Tax & Notary - Topics of Interest

IRS Needs Better Controls over Partial Payment Agreements

The Internal Revenue Service is not always properly monitoring or establishing the partial payment installment agreements it enters into with taxpayers, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, noted that taxpayers who enter into a partial payment installment agreement will not fully pay all of their delinquent tax liability, so it is important that PPIAs are carefully and accurately administered. If the IRS does not effectively pursue collection of unpaid tax through the use of PPIAs, it could create an unfair burden on the majority of taxpayers who fully pay their taxes on time, the report noted.

When establishing a PPIA, the IRS is required to complete a financial analysis of the taxpayer and assess the financial condition of taxpayers with a PPIA every two years. TIGTA reviewed a random sample of 100 PPIAs and found that the two-year reviews were not always properly performed and that some PPIAs were established without a complete financial analysis and/or manager approval.

To begin the two-year financial assessment, the IRS performs an automated review process of PPIAs at the two-year mark. However, the automated two-year review processes did not occur in eight (or 10 percent) of the 84 PPIAs requiring a two-year review.

If the automated review process determines that the financial condition of the taxpayer may have improved, a manual review is required. However, the manual reviews were not performed properly for 15 (or 52 percent) of the 29 PPIA cases for which a manual review was required. IRS procedures do not require managers to review or approve the results of the two-year review of PPIAs.

In addition, 15 of the 100 PPIAs sampled were established without a complete financial analysis. Without a complete financial analysis, there is a higher risk that the taxpayers are not paying the maximum amount they can afford or that they are unable to afford the amount in the agreement, TIGTA. Furthermore, 34 of the 100 PPIAs did not have evidence that the manager approved the PPIA. The absence of documented manager approval indicated that managers are not reviewing the PPIAs before they are established.

The IRS Collection Process Study report recommended that the IRS expand the use of PPIAs by offering a modified minimum PPIA to all individual taxpayers in uncollectible status. The report estimated that if PPIAs were offered to 230,000 individual taxpayers classified as unable to pay, the collection potential could be as high as $69 million annually. TIGTA was advised that the IRS does not have plans to implement this recommendation due to limited resources, however.

TIGTA made several recommendations to improve controls over the two-year review process and establishment of PPIAs. TIGTA also recommended that IRS management test the viability of expanding the use of PPIAs on a sample of taxpayers in uncollectible status.

In response to the report, IRS officials agreed or partially agreed with six of the seven recommendations. The IRS plans to revise procedures to improve controls over the two-year review process and plans to establish controls to prevent PPIAs from being established without manager review or approval.

The IRS did not agree with the recommendation to test the viability of expanding the use of PPIAs, saying it conducted similar tests with the Offer in Compromise program for taxpayers in currently not collectible status, which did not yield significant results.

TIGTA argued that the IRS’s tests involved taxpayers who were asked to consider applying for an Offer in Compromise, not a PPIA. Because of the differences between the two programs, TIGTA said it does not believe it is appropriate to draw conclusions about taxpayer willingness to establish a PPIA. For example, unlike a PPIA, taxpayers entering into an Offer in Compromise may have to pay 20 percent of their balance due before the IRS will consider their request.

“We are proud of the actions taken to improve the PPIA program,” wrote IRS Deputy Inspector General for Audit Michael R. Phillips in response to the report. “We have enhanced tracking reports for PPIAs, revised notices and improved telephone systems to better serve customers.  Through training and Internal Revenue Manual updates, employees are well aware of PPIAs as evidenced by their increased use over the past several years.”

Phillips generally agreed with TIGTA’s recommendations for financial analysis and managerial approval, but said he was concerned that the date ranges chosen for the sample review might have skewed the results of TIGTA’s findings. The sample of reviewed cases only included PPIAs established between Jan. 1, 2008 and July 1, 2009 and did not include any recent agreements, he pointed out.

“While this was necessary for the two-year review portion of the process, your findings may not be indicative of current case work,” he wrote. “In addition, your review did not include any supporting documentation submitted by the taxpayer or any physical supporting documentation associated with a case file when a PPIA was established. Analysis of supporting documentation may provide additional insight into a taxpayer's ability to repay a liability. As such, we will conduct a review of recently established PPIAs and supporting documentation to determine if proper financial analysis, managerial review, and managerial approval are being done.”

