The U.S. Tax Court lacks jurisdiction over a taxpayer’s appeal of a levy in a collection due process hearing when the IRS abandoned its levy because it applied the taxpayer’s later year overpayments to her earlier tax liability, eliminating the underpayment on which the levy was based. The 8-1 ruling by the Court resolves a split between the Third Circuit and the Fourth and D.C. Circuit.

The U.S. Tax Court lacks jurisdiction over a taxpayer’s appeal of a levy in a collection due process hearing when the IRS abandoned its levy because it applied the taxpayer’s later year overpayments to her earlier tax liability, eliminating the underpayment on which the levy was based. The 8-1 ruling by the Court resolves a split between the Third Circuit and the Fourth and D.C. Circuit.

The IRS determined that taxpayer had a tax liability for 2010 and began a levy procedure. The taxpayer appealed the levy in a collection due process hearing, and then appealed that adverse result in the Tax Court. The taxpayer asserted that she did not have an underpayment in 2010 because her then-husband had made $50,000 of estimated tax payments for 2010 with instructions that the amounts be applied to the taxpayer’s separate 2010 return. The IRS instead applied the payments to the husband’s separate account. While the agency and Tax Court proceedings were pending, the taxpayer filed several tax returns reflecting overpayments, which she wanted refunded to her. The IRS instead applied the taxpayer’s 2013-2016 and 2019 tax overpayments to her 2010 tax debt.

When the IRS had applied enough of the taxpayer’s later overpayments to extinguish her 2010 liability, the IRS moved to dismiss the Tax Court proceeding as moot, asserting that the Tax Court lacked jurisdiction because the IRS no longer had a basis to levy. The Tax Court agreed. The taxpayer appealed to the Third Circuit, which held for the taxpayer that the IRS’s abandonment of the levy did not moot the Tax Court proceedings. The IRS appealed to the Supreme Court, which reversed the Third Circuit.

The Court, in an opinion written by Justice Barrett in which seven other justices joined, held that the Tax Court, as a court of limited jurisdiction, only has jurisdiction under Code Sec. 6330(d)(1) to review a determination of an appeals officer in a collection due process hearing when the IRS is pursuing a levy. Once the IRS applied later overpayments to zero out the taxpayer’s liability and abandoned the levy process, the Tax Court no longer had jurisdiction over the case. Justice Gorsuch dissented, pointing out that the Court’s decision leaves the taxpayer without any resolution of the merits of her 2010 tax liability, and “hands the IRS a powerful new tool to avoid accountability for its mistakes in future cases like this one.”

Zuch, SCt

The Internal Revenue Service collected more than $5.1 trillion in gross receipts in fiscal year 2024. It is the first time the agency broke the $5 trillion mark, according to the 2024 Data Book, an annual publication that reviews IRS activities for the given fiscal year.

The Internal Revenue Service collected more than $5.1 trillion in gross receipts in fiscal year 2024.

It is the first time the agency broke the $5 trillion mark, according to the 2024 Data Book, an annual publication that reviews IRS activities for the given fiscal year. It was an increase over the $4.7 trillion collected in the previous fiscal year.

Individual tax, employment taxes, and real estate and trust income taxes accounted for $4.4 trillion of the fiscal 2024 gross collections, with the balance of $565 billion coming from businesses. The agency issued $120.1 billion in refunds, including $117.6 billion in individual income tax refunds and $428.4 billion in refunds to businesses.

The 2024 Data Book broke out statistics from the pilot year of the Direct File program, noting that 423,450 taxpayers logged into Direct File, with 140,803 using the program, which allows users to prepare and file their tax returns through the IRS website, to have their tax returns filed and accepted by the agency. Of the returns filed, 72 percent received a refund, with approximately $90 million in refunds issued to Direct File users. The IRS had gross collections of nearly $35.3 million (24 percent of filers using Direct File). The rest had a return with a $0 balance due.

Among the data highlighted in this year’s publication were service level improvements.

"The past two filing seasons saw continued improvement in IRS levels of service—one the phone, in person, and online—thanks to the efforts of our workforce and our use of long-term resources provided by Congress," IRS Acting Commissioner Michael Faulkender wrote. "In FY 2024, our customer service representatives answered approximately 20 million live phone calls. At our Taxpayer Assistance Centers around the country, we had more than 2 million contacts, increasing the in-person help we provided to taxpayers nearly 26 percent compared to FY 2023."

On the compliance side, the IRS reported in the 2024 Data Book that for all returns filed for Tax Years 2014 through 2022, the agency "has examined 0.40 percent of individual returns filed and 0.66 percent of corporation returns filed, as of the end of fiscal year 2024."

This includes examination of 7.9 percent of taxpayers filing individual returns reporting total positive incomes of $10 million or more. The IRS collected $29.0 billion from the 505,514 audits that were closed in FY 2024.

By Gregory Twachtman, Washington News Editor

IR-2025-63

The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015- 5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2024-23, I.R.B. 2024-23.

The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015- 5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2024-23, I.R.B. 2024-23.

