With the 2016 federal income tax filing deadline coming up soon, individual taxpayers have a short window to estimate whether or not they will need addition time to meet their filing obligations. Those individuals who do need more time can request an automatic six-month filing extension, as long as they do so before April 18, 2017.
Contrary to popular belief, filing extensions are not reserved solely for procrastinators. Rather, there are a large number of taxpayers who routinely file for extensions, including securities traders and/or partners/investors in pass-through entities such as S-Corporations.
While a filing extension will give taxpayers until October 16, 2017, to submit their tax returns, it does not delay the deadline for which they are responsible for paying their tax liabilities. As a result, individuals will need to estimate their tax bills as accurately as possible and make a payment to the IRS by April 18 or risk a tax penalty, which can be 10 times more costly than not paying on time. Taxpayers who cannot pay in April the full amount of the taxes they owe, may request assistance from the IRS to work out a payment plan.
There are three groups of U.S. taxpayers who may receive from the IRS automatic filing extensions without having to ask for it. They include victims affected by federal disaster areas, members of the military who are on duty outside the U.S. or serving in a combat zone, and U.S. citizens and resident aliens who live and work outside of the U.S, and Puerto Rico. The length of these extensions vary based upon a taxpayer’s individual circumstances.
About the Author: Adam Slavin, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practices, where he provides tax planning and consulting services to high-net-worth individuals and closely held business. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at email@example.com.
In its ongoing efforts to ensure compliance with an already complex tax system, the IRS’s Large Business and International (LB&I) division in January 2017 issued a new audit strategy that focuses on what it considers to be red flags of potential tax evasion among high-net-worth individuals and businesses with more than $10 million in assets. Taxpayers affected by this strategy include individuals, land developers, partnerships, S Corporations, other domestic businesses with operations abroad, and foreign entities conducting business in the U.S.
Under these “campaigns”, the IRS intends to “treat”, or resolve, high-risk activities by updating regulatory guidance, developing issue-based practice units, improving IRS agent training, issuing warning letters to non-compliant taxpayers, and conducting issue-based IRS examinations, when warranted.
Following are the 13 initial issues that the IRS has focused in its crosshairs. Affected taxpayers should be on alert and meet with their accountants to prepare and respond accordingly.
S Corporation Losses Claimed in Excess of Basis. The Internal Revenue Code allows shareholders in S Corporations to pass business income, losses and other items through to their personal income tax returns. However, the IRS has found that some shareholders erroneously claim losses and deductions in excess of their basis in a corporation, to which they are not entitled.
Land Developers Applying the Completed Contract Method (CCM) of Accounting. Large land developers that construct residential communities may be improperly using the Completed Contract Method (CCM) of accounting when their average annual gross receipts exceed $10 million, but their contracts do not call for the construction of residential homes as required by the Internal Revenue Code. According to the IRS, some developers are improperly deferring all gain until the entire development is completed.
Domestic Production Activities Deductions for Multi-Channel Video Program Distributors (MVPD) and TV Broadcasters. MVPDs and TV broadcasters often claim an Internal Revenue Code Section 199 Domestic Production Activity Deduction, asserting that they are the producers of qualified U.S. films when “distributing channels and subscription packages that often include third-party produced content”. Additionally, these entities often claim the deduction erroneously by maintaining that their qualifying activities provide customers with online access and direct use of computer software.
Energy Credits. Only those businesses that apply for and receive approval from the Department of Energy (DOE) and the IRS may claim a tax credit equal to 30 percent of their investment to “re-equip, expand or establish a manufacturing facility for the production of” seven qualifying advanced energy-production properties. The IRS implies that there are a significant number of businesses that are claiming the credit without pre-approval from the agency or the DOE.
Related Party Transactions. This campaign focuses on mid-market businesses that are potentially noncompliant with regulations that govern how commonly controlled entities conduct transactions between each other, including transferring funds from corporations to related pass-through entities or shareholders.
Tax Equity and Fiscal Responsibility Act (TEFRA) Linkage Plan Strategy. The IRS regularly revises processes for accessing tax on terminal investors in partnerships. This campaign aims to identify, link and assess taxes on those investors that pose the most significant audit-compliance risk.
Micro-Captive Insurance. Transactions in which a taxpayer attempts to reduce aggregate taxable income using contracts it treats as insurance contracts and a related company that the parties treat as a captive insurance company must comply with an arm’s-length standard and sound business practices. When this is not the case, each entity that the parties treat as an insured entity under the contracts cannot claim deductions for insurance premiums.
Deferred Variable Annuity Reserves and Life Insurance Reserves Industry Issue Resolution (IIR). The IRS agreed to accept the Deferred Variable Annuity Reserves and Life Insurance Reserves issued in the IIR program under Revenue Procedure 2016-19 to address issues it identified relating to, among other things, the amounts to be taken into account when determining tax reserves for Life Insurance Contracts and tax-deferred variable annuities with guaranteed minimum benefits.
Basket Transactions. Taxpayers attempting to defer ordinary income and short-term capital gain from a structured financial transaction and treat it as long-term capital gain may do so only when they treat the option or another derivative as “open” and when they do not record current period gains until the contract terminates.
Offshore Voluntary Disclosure Program (OVDP) Declines and Withdrawals. This campaign applies to individual U.S. taxpayers who volunteered to disclose and file previously unreported foreign income and required informational returns under the OVDP but subsequently withdrew from the program or received a notice denying them access to it. The IRS intends to bring these individuals up-to-date in their compliance with relevant tax laws.
Repatriation. The IRS aims to crack down on what it refers to as “different repatriation structures being used for purposes of tax-free repatriation of funds into the U.S. in the mid-market population.” Taxpayers have a responsibility to report repatriations as taxable events on their tax returns.
Form 1120-F Non-Filer. Based on external data sources, the IRS has found that a significant number of foreign companies doing business in the U.S. are not meeting their obligation to file Form 1120-F, U.S. Income Tax Return of a Foreign Corporation.
Inbound Distributors. The IRS implies that U.S. distributors of products sourced from foreign related parties have erroneously incurred losses or small profits that are not commensurate with the functions performed and the risk assumed. In some cases, the taxpayer should qualify for higher taxable returns in arms-length transactions.
The advisors and accountants with Berkowitz Pollack Brant work with individuals and businesses to meet their domestic and international regulatory compliance obligations, optimize profitability and build wealth while maintaining tax efficiency.
About the Author: Edward N. Cooper, CPA, is director-in-charge of Tax Services with Berkowitz Pollack Brant, where he provides business and tax consulting services to real estate entities, multi-national companies and their owners. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.