He agreed to include PPIAs in campus operational reviews of installment agreements to ensure Internal Revenue Manual procedures were followed, but added that since PPIAs represent less than 2 percent of installment agreements, he did not believe it was appropriate to conduct separate National Quality Review System product line reviews for PPIAs.

With respect to the Collection Process Study recommendation to test the viability of expanding the use of PPIAs on a sample of taxpayers in uncollectible status, he said he did not believe it was an efficient use of the IRS’s limited resources.

“We conducted two similar tests with the Offer in Compromise (OIC) program for taxpayers in currently not collectible (CNC) status,” Phillips noted. “These taxpayers received a letter of solicitation informing them of the OIC program as a viable collection alternative. Even when offered an alternative that would fully resolve their accounts, the response rate was less than 3 percent.”

Based on the assumptions in the report, Phillips agreed with TIGTA’s proposed outcome measures for taxpayers who had their monthly payments reduced. However, he did not agree with the outcome measure for offering a modified PPIA to taxpayers in CNC status, noting that similar tests have not yielded significant results and do not mirror the estimated outcomes identified in the Collection Process Study.

 

 

IRS e-File Improvements Should Help Next Tax Season

The enhancements that the Internal Revenue Service is making to its Modenized e-File computer system promise to improve the system’s reliability and reduce delays in processing tax returns next filing season, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, noted that during the last filing season, the IRS had to suspend MeF system processing on at least two occasions to correct system performance issues. The IRS subsequently reviewed the MeF system performance issues and identified major categories of work to address performance and reliability issues.

For the report, TIGTA reviewed whether infrastructure changes to the MeF system were on track to deliver improvements in performance and reliability for next filing season.

The IRS took the necessary steps to improve MeF system performance, TIGTA found. These included testing the system’s ability to process high volumes of returns for a sustained period of time. The tests concluded that the MeF system would meet peak performance requirements.

In addition, the IRS increased the bandwidth of the portal that serves as the entry point for web-based access to IRS applications and data.  Because other IRS applications use the same portal as the MeF system, this increased bandwidth helps guard against a decrease in overall system performance.

“The Modified e-File System is a critical component to meet the needs of taxpayers, reduce taxpayer burden, and broaden the use of electronic interactions,” said TIGTA Inspector General J. Russell George in a statement. “Collectively, the various categories of work should provide the enhancements intended to correct problems associated with the 2012 filing season and give the IRS assurance of the MeF system’s readiness for the 2013 filing season."

TIGTA did not make any recommendations in this report, and the IRS had no comment on the report.

 

 

Protecting Clients from Tax-Related Identity Theft

Tax-related identity theft is a continuing problem, with the National Tax Advocate reporting that the use of stolen Social Security numbers to collect fraudulent tax refunds increased more than 78 percent from 2011 to 2012, affecting nearly 450,000 individuals. Experian's ProtectMyID service offered the following advice for ways that taxpayers can protect themselves. A trustworthy tax preparer is an important part of the solution.

• Place tax documents in a secure location, such as a safe or a locking file cabinet, and store them there until needed to prepare tax forms. Do not leave them in a car. 
• Some tax apps require users to take photos of W2 forms. Be sure to delete images after use.
• Password-protect your smartphone. 
• Do not follow links in emails or text messages to the IRS site. Always type "irs.gov" directly into a browser to avoid vicious links. Report fraudulent IRS emails, texts or phone calls to phishing@irs.gov. 

FASB, IASB Propose Major Changes to Lease Accounting

The Financial Accounting Standards Board and the International Accounting Standards Board have released for comment a revised exposure draft proposing significant changes to the standards for accounting for leases.

The new Proposed Accounting Standards Update, Leases (Topic 842) — A revision of the 2010 Proposed FASB Accounting Standards Update, Leases (Topic 840), would create a new, converged approach to lease accounting that would remove the old distinction between operating and capital leases, and require instead that all assets and liabilities arising from leases be recognized on the balance sheet.

How leases with terms of more than 12 months are treated will now depend on how much of the economic benefit of the underlying asset the lessee is expected to consume, which in practice will generally come down to whether it’s a lease for real estate, including land and buildings, or for other property, such as equipment, aircraft or trucks. (For leases of under 12 months, the preparer can elect not apply the proposed standard.)