Significant changes to the list of automatic changes made by this revenue procedure to Rev. Proc. 2024-23 include:

• (1) Section 6.22, relating to late elections under § 168(j)(8), § 168(l)(3)(D), and § 181(a)(1), is removed because the section is obsolete;
• (2) The following paragraphs, relating to the § 481(a) adjustment, are clarified by adding the phrase “for any taxable year in which the election was made” to the second sentence: (a) Paragraph (2) of section 3.07, relating to wireline network asset maintenance allowance and units of property methods of accounting under Rev. Proc. 2011-27; (b) Paragraph (2) of section 3.08, relating to wireless network asset maintenance allowance and units of property methods of accounting under Rev. Proc. 2011-28; and (c) Paragraph (3)(a) of section 3.11, relating to cable network asset capitalization methods of accounting under Rev. Proc. 2015-12;
• (3) Section 6.04, relating to a change in general asset account treatment due to a change in the use of MACRS property, is modified to remove section 6.04(2)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, because the provision is obsolete;
• (4) Section 6.05, relating to changes in method of accounting for depreciation due to a change in the use of MACRS property, is modified to remove section 6.05(2) (b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, because the provision is obsolete;
• (5) Section 6.13, relating to the disposition of a building or structural component (§ 168; § 1.168(i)-8), is clarified by adding the parenthetical “including the taxable year immediately preceding the year of change” to sections 6.13(3)(b), (c), (d), and (e), regarding certain covered changes under section 6.13;
• (6) Section 6.14, relating to dispositions of tangible depreciable assets (other than a building or its structural components) (§ 168; § 1.168(i)-8), is clarified by adding the parenthetical “including the taxable year immediately preceding the year of change” to sections 6.14(3)(b), (c), (d), and (e), regarding certain covered changes under section 6.14; June 9, 2025 1594 Bulletin No. 2025–24;
• (7) Section 7.01, relating to changes in method of accounting for SRE expenditures, is modified as follows. First, to remove section 7.01(3)(a), relating to changes in method of accounting for SRE expenditures for a year of change that is the taxpayer’s first taxable year beginning after December 31, 2021, because the provision is obsolete. Second, newly redesignated section 7.01(3)(a) (formerly section 7.01(3)(b)) is modified to remove the references to a year of change later than the first taxable year beginning after December 31, 2021, because the language is obsolete;
• (8) Section 12.14, relating to interest capitalization, is modified to provide under section 12.14(1)(b) that the change under section 12.14 does not apply to a taxpayer that wants to change its method of accounting for interest to apply either: (1) current §§ 1.263A-11(e)(1)(ii) and (iii); or (2) proposed §§ 1.263A-8(d)(3) and 1.263A-11(e) and (f) (REG-133850-13), as published on May 15, 2024 (89 FR 42404) and corrected on July 24, 2024 (89 FR 59864);
• (9) Section 15.01, relating to a change in overall method to an accrual method from the cash method or from an accrual method with regard to purchases and sales of inventories and the cash method for all other items, is modified by removing the first sentence of section 15.01(5), disregarding any prior overall accounting method change to the cash method implemented using the provisions of Rev. Proc. 2001-10, as modified by Rev. Proc. 2011- 14, or Rev. Proc. 2002-28, as modified by Rev. Proc. 2011-14, for purposes of the eligibility rule in section 5.01(e) of Rev. Proc. 2015-13, because the language is obsolete;
• (10) Section 15.08, relating to changes from the cash method to an accrual method for specific items, is modified to add new section 15.08(1)(b)(ix) to provide that the change under section 15.08 does not apply to a change in the method of accounting for any foreign income tax as defined in § 1.901-2(a);
• (11) Section 15.12, relating to farmers changing to the cash method, is clarified to provide that the change under section 15.12 is only applicable to a taxpayer’s trade or business of farming and not applicable to a non-farming trade or business the taxpayer might be engaged in;
• (11) Section 12.01, relating to certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers, is modified as follows. First, to provide that section 12.01 applies to a taxpayer that uses a historic absorption ratio election with the simplified production method, the modified simplified production method, or the simplified resale method and wants to change to a different method for determining the additional Code Sec. 263A costs that must be capitalized to ending inventories or other eligible property on hand at the end of the taxable year (that is, to a different simplified method or a facts-and-circumstances method). Second, to remove the transition rule in section 12.01(1)(b)(ii)(B) because this language is obsolete;
• (12) Section 15.13, relating to nonshareholder contributions to capital under § 118, is modified to require changes under section 15.13(1)(a)(ii), relating to a regulated public utility under § 118(c) (as in effect on the day before the date of enactment of Public Law 115-97, 131 Stat. 2054 (Dec. 22, 2017)) (“former § 118(c)”) that wants to change its method of accounting to exclude from gross income payments or the fair market value of property received that are contributions in aid of construction under former § 118(c), to be requested under the non-automatic change procedures provided in Rev. Proc. 2015- 13. Specifically, section 15.13(1)(a)(i), relating to a regulated public utility under former § 118(c) that wants to change its method of accounting to include in gross income payments received from customers as connection fees that are not contributions to the capital of the taxpayer under former § 118(c), is removed. Section 15.13(1)(a)(ii), relating to a regulated public utility under former § 118(c) that wants to change its method of accounting to exclude from gross income payments or the fair market value of property received that are contributions in aid of construction under former § 118(c), is removed. Section 15.13(2), relating to the inapplicability of the change under section 15.13(1) (a)(ii), is removed. Section 15.13(1)(b), relating to a taxpayer that wants to change its method of accounting to include in gross income payments or the fair market value of property received that do not constitute contributions to the capital of the taxpayer within the meaning of § 118 and the regulations thereunder, is modified by removing “(other than the payments received by a public utility described in former § 118(c) that are addressed in section 15.13(1)(a)(i) of this revenue procedure)” because a change under section 15.13(1)(a)(i) may now be made under newly redesignated section 15.13(1) of this revenue procedure;
• (13) Section 16.08, relating to changes in the timing of income recognition under § 451(b) and (c), is modified as follows. First, section 16.08 is modified to remove section 16.08(5)(a), relating to the temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes under section 16.08, because the provision is obsolete. Second, section 16.08 is modified to remove section 16.08(4)(a)(iv), relating to special § 481(a) adjustment rules when the temporary eligibility waiver applies, because the provision is obsolete. Third, section 16.08 is modified to remove sections 16.08(4)(a) (v)(C) and 16.08(4)(a)(v)(D), providing examples to illustrate the special § 481(a) adjustment rules under section 16.08(4)(a) (iv), because the examples are obsolete;
• (14) Section 19.01, relating to changes in method of accounting for certain exempt long-term construction contracts from the percentage-of-completion method of accounting to an exempt contract method described in § 1.460-4(c), or to stop capitalizing costs under § 263A for certain home construction contracts, is modified by removing the references to “proposed § 1.460-3(b)(1)(ii)” in section 19.01(1), relating to the inapplicability of the change under section 19.01, because the references are obsolete;
• (15) Section 19.02, relating to changes in method of accounting under § 460 to rely on the interim guidance provided in section 8 of Notice 2023-63, 2023-39 I.R.B. 919, is modified to remove section 19.02(3)(a), relating to a change in the treatment of SRE expenditures under § 460 for the taxpayer’s first taxable year beginning after December 31, 2021, because the provision is obsolete;
• (16) Section 20.07, relating to changes in method of accounting for liabilities for rebates and allowances to the recurring item exception under § 461(h)(3), is clarified by adding new section 20.07(1)(b) (ii), providing that a change under section 20.07 does not apply to liabilities arising from reward programs;
• (17) The following sections, relating to the inapplicability of the relevant change, are modified to remove the reference to “proposed § 1.471-1(b)” because this reference is obsolete: (a) Section 22.01(2), relating to cash discounts; (b) Section 22.02(2), relating to estimating inventory “shrinkage”; (c) Section 22.03(2), relating to qualifying volume-related trade discounts; (d) Section 22.04(1)(b)(iii), relating to impermissible methods of identification and valuation of inventories; (e) Section 22.05(1)(b)(ii), relating to the core alternative valuation method; Bulletin No. 2025–24 1595 June 9, 2025 (f) Section 22.06(2), relating to replacement cost for automobile dealers’ parts inventory; (g) Section 22.07(2), relating to replacement cost for heavy equipment dealers’ parts inventory; (h) Section 22.08(2), relating to rotable spare parts; (i) Section 22.09(3), relating to the advanced trade discount method; (j) Section 22.10(1)(b)(iii), relating to permissible methods of identification and valuation of inventories; (k) Section 22.11(2), relating to a change in the official used vehicle guide utilized in valuing used vehicles; (l) Section 22.12(2), relating to invoiced advertising association costs for new vehicle retail dealerships; (m) Section 22.13(2), relating to the rolling-average method of accounting for inventories; (n) Section 22.14(2), relating to sales-based vendor chargebacks; (o) Section 22.15(2), relating to certain changes to the cost complement of the retail inventory method; (p) Section 22.16(2), relating to certain changes within the retail inventory method; and (q) Section 22.17(1)(b)(iii), relating to changes from currently deducting inventories to permissible methods of identification and valuation of inventories; and
• (18) Section 22.10, relating to permissible methods of identification and valuation of inventories, is modified to remove section 22.10(1)(d).

