gallon. Revenue Administrative Bulletin 2016-19, Michigan Department of Treasury, October 5, 2016

Tax Briefings

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