“Leasing is a very important source of financing,” said IASB Chair Hans Hoogervorst in a conference call with reporters. “There are $800 billion in new leasing contracts every year, the majority of which are recorded as operating leases, so they don’t go on the balance sheet. In fact, many are specifically structured specifically to be kept off the books. We don’t think that’s acceptable -- it’s important to get the leases on the balance sheet.”

The current operating-versus-capital-lease standards have been criticized for not accurately representing leasing transactions, and for allowing too many lease assets and liabilities to go unrecognized in financial statements. In response to concerns expressed by the users of financial statements, the boards began developing new proposals in 2005.

The new exposure draft reflects the boards’ redeliberations and stakeholder feedback on an earlier exposure draft that was put out for comment in 2010.

One of the main distinctions between the earlier ED and the new release was that the prior draft would have required the same treatment for all leases, while the current version offers the dual approach that offers different treatments to reflect the underlying economics of the transaction.

The new draft also includes a number of revisions that are aimed at making the standards less expensive and less complex to apply, including the exception for short-term leases; the removal of the requirement to include most variable lease payments in liability, due to the complexity of estimating them; and simplifications to the accounting for renewal options.

The boards expect comments by mid-September, and hope to begin redeliberations by the end of the year, and finalize a standard in 2014.

In terms of the potential transition to the proposed standards, “We will be requiring the application of the proposals to all existing lease arrangements,” said Seidman. “We will not be grandfathering any lease arrangements. … For operating leases, we tried to simplify the transition to make it easier to get the leases on the balance sheet.”

“We plan to conduct joint field work with the IASB during the comment period,” Seidman noted during the conference call, including webcasts, workshops, meeting with stakeholders and roundtables. FASB has also scheduled a specific meeting with the Private Company Council.

 

The details

For most leases of property, the proposal would require lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, and also recognize a single lease cost, combining the interest on the lease liability with the amortization of the right-of-use asset, on a straight-line basis.

For most leases of assets other than property, the lessee would recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments, and would recognize and present the interest on the lease liability separately from the amortization of the right-of-use asset.

The boards have also proposed new accounting for lessors, which follows similar distinctions based on the degree of consumption of the underlying leased asset.

While the boards are quick to point out that this is a converged standard, FASB’s version does have two minor points of difference: The U.S. standard-setter has “tentatively” decided that private companies and non-public nonprofit organizations can elect to use a risk-free rate when discounting their lease liabilities, and they don’t have to disclose a reconciliation of lease liability from the beginning of the year to the end of the year.

The boards will host a live webcast on the revised exposure draft on Monday, May 20, at 10:30 a.m. EST. Attendees can register for the webcast here. More details, including the revised ED itself, are available on the IASB Web site and the (newly revamped) FASB Web site.

 

 

Affordable Care Act

On January 1, 2014, the new health law goes into effect requiring most Americans to have health insurance.

What you need to know:

▪    If you have fewer than 50 full-time employees, you are not required to offer health insurance

▪    However, your employees must have health insurance or they could be hit with a tax penalty

You have the following options if you want to help your employees afford insurance:

1. Offer group insurance to your employees*

(even though you don't have to if you have less than 50 employees)

 ▪       Starting Oct 1, 2013, you can buy group insurance from your state's health marketplace.*

▪       You may qualify for a tax credit if you meet certain criteria.

*Small Businesses today, small employers like you have a tough time finding and affording coverage that meets the needs of your employees. Starting in 2014, you’ll have more choice and control over your health insurance spending through the Small Business Health Options Program (SHOP), a new program designed to simplify the process of finding health insurance for your small business. You control the coverage you offer.  You choose the level of coverage you’ll offer, and define how much you’ll contribute towards your employees’ coverage.  You’ll also have exclusive access to an expanded Small Business Healthcare Tax Credit. This tax credit covers as much as 50% of the employer contribution toward premium costs for eligible employers who have low- to moderate-wage workers.  When you get insurance through the SHOP (www.healthcare.gov), it makes it easy for you take advantage of other tax breaks too including the chance for you and your employees to use pre-tax dollars to make your premium payments.

2. Help your employees buy their own insurance using pre-tax dollars

▪       Save your employees $500 or more per year in taxes by letting them use pre-tax dollars to buy insurance and pay for out-of-pocket expenses.

▪       Decide how much you want to contribute to help employees pay for healthcare expenses. Even $0 is okay.

3. Let your employees figure it out

▪       If your employees already have their own insurance, they are all set.