Subject to a transition rule, this revenue procedure is effective for a Form 3115 filed on or after June 9, 2025, for a year of change ending on or after October 31, 2024, that is filed under the automatic change procedures of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, as clarified and modified by Rev. Proc. 2015-33, 2015-24 I.R.B. 1067, and as modified by Rev. Proc. 2021-34, 2021-35 I.R.B. 337, Rev. Proc. 2021-26, 2021-22 I.R.B. 1163, Rev. Proc. 2017-59, 2017-48 I.R.B. 543, and section 17.02(b) and (c) of Rev. Proc. 2016-1, 2016-1 I.R.B. 1 .

Rev. Proc. 2025-23

The Treasury Department and IRS have issued Notice 2025-33, extending and modifying transition relief for brokers required to report digital asset transactions using Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The notice builds upon the temporary relief previously provided in Notice 2024-56 and allows additional time for brokers to comply with reporting requirements.

The Treasury Department and IRS have issued Notice 2025-33, extending and modifying transition relief for brokers required to report digital asset transactions using Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The notice builds upon the temporary relief previously provided in Notice 2024-56 and allows additional time for brokers to comply with reporting requirements.

Reporting Requirements and Transitional Relief

In 2024, final regulations were issued requiring brokers to report digital asset sale and exchange transactions on Form 1099-DA, furnish payee statements, and backup withhold on certain transactions beginning January 1, 2025. Notice 2024-56 provided general transitional relief, including limited relief from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs.

Additional Transition Relief from Backup Withholding, Customers Not Previously Classified as U.S. Persons

Under Notice 2025-33, transition relief from backup withholding tax liability and associated penalties is extended for any broker that fails to withhold and pay the backup withholding tax for any digital asset sale or exchange transaction effected during calendar year 2026.

Brokers will not be required to backup withhold for any digital asset sale or exchange transactions effected in 2027 when they verify customer information through the IRS Tax Information Number (TIN) Matching Program. To qualify, brokers must submit a customer's name and tax identification number to the matching service and receive confirmation that the information corresponds with IRS records.

Additionally, penalties that apply to brokers that fail to withhold and pay the full backup withholding due are limited with respect to any decrease in the value of received digital assets between the time of the transaction giving rise to the backup withholding obligation and the time the broker liquidates 24 percent of a customer’s received digital assets.

Finally, the notice also provides additional transition relief for brokers for sales of digital assets effected during calendar year 2027 for certain preexisting customers. This relief applies when brokers have not previously classified these customers as U.S. persons and the customer files contain only non-U.S. residence addresses.

Notice 2025-33

IR-2025-67

The IRS failed to establish that it issued a valid notice of deficiency to an individual under Code Sec. 6212(b). Thus, the Tax Court dismissed the case due to lack of jurisdiction.

The IRS failed to establish that it issued a valid notice of deficiency to an individual under Code Sec. 6212(b). Thus, the Tax Court dismissed the case due to lack of jurisdiction.

The taxpayer filed a petition to seek re-determination of a deficiency for the tax year at issue. The IRS moved to dismiss the petition under Code Sec. 6213(a), contending that it was untimely and that Code Sec. 7502’s "timely mailed, timely filed" rule did not apply. However, the Court determined that the notice of deficiency had not been properly addressed to the individual’s last known address.

Although the individual attached a copy of the notice to the petition, the Court found that the significant 400-day delay in filing did not demonstrate timely, actual receipt sufficient to cure the defect. Because the IRS could not establish that a valid notice was issued, the Court concluded that the 90-day deadline under Code Sec. 6213(a) was never triggered, and Code Sec. 7502 was inapplicable.

L.C.I. Cano, TC Memo. 2025-65, Dec. 62,679(M)

A limited partnership classified as a TEFRA partnership was not entitled to exclude its limited partners’ distributive shares from net earnings from self-employment under Code Sec. 1402(a)(13). The Tax Court found that the individuals materially participated in the partnership’s investment management business and were not acting as limited partners “as such.”

A limited partnership classified as a TEFRA partnership was not entitled to exclude its limited partners’ distributive shares from net earnings from self-employment under Code Sec. 1402(a)(13). The Tax Court found that the individuals materially participated in the partnership’s investment management business and were not acting as limited partners “as such.”

Furthermore, the Court concluded that the limited partners’ roles were indistinguishable from those of active general partners. Accordingly, their distributive shares were includible in net earnings from self-employment under Code Sec. 1402(a) and subject to tax under Code Sec. 1401. The taxpayer’s argument that the partners’ actions were authorized solely through the general partner was found unpersuasive. The Court emphasized substance over form and found that the partners’ conduct and economic relationship with the firm were determinative.

Additionally, the Court held that the taxpayer failed to meet the requirements under Code Sec. 7491(a) to shift the burden of proof because it did not establish compliance with substantiation and net worth requirements. Lastly, the Tax Court also upheld the IRS’s designation of the general partner LLC as the proper tax matters partner under Code Sec. 6231(a)(7)(B), finding that the attempted designation of a limited partner was invalid because an eligible general partner existed and had the legal authority to serve.

Soroban Capital Partners LP, TC Memo. 2025-52, Dec. 62,665(M)

Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.

Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.

Payments and Withholding

As a household employer, the parent must withhold and pay Social Security and Medicare taxes if the cash wages paid to the nanny exceed the threshold amount for the year. If the amount paid is less than the threshold, the parent does not owe any Social Security or Medicare taxes. For 2017, the domestic employee coverage threshold, as adjusted for a slightly different inflation factor and subject to rounding, will be $2,000, which is the same as for 2016 after rising from $1,900 in 2015. Earnings of any domestic employee are not subject to Social Security taxes if they do not exceed that threshold for the year. If the employee earns more than $1,000 in any calendar quarter, the parent must also pay federal unemployment (FUTA) tax on wages paid, up to $7,000. Publication 926, Household Employer's Tax Guide, has more information about withholding and paying employment taxes.  

If the amount paid is more than the threshold, the parent must withhold the employee's share of Social Security and Medicare taxes unless the parent chooses to pay both the employee's and the employer's share. The taxes are 15.3 percent of cash wages, 7.65 percent each for the employee and the employer. This includes 6.2 percent for Social Security and 1.45 percent for Medicare (hospitalization insurance).

The parent is not required to withhold income tax from the nanny's wages. However, the parent and the nanny may agree to withholding income tax from the nanny's wages. The nanny must provide a filled-out Form W-4, Employee's Withholding Allowance Certificate, to the employer.

The employment taxes amounts are part of the parent's tax liability and can trigger an estimated tax penalty if not enough is paid during the year. The parent submits estimated tax payments on Form 1040-ES, Estimated Tax for Individuals.

Forms to File

If the parent must pay Social Security and Medicare taxes, or if the parent withholds income tax, the parent must file Schedule H, Household Employment Taxes, with the parent's Form 1040. The parent may also need to file a Form W-2, Wage and Tax Statement, and furnish a copy of the form to the nanny. To complete Form W-2, the parent must obtain an employer identification number (EIN) from the IRS, either by applying online or by submitting Form SS-4, Application for Employer Identification Number.

Please do not hesitate to contact this office if you have any questions regarding your “nanny tax” responsibilities.

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

IRS Recommended Action Steps

Specifically, the IRS advised the taxpayers take the following steps now to jump start a successful 2016 filing season for their 2015 tax year returns:

• Consider filing a new Form W-4, Employee's Withholding Allowance Certificate, with an employer if certain life circumstances have changed (such as a change in marital status or the birth of a child). A new child could mean an additional exemption and/or tax credits that might lower your tax liability. Therefore you might benefit from claiming an extra withholding allowance. Conversely, getting married (or divorced) could change your income, making it advantageous to readjust your withholding accordingly.
• Report any changes or projected changes in income to the Health Insurance Marketplace (if taxpayer obtained insurance through a marketplace). Income affects the calculation of subsidy payments. Recipients of the advance premium tax credit may owe tax for 2015 if their subsidy payments are too high.
• Maintain accurate and organized tax records, such as home loan documents or financial aid documents. Many deductions must be substantiated with evidence, and staying organized now could facilitate the tax return filing process in the future.
• Find a tax return preparer. Looking for a qualified tax return preparer may be easier in the off-season, when you are under no immediate pressure to select a person. This can provide taxpayers with more time to evaluate a preparer's credentials.
• Plan to increase itemized deductions. If a taxpayer plans to purchase a house, contribute to charity, or incur medical expenses that may not be reimbursed during 2015, it may be beneficial to consider whether itemizing deductions would be more beneficial than claiming the standard deduction for 2015.
• Stay informed of the latest tax law changes. Keeping on top of developments can reduce confusion in the long run.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