▪       Your employees might qualify for government assistance when buying insurance on their state's marketplace.

▪       By not having insurance starting Jan 1, 2014, your employees risk a tax penalty.

▪       Some of your employees may be exempt from having insurance

 

Obama Appoints OMB Official as Acting IRS Commissioner

 President Obama  appointed Office of Management and Budget official Danny Werfel to serve as acting commissioner of the Internal Revenue Service.

Werfel, 42, replaces Steven Miller, who was asked to resign Wednesday in the wake of revelations that IRS employees inappropriately targeted conservative groups.

"Throughout his career working in both Democratic and Republican administrations, Danny has proven an effective leader who serves with professionalism, integrity and skill," Obama said. "The American people deserve to have the utmost confidence and trust in their government, and as we work to get to the bottom of what happened and restore confidence in the IRS, Danny has the experience and management ability necessary to lead the agency at this important time." 

Divorced Parents with Children Face Complex Tax Choices

There is sometimes a disconnect in the handling of dependency exemptions and related tax credits between what courts advise a taxpayer to do and what the Tax Code actually permits.

This can be a source of inequity to taxpayers, particularly in the case of divorced parents. These problems commonly surface when determining who is entitled to take the dependency exemption, the child and dependent care credit, the child tax credit, the earned income credit, and head-of-household filing status, noted Robbin Weiner, CPA, of Dayton, N.J.-based E. Martin Davidoff & Associates.

“It’s important that tax advisors tell their clients what language they need to include in their divorce settlement,” she observed. “They need to specify that the custodial parent is required to sign and provide the necessary Form 8332 to the non-custodial parent, which allows them to take the dependency deduction and the child tax credit.”

Weiner cited an instance in which a recently divorced client came into her office. “The mother was the custodial parent, and to enable her to work, she incurred additional aftercare expenses. The divorce court decreed that the parents of the child were to split the expenses 40/60,” she said. “The court instructed the father that he must pay the wife the full 60 percent and get his reimbursement for the tax credit by filing the dependent care credit on his own tax return. However, the Tax Code specifically does not permit a non-custodial parent to utilize this tax credit.”

The taxpayer’s former accountant had prepared his return and advised him to put the credit on the return, in addition to filing as a head of household. “But you’re not allowed to do that if you’re not the custodial parent,” explained Weiner.

The custodial parent is generally the parent with whom the child lived for the greater number of nights during the year. Form 8332 can be used by the custodial parent to release the claim for a dependency exemption to the noncustodial parent. It allows the noncustodial parent to claim the exemption and also the child tax credit.

However, Form 8332 does not allow the noncustodial parent to claim the child as a qualifying child in determining head-of-household filing status, the earned income credit, and the child and dependent care credit or the exclusion from income for dependent care assistance, Weiner indicated. Only the custodial parent may claim these, even if the Form 8332 waiver is provided to the noncustodial parent.

“The problem we had with the child care credit was that only the custodial parent can take it on the return,” said Weiner. “So when you write the divorce document, you also have to specify that if the custodial parent receives the credit, the noncustodial parent needs to be reimbursed for his or her share of the credit.”

A Tax Court decision earlier this week (Shenk, 140 T.C. No. 10, decided May 6, 2013) further illustrates the predicament a taxpayer may find himself in when trying to merge a state court order with the reality of the tax law, Weiner noted.

Michael Shenk’s judgment of divorce provided that his ex-wife would have primary residential custody of their three minor children, and that the dependency exemption would be divided according to various conditions. But it did not provide that the ex-wife should execute a Form 8332 for any year. For 2009, both Mr. Shenk and his ex-wife claimed the same child on their returns, and the husband also filed as head of household.

The Tax Court held that since Form 8332 was not executed by the wife nor attached to the husband’s return, he was not entitled to claim the dependency exemption deduction or the child tax credit. Moreover, since all three of his children resided with their mother for more than half the year, the court held he was not entitled to head of household status.

 

 

IRS Changes Tax-Filing Requirements for Large Corporations and Partnerships

The Internal Revenue Service said Friday that it will be making changes to the filing requirements for corporate and partnership taxpayers with assets of between $10 million and $50 million in an effort to lighten the burden.

The changes pertain to the Schedule M-3 filing requirement for taxpayers with assets between $10 million to $50 million for Forms 1120, 1120-C, 1120-F, 1120S, 1065 and 1065-B.