Tax-related identity theft

Tax-related identity theft most often occurs when a criminal uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Often, criminals will claim bogus tax credits or deductions to generate large refunds. Fraud is particularly prevalent for the earned income tax credit, residential energy credits and others. In many cases, the victims of tax-related identity theft only discover the crime when they file their genuine return with the IRS. By this time, all the taxpayer can do is to take steps to prevent a recurrence.

Being proactive

However, there are steps taxpayers can take to reduce the likelihood of being a victim of tax-related identity theft. Personal information must be kept confidential. This includes not only an individual's Social Security number (SSN) but other identification materials, such as bank and other financial account numbers, credit and debit card numbers, and medical and insurance information. Paper documents, including old tax returns if they were filed on paper returns, should be kept in a secure location. Documents that are no longer needed should be shredded.

Online information is especially vulnerable and should be protected by using firewalls, anti-spam/virus software, updating security patches and changing passwords frequently. Identity thieves are very skilled at leveraging whatever information they can find online to create a false tax return.

Impersonators

Criminals do not only steal a taxpayer's identity from documents. Telephone tax scams soared during the 2015 filing season. Indeed, a government watchdog reported that this year was a record high for telephone tax scams. These criminals impersonate IRS officials and threaten legal action unless a taxpayer immediately pays a purported tax debt. These criminals sound convincing when they call and use fake names and bogus IRS identification badge numbers. One sure sign of a telephone tax scam is a demand for payment by prepaid debit card. The IRS never demands payment using a prepaid debit card, nor does the IRS ask for credit or debit card numbers over the phone.

The IRS, the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Tax Commission (FTC) are investigating telephone tax fraud. Individuals who have received these types of calls should alert the IRS, TIGTA or the FTC, even if they have not been victimized.

Tax-related identity theft is a time consuming process for victims so the best defense is a good offense. Please contact our office if you have any questions about tax-related identity theft.

The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS's requirements.

The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS's requirements.

Substantiation

One way to understand the IRS's requirements is to break them down by monetary amount and the type of donation, money and/or household items or clothing.

• To deduct a contribution of cash, check, or other monetary gift (of less than $250), a taxpayer must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.
• To claim a deduction for contributions of cash or property equaling $250 or more, the taxpayer must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
• If the total deduction for all noncash contributions for the year is over $500, the taxpayer must file Form 8283, Noncash Charitable Contributions, with the IRS.
• Donations valued at more than $5,000 generally require an appraisal by a qualified appraiser.

The IRS also requires that donations of clothing and household items be in good used condition or better to be deductible. Special rules apply to donations of motor vehicles, boats and aircraft.

Tax Court sheds light

In April, the U.S. Tax Court issued an instructive decision (Kunkel, TC Memo. 2015-71) on the steps taxpayers must take to deduct a contribution to a charitable organization. The taxpayers in Kunkel made a number of donations, some by cash and others of household items and clothing, but the court disallowed nearly all of the claimed deductions because the taxpayers failed to follow the rules.

In this case, the taxpayers reported $42,000 in charitable contributions, comprising $5,000 in cash and $37,000 in noncash donations. The noncash contributions were donations of books, clothing, furniture, and household items. The taxpayers told the IRS that they took the household items, clothing and books to charities in batches, which they claimed were worth less than $250 because they believed this eliminated the need to get receipts. Other times, one or more charities came to the taxpayers' residence and picked up the household items (however, the taxpayers were not home at the time of the pickup and the charities left undated doorknob hangers as receipts).

The Tax Court reminded the taxpayers that for all contributions of $250 or more, a taxpayer generally must obtain a contemporaneous written acknowledgment from the charity. The court found it implausible that the taxpayers had made their donations in batches worth less than $250. The court calculated that this would mean they had made these donations on 97 different occasions in one year. The court also found that the doorknob hangers were inadequate substantiation of their claimed donations. The doorknob hangers not specific to taxpayer, did not describe the property contributed, and were not contemporaneous written acknowledgments, the court found.

This article is a very high level overview of the IRS's substantiation requirements for donations to charity. If you have any questions about the substantiation or other requirements for a gift you are making to a charity, please contact our office for more details.

An employer must withhold income taxes from compensation paid to common-law employees (but not from compensation paid to independent contractors). The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. Note that although the Tax Code and regulations distinguish between withholding exemptions and withholding allowances, the terms are interchangeable. The amount of reduction attributable to one withholding allowance is the same as that attributable to one withholding exemption. Form W-4 and most informal IRS publications refer to both as withholding allowances, probably to avoid confusion with the complete exemption from withholding for employees with no tax liability.

An employer must withhold income taxes from compensation paid to common-law employees (but not from compensation paid to independent contractors). The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. Note that although the Tax Code and regulations distinguish between "withholding exemptions" and "withholding allowances," the terms are interchangeable. The amount of reduction attributable to one withholding allowance is the same as that attributable to one withholding exemption. Form W-4 and most informal IRS publications refer to both as withholding allowances, probably to avoid confusion with the complete exemption from withholding for employees with no tax liability.