These business taxpayers will be permitted to file Schedule M-1 in place of the Schedule M-3 Parts II and III. The changes will be effective for tax years ending on Dec. 31, 2014, and later.

However, the IRS added that no changes are currently planned to the Schedule M-3 requirements for Forms 1120-L or 1120-PC, nor for Form 1120 taxpayers filing as a mixed group.

The IRS said the reason for the changes is to reduce filing burden and to simplify reporting for these corporations and partnerships. The changes affect the filing requirements for Schedule M-3, “Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More.”

Effective for tax years ending Dec. 31, 2014 and later, corporations and partnerships with at least $10 million but less than $50 million in total assets at tax year end will be permitted to file Schedule M-1 instead of Schedule M-3, Parts II and III. Schedule M-3, Part I, lines 1-12 will continue to be required for these taxpayers. Those taxpayers electing to file Schedule M-1 must report book income on Schedule M-1, line 1, equal to the book income amount reported on Schedule M-3, Part I, line 11. Corporations and partnerships with $10 million to $50 million in total assets may voluntarily file Schedule M-3 Parts II and III rather than Schedule M-1. This change applies to corporations and partnerships filing Forms 1120, 1120-C, 1120-F, 1120S, 1065 and 1065B.

Corporations and partnerships filing Forms 1120, 1120-C, 1120-F, 1120S, 1065 and 1065B with $10 million to $50 million in total assets will not be required to file Form 1120 Schedule B, Form 1065 Schedule C or Form 8916-A.

The IRS’s Large Business & International Division is continuing to consider changes to Schedule M-3 and to the requirements for the book-to-tax reconciliation for corporations with $10 million to $50 million in total assets filing Form 1120-L, 1120-PC, or filing as a mixed group including the requirement that mixed groups sub-consolidate and file Form 8916, the IRS noted. In addition, the IRS LB&I Division is considering changes to Schedule M-3 and to the requirements for the book-to-tax reconciliation for corporations and partnerships with $50 million or more in total assets.

Schedule M-1 detail is currently filed electronically as four attachments, one each to Schedule M-1 lines 4, 5, 7, and 8.  This will not change, according to the IRS.

Partnerships with less than $10 million in total assets that are currently required to file Schedule M-3 (adjusted total assets of $10 million or more, total receipts for $35 million or more, or a reportable entity partner also required to file Schedule M-3) will continue to file Schedule M-3, Part I and may elect to file Schedule M-1 in place of Schedule M-3, Parts II and III.  Partnerships with less than $10 million in assets will not be required to file Form 1065 Schedule C or Form 8916-A.

Corporations and partnerships with less than $10 million in total assets that are not otherwise required to file Schedule M-3 are currently allowed to voluntarily file Schedule M-3. These taxpayers can continue to voluntarily file Schedule M-3, according to the IRS, and they may elect to file Schedule M-3 Parts I, II, and III or to file Schedule M-3 Part I and to file Schedule M-1 in place of Schedule M-3 Parts II and III. Such corporations and partnerships will not be required to file Form 1120 Schedule B, Form 1065 Schedule C, or Form 8916-A.

 

 

Congress Mulls Changing Taxes on Residential Real Estate

The House Ways and Means Committee held a hearing on tax reform and residential real estate, considering the effect of chaning popular tax breaks like the mortgage interest deduction. Thursday’s hearing showed little indication that Congress is ready to abandon such a popular tax break, especially as the housing and the construction industries finally show signs of rebounding from the mortgage crisis.

House Ways and Means Committee chairman Dave Camp, R-Mich., contended that it was important to fix the broken Tax Code to make it simpler, fairer and more transparent for families and employers.

“Homeownership is an integral part of the American dream, and the Tax Code has long provided a variety of incentives to make it easier for families to buy and own a home,” said Camp. “We also know that the real estate industry plays a large role in our economy. So, this is an area that needs careful, thoughtful review.”

Camp noted that a number of federal tax preferences provide benefits for residential real estate, each of which is governed by different rules and criteria. For example, only taxpayers who itemize their deductions may deduct mortgage interest. “Other interactions within the Tax Code can also limit the use of this provision,” said Camp. “By way of example, the deduction for interest on home equity indebtedness is disallowed for purposes of the Alternative Minimum Tax.”