An employee may change the number of withholding exemptions and/or allowances she claims on Form W-4, Employee's Withholding Allowance Certificate. It is generally advisable for an employee to change his or her withholding so that it matches his or her projected federal tax liability as closely as possible. If an employer overwithholds through Form W-4 instructions, then the employee has essentially provided the IRS with an interest-free loan. If, on the other hand, the employer underwithholds, the employee could be liable for a large income tax bill at the end of the year, as well as interest and potential penalties.

How allowances affect withholding

For each exemption or allowance claimed, an amount equal to one personal exemption, prorated to the payroll period, is subtracted from the total amount of wages paid. This reduced amount, rather than the total wage amount, is subject to withholding. In other words, the personal exemption amount is $4,000 for 2015, meaning the prorated exemption amount for an employee receiving a biweekly paycheck is $153.85 ($4,000 divided by 26 paychecks per year) for 2015.

In addition, if an employee's expected income when offset by deductions and credits is low enough so that the employee will not have any income tax liability for the year, the employee may be able to claim a complete exemption from withholding.

Changing the amount withheld

Taxpayers may change the number of withholding allowances they claim based on their estimated and anticipated deductions, credits, and losses for the year.  For example, an employee who anticipates claiming a large number of itemized deductions and tax credits may wish to claim additional withholding allowances if the current number of withholding exemptions he is currently claiming for the year is too low and would result in overwithholding.

Withholding allowances are claimed on Form W-4, Employee's Withholding Allowance Certificate, with the withholding exemptions. An employer should have a Form W-4 on file for each employee. New employees generally must complete Form W-4 for their employer. Existing employees may update that Form W-4 at any time during the year, and should be encouraged to do so as early as possible in 2015 if they either owed significant taxes or received a large refund when filing their 2014 tax return.

The IRS provides an IRS Withholding Calculator at www.irs.gov/individuals that can help individuals to determine how many withholding allowances to claim on their Forms-W-4. In the alternative, employees can use the worksheets and tables that accompany the Form W-4 to compute the appropriate number of allowances.

Employers should note that a Form W-4 remains in effect until an employee provides a new one. If an employee does update her Form W-4, the employer should not adjust withholding for pay periods before the effective date of the new form. If an employee provides the employer with a Form W-4 that replaces an existing Form W-4, the employer should begin to withhold in accordance with the new Form W-4 no later than the start of the first payroll period ending on or after the 30th day from the date on which the employer received the replacement Form W-4.

Beginning January 1, 2014, the Affordable Care Act (ACA) required individuals to carry minimum essential health coverage or make a shared responsibility payment, unless exempt. Individuals will report on their 2014 federal income tax return if they had minimum essential health coverage for all or part of the year. Individuals who file Form 1040, U.S. Individual Income Tax Return, will indicate on Line 61 if they were covered by minimum essential health coverage for 2014, if they are exempt from the requirement to carry minimum essential health coverage or if they are making an individual shared responsibility payment.

Beginning January 1, 2014, the Affordable Care Act (ACA) required individuals to carry minimum essential health coverage or make a shared responsibility payment, unless exempt. Individuals will report on their 2014 federal income tax return if they had minimum essential health coverage for all or part of the year. Individuals who file Form 1040, U.S. Individual Income Tax Return, will indicate on Line 61 if they were covered by minimum essential health coverage for 2014, if they are exempt from the requirement to carry minimum essential health coverage or if they are making an individual shared responsibility payment.

Minimum essential coverage

Minimum essential coverage is a term used to describe the type of coverage an individual needs to have to meet the individual responsibility requirement under the ACA. Nearly all individuals covered by employer-sponsored health insurance are treated under the ACA as carrying minimum essential coverage. Coverage obtained through the ACA Marketplace as well as Medicare, TRICARE and the Children’s Health Insurance Program (CHIP) qualifies as minimum essential coverage. An important exception to minimum essential coverage is coverage that provides limited benefits, such as stand-alone dental insurance, accident or disability income insurance and workers’ compensation insurance. If you have any questions whether your health coverage is minimum essential coverage requirement, please contact our office.

Exemptions     

The ACA sets out a number of categories of individuals exempt from the individual shared responsibility requirement:

• Members of Certain Religious Sects
• Short Coverage Gap
• Certain Noncitizens
• Coverage is Considered Unaffordable
• Household Income below the Return Filing Threshold
• Members of Federally-Recognized Native American Nations
• Members of Health Care Sharing Ministries
• Incarcerated individuals
• Hardships

Many of these exemptions are quite technical and have various sub-categories of exemptions. Some exemptions are available only through the ACA Marketplace, others only from the IRS and others from either the ACA Marketplace or the IRS. Please contact our office for more information about a particular exemption and how to apply for an exemption.

Shared responsibility payment

For 2014, the individual shared responsibility payment is the greater of:

• One percent of household income that is above the tax return filing threshold for the individual’s filing status; or
• The individual’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285, but capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014.

For 2014, the annual national average premium for a bronze level health plan available through the Marketplace is $2,448 per individual ($204 per month per individual), but $12,240 for a family with five or more members ($1,020 per month for a family with five or more members).

Here’s an example from the IRS:

Emma and Noah are married and have two children under 18. The couple did not have minimum essential coverage for any family member for any month during 2014 and no one in the family qualified for an exemption from the individual shared responsibility requirement. For 2014, their household income is $70,000 and their filing threshold is $20,300. The IRS explained that to determine their individual shared responsibility payment using the income formula, the couple would subtract $20,300 (filing threshold) from $70,000 (2014 household income). The result is $49,700. One percent of $49,700 equals $497. The couple’s flat dollar amount is $285, or $95 per adult and $47.50 per child. The total of $285 is the flat dollar amount in 2014. The family’s annual national average premium for bronze level coverage through the Marketplace for 2014 is $9,792 ($2,448 x 4). Because $497 is greater than $285 and is less than $9,792, their shared responsibility payment is $497 for 2014, or $41.41 per month for each month the family is uninsured (1/12 of $497 equals $41.41).

Please contact our office for more information about the ACA’s individual shared responsibility requirement.

The IRS has announced an increase in the optional business standard mileage reimbursement rate for 2015. The business standard mileage rate increased by one and a half cents, to 57.5 cents (up from 56 cents for 2014). The 2015 standard mileage rate for medical and moving expenses decreased slightly to 23 cents (down from 23.5 cents for 2014). The charitable mileage rate, however, is set by statute at a flat 14 cents per mile without inflation adjustment each year. The revised rates apply to deductible transportation expenses paid or incurred for business or medical/moving expenditures, or qualified charitable miles driven, on or after January 1, 2015.

The IRS has announced an increase in the optional business standard mileage reimbursement rate for 2015. The business standard mileage rate increased by one and a half cents, to 57.5 cents (up from 56 cents for 2014). The 2015 standard mileage rate for medical and moving expenses decreased slightly to 23 cents (down from 23.5 cents for 2014). The charitable mileage rate, however, is set by statute at a flat 14 cents per mile without inflation adjustment each year. The revised rates apply to deductible transportation expenses paid or incurred for business or medical/moving expenditures, or qualified charitable miles driven, on or after January 1, 2015.

The IRS works with an independent contractor to establish the business, medical and moving expense standard rates. The IRS and the independent contractor take into account the fixed and variable costs of operating an automobile, such as fuel costs and maintenance expenses. The decline in fuel prices during 2014, however, was not reflected in the business standard mileage rate for 2015. Some practitioners have speculated this could indicate that the IRS does not expect the low gas prices to last. Alternatively, if prices continue to decline, the IRS could issue a mid-year adjustment of the rate during 2015.

Some background

The standard mileage rates for business use, medical and moving expenses, and charitable usage, may be used by an employee or self-employed taxpayer to compute the allowable deduction attributable to his or her business use of a car. Taxpayers also have the option of calculating the actual cost of operating a vehicle for business and deducting that amount, but using the standard mileage rate is the simplest method of computing automobile expenses because it simplifies the amount of required recordkeeping. This is because business standard mileage rate is designed to take into account costs such as maintenance and repairs, gas and oil, depreciation, insurance, and license and registration fees. For example, the depreciation component of the business standard mileage rate for 2015 will be 24 cents-per-mile, a two-cent increase from the 22-cents-per-mile rate that was effective for 2014.

Because depreciation and other costs are already factored into the standard rate, taxpayers using the standard mileage rate may not deduct depreciation, maintenance and fees, gasoline, insurance, or vehicle registration costs. The plus side is that standard mileage rate taxpayers do not need to maintain detailed records on these costs.

The taxpayer using the standard mileage rate need only keep a log of his or her business miles. To calculate the deduction, the taxpayer will multiply the standard mileage rate by the number of business miles traveled. Taxpayers using the standard rate may also deduct any business-related parking fees and tolls.

Requirements

Taxpayers must meet several requirements before they may use the business standard mileage rate. First, they must be either self-employed or an employee who has incurred automobile costs for business that were not reimbursed by the employer. The taxpayer must either own or lease the car. Additional requirements are listed in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Certain types of travel are not considered deductible, however. For example the cost of commuting from the taxpayer’s home to his or her place of business is considered nondeductible. In general, deductible transportation expenses are deemed ordinary and necessary costs of:

• Traveling from one workplace to another in the course of your business;
• Visiting clients or customers;
• Attending a business meeting away from your regular workplace; or
• Traveling from your home to a temporary workplace when a taxpayer has one or more regular places of work.

Fixed and variable rate (FAVR) allowance

Taxpayers may also use the fixed and variable rate allowance to substantiate automobile expenses. Under the FAVR method, an employer reimburses the employee’s expenses with a mileage allowance using a flat rate or stated schedule that combines periodic fixed and variable payments.

For purposes of computing the allowance under a FAVR plan, the standard automobile cost may not exceed $28,200 for automobiles; but the rate increases to $30,800 for trucks and vans (up from $30,400 for 2014).

Please contact this office if you have any questions regarding how your business or how you as an employee can qualify for use of the standard mileage rate (and whether you might be better off using the actual cost method for claiming a deduction for vehicle use).

IR-2014-114, Notice 2014-79

The upcoming filing season is expected to be challenging for taxpayers and the IRS as new requirements under the Patient Protection and Affordable Care Act kick-in. Taxpayers, for the first time, must make a shared responsibility payment if they fail to carry minimum essential health care coverage or qualify for an exemption. At the same time, there is growing uncertainty over one of the key elements of the Affordable Care Act: the Code Sec. 36B premium assistance tax credit as litigation makes its way to the U.S. Supreme Court.

The upcoming filing season is expected to be challenging for taxpayers and the IRS as new requirements under the Patient Protection and Affordable Care Act kick-in. Taxpayers, for the first time, must make a shared responsibility payment if they fail to carry minimum essential health care coverage or qualify for an exemption. At the same time, there is growing uncertainty over one of the key elements of the Affordable Care Act: the Code Sec. 36B premium assistance tax credit as litigation makes its way to the U.S. Supreme Court.