He pointed out that federal tax benefits for real estate treat homeowners differently than renters. A taxpayer who pays $1,000 per month to rent an apartment may not deduct that amount from income, but a taxpayer who pays mortgage interest of $1,000 may take a deduction if they itemize, Camp noted. 

“You shouldn't need an army of lawyers and accountants to understand our Tax Code,” said Camp. “And, it shouldn’t take American taxpayers over 6 billion hours and $168 billion every year to comply with the code. We should get rid of the loopholes in the code and make it more efficient and effective for hardworking taxpayers.”

His Democratic counterpart on the committee sees more fruitful areas for tax reform. “Let’s be clear. There are many egregious loopholes in the Tax Code. But the main provisions incentivizing home ownership are policies, not loopholes,” said House Ways and Means ranking member Sander Levin, D-Mich. “The failure to differentiate which is which—between policies and real loopholes—has led to facile proposals. Among them are proposals that begin without the mortgage interest or any other deductions or proposals that simply pick a much lower top tax rate then present law without any suggestions as to how to fill the trillions in lost revenue that would result.”

He referred to a report from the Joint Committee on Taxation that found 70 percent of the benefit of the mortgage interest deduction goes to households earning less than $200,000 a year. Less than a third of the benefit, 30 percent, goes to those who make more than that.

“By comparison, the reduced rate for capital gains almost exclusively benefits the very wealthy,” said Levin. “More than 70 percent of the benefit of that lower rate flows to people making more than $1 million a year. Just 12 percent goes to those making less than $200,000. These tax policies deserve serious consideration, beyond the easy rhetoric about simply broadening the base and reducing rates.”

Gary Thomas, president of the National Association of Realtors, pointed to the longevity of the mortgage interest deduction in his testimony.

“Some provisions in the Tax Code, such as the deductions for mortgage interest and state and local taxes paid, have been part of the federal Tax Code since the income tax was introduced 100 years ago,” said Thomas. “Thus, the values of such tax benefits are both directly and indirectly embedded in the price of a home. While economists agree that there is no accurate measure of the value of those embedded tax benefits, they all generally agree that the value of a particular home includes tax benefits. Real estate is the most widely-held category of assets that American families own, and for many Americans, the largest portion of their family’s net worth, despite the price declines of the Great Recession. Therefore, while NAR agrees that reform and revision to different portions of the individual tax code may be warranted, we remain committed to preserving the current law incentives for homeownership and real estate investment.”

Mark Fleming, chief economist at CoreLogic, a company that analyzes data on the mortgage industry, discussed the recent positive trends in the housing sector.

“One of the brightest spots within the uneven economic recovery is the housing sector,” he said in his prepared testimony. “Residential investment contributed 0.4 percentage points to GDP growth in Q4 2012, significant for a single industrial sector.”

He noted that housing starts increased to an annualized rate of 1 million, which is 47 percent above the level for the same month a year ago and the largest increase in 20 years. Home prices increased 10.2 percent year over year, the biggest increase in nearly seven years. Fleming credited the rebound in the housing industry in part to stimulus measures such as the First-Time Homebuyer Tax Credit.

Eric Toder, co-director of the Urban-Brookings Tax Policy Center, noted that Congress’s Joint Committee on Taxation estimates that the mortgage interest deduction will reduce federal receipts by about $70 billion in fiscal year 2013 and by about $380 billion between fiscal years 2013 and 2017. Homeowners benefit from the deduction of real property taxes ($153 billion between 2013 and 2017) and the exemption of the first $250,000 ($500,000 for joint returns) of capital gains on the sale of principal residences ($130 billion between 2013 and 2017). However, he argued against eliminating the mortgage interest deduction.

“If the Committee is to achieve its stated goals of reducing the top individual income tax rate to 25 percent and maintaining receipts at their baseline projected level of 19.4 percent of GDP by the end of the decade, it will be necessary to eliminate or pare back some major tax expenditures,” said Toder. “But the mortgage interest deduction is one of the most popular benefits in the tax law, and politicians have in the past viewed it as untouchable. The mortgage interest deduction is the only tax benefit that President Reagan promised to protect in 1984 when his Treasury Department was preparing the wide-reaching reform proposals that would form the basis for the 1986 Tax Reform Act. In 2015, according to Tax Policy Center estimates, about 40 million taxpayers will benefit from the deduction.”

Robert Dietz, assistant vice president for tax and policy issues at the National Association of Home Builders, also cited the Tax Reform Act of 1986 in his testimony, but warned against any reforms that could hurt the real estate industry.

“Many in Congress have looked back to the tax reform efforts in 1986 as a guide for today,” he said. “And there are some important efforts to remember from that experience. First, it is possible to achieve those low [tax] rates and maintain strong incentives for housing. But we also saw for commercial and multifamily real estate the perils of significant tax policy changes. Most economists agree that the changes in the 1986 Act led to a crisis in commercial and multifamily real estate. How housing is dealt with in tax reform will shape the economy moving forward. Housing can be a key engine of job growth that this country needs.”

 

IRS to Serve Summons at Wells Fargo Seeking Identities of U.S. Taxpayers with Offshore Accounts at CIBC FirstCaribbean Bank

A federal court in San Francisco has entered an order authorizing the Internal Revenue Service to serve a summons seeking information about U.S. taxpayers who may hold offshore accounts at Canadian Imperial Bank of Commerce FirstCaribbean International Bank, seeking records of FCIB’s U.S. correspondent account at Wells Fargo.

The order, signed Monday evening by Senior District Judge Thelton E. Henderson, will allow the IRS to identify U.S. taxpayers who hold or held interests in financial accounts at FCIB and other financial institutions that used FCIB’s Wells Fargo correspondent account.

Under a petition filed by the Justice Department, the court granted the IRS permission to serve what is known as a “John Doe” summons on Wells Fargo. The IRS uses John Doe summonses to obtain information about possible violations of federal tax laws by individuals whose identities are unknown. The John Doe summons approved by the court will direct Wells Fargo to produce records identifying U.S. taxpayers with accounts at FCIB and other banks that used FCIB’s correspondent account.

According to the declaration of IRS Revenue Agent Cheryl R. Kiger filed in support of the petition, FCIB is based in Barbados and has branches in 18 Caribbean countries. While FCIB does not have U.S. branches, it maintains a correspondent account in the United States at Wells Fargo Bank.

A correspondent account is a bank deposit account maintained by one bank for another bank. Financial transactions involving U.S. dollars flow through U.S. banks. Therefore, foreign banks that do business in U.S. dollars, but have no office in the U.S., obtain a correspondent account at a U.S. bank in order to engage in such transactions. These transactions leave a trail in the U.S. that the IRS can access through the records of the correspondent bank accounts. These correspondent bank accounts have records of money deposited, money paid out through checks and money moved through the correspondent account by wire transfers. All of this information the IRS can obtain through a John Doe summons issued to the U.S. bank holding the correspondent account.

“This summons marks another milestone in international tax enforcement,” said IRS Acting Commissioner Steven T. Miller in a statement. “Our work here shows our resolve to pursue these cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil.”

As alleged in Agent Kiger’s declaration, the IRS learned that U.S. taxpayers were using FCIB to help them keep their offshore accounts undetected by the IRS and not to pay U.S. federal income tax on money placed in those offshore accounts. Kiger’s declaration describes her review of the information submitted by more than 120 FCIB customers who participated in the IRS’s Offshore Voluntary Disclosure Program. According to the Kiger declaration, many of the FCIB customers in the John Doe class may have been under-reporting income, evading income taxes, or otherwise violating the internal revenue laws of the United States.        

“The Department of Justice and the IRS are committed to global enforcement to stop the use of foreign bank accounts to evade U.S. taxes,” said Kathryn Keneally, Assistant Attorney General for the Justice Department’s Tax Division, in a statement. “This John Doe summons is a visible indication of how we are using the many tools available to us to pursue this activity wherever it is occurring. Those who are still hiding should get right with their country and their fellow taxpayers before it is too late.”

A deliberate failure to report a foreign account can result in a penalty of up to 50 percent of the amount in the account at the time of the violation.

In a similar case in January, the U.S. District Court for the Southern District of New York entered an order authorizing the IRS to serve a John Doe summons on UBS AG, seeking records of Swiss bank Wegelin & Co.’s United States correspondent account at UBS, which will allow the IRS and the Justice Department to determine the identity of U.S. taxpayers who hold or held interests in financial accounts at Wegelin and other Swiss financial institutions to evade federal income taxes (see UBS Ordered to Provide IRS with Ino on Other Swiss Banks).