Individual shared responsibility payment

Individuals who are not exempt from the individual mandate and who do not carry minimum essential coverage in 2014 must make a shared responsibility payment. The payment is due when the individual files his or her 2014 tax return in 2015. In November, the IRS’s national ACA coordinator said that the agency will work with individuals who owe a shared responsibility payment and may not have the resources to make the payment when they file their return. Keep in mind that the IRS will apply any refund to a taxpayer’s unpaid shared responsibility payment. The IRS cannot, however, use its lien and levy power to collect an unpaid shared responsibility payment.

Note. For 2014, the shared responsibility payment amount generally is the greater of: One percent of the person's household income that is above the tax return threshold for their filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment, however, does not stay at this level after 2014. By 2016, the payment grows significantly.

In November, the IRS clarified when Medicaid coverage qualifies as minimum essential coverage and when it may not. The IRS also clarified how employer contributions to a cafeteria plan impact minimum essential coverage. Final regulations exclude employer contributions to a cafeteria plan from an employee’s household income for purposes of determining minimum essential coverage,

Exemptions

The IRS reminded individuals in November that they may be exempt from the requirement to carry minimum essential coverage. There are nine main exemptions: religious conscience; health care sharing ministries; members of federally recognized Native American nations; individuals whose income is below the minimum return filing threshold; individuals with a short coverage gap; hardship cases; affordability cases; incarcerated individuals; and individuals not lawfully present in the U.S.

Some exemptions are obtained through the Marketplaces, some through the filing process, and some either way. The exemptions for members of federally recognized Native American nations, members of health care sharing ministries and individuals who are incarcerated are available either from the Marketplace or claiming the exemption as part of filing a federal income tax return. The exemptions for lack of affordable coverage, a short coverage gap, and household income below the filing threshold and individuals who are not lawfully present in the U.S. may be claimed only as part of filing a federal income tax return. In November, the IRS removed references to specific hardships and streamlined the process for obtaining an exemption because of a hardship.

Code Sec. 36B litigation

The Code Sec. 36B premium assistance tax credit helps offset the cost of health insurance obtained through the ACA Marketplace. According to the U.S. Department of Health and Human Services (HHS), more than two-thirds of enrollees in Marketplace coverage were eligible for the credit in 2014. IRS regulations for the credit, however, have come under fire for being contrary to the ACA. The regulations allow enrollees in state-run Marketplaces and federal-facilitated Marketplaces to claim the credit. 

In July, the U.S. Court of Appeals for the District of Columbia Circuit struck down the IRS regulations in Halbig, 2014-2 USTC ¶50,366. The D.C. Circuit found that the plain language of the Affordable Care Act limits the credit to enrollees in state-run Marketplaces. In contrast, the Court of Appeals for the Fourth Circuit upheld the regulations in King, 2014-2 USTC ¶50,367. The Fourth Circuit found that it could not say definitively that Congress intended to limit the Code Sec. 36B credit to individuals who obtain insurance through state-run Marketplaces.

The U.S. Supreme Court announced in November that it will hear an appeal of King. The Supreme Court is expected to hear oral arguments about the IRS regulations in early 2015. A decision will likely be announced in June 2015. Our office will keep you posted of developments.

Open enrollment

The ACA Marketplace opened for enrollment for 2015 coverage on November 15 and runs through February 15, 2015. HHS explained that it has streamlined application procedures for individuals who are renewing coverage and who are applying for coverage for the first time. The Small Business Health Option Program (SHOP) also opened on November 15. Small employers (employers with 50 or fewer full-time equivalent employees) may enroll qualified employees in health coverage through SHOP.

Please contact our office if you have any questions about the Affordable Care Act and the new requirements.

As most people know, a taxpayer can take a distribution from an IRA without being taxed if the taxpayer rolls over (contributes) the amount received into an IRA within 60 days. This tax-free treatment does not apply if the individual rolled over another distribution from an IRA within the one-year period ending on the day of the second distribution.

As most people know, a taxpayer can take a distribution from an IRA without being taxed if the taxpayer rolls over (contributes) the amount received into an IRA within 60 days. This tax-free treatment does not apply if the individual rolled over another distribution from an IRA within the one-year period ending on the day of the second distribution.

Taxpayers and the IRS both believed that this one-rollover-per-year limit was applied separately to each IRA owned by the individual. If an individual owned two IRAs, for example, the taxpayer could do two rollovers in the appropriate period - one from each IRA. The IRS applied this interpretation in proposed regulations and in Publication 590, IRAs.

One rollover per taxpayer

In Bobrow, TC Memo. 2014-21, CCH Dec. 59,823(M), issued in January 2014, the Tax Court concluded that a taxpayer could make only one nontaxable rollover between IRAs within a one-year period, regardless of how many IRAs the taxpayer maintained. Thus, the one-per-year limit applied to the taxpayer, not to each separate IRA owned by the taxpayer.

In Notice 2014-15 and Announcement 2014-32, the IRS indicated that it would follow the Bobrow interpretation. It withdrew the proposed regulations, and will issue a new Publication 590-A, Contributions to IRAs, that applies the Bobrow interpretation.

Transition rule

In the notice and the announcement, the IRS provided a transition rule that it will not apply the new interpretation of the limit on permissible IRA rollovers until January 1, 2015. A distribution from an IRA in 2014 that is rolled over to another IRA will be disregarded in applying the new rule to 2015 distributions, provided that the 2015 distribution is from a different IRA that was included in the 2014 rollover.

Exceptions

The IRS noted that there are several types of rollovers that that are not subject to the Bobrow rule: a rollover from a traditional IRA to a Roth IRA; a rollover to or from a qualified plan; and trustee-to-trustee transfers. The IRS stated that trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly between IRAs, or by providing the IRA owner with a check made payable to the trustee of the receiving IRA.

However, a rollover between Roth IRAs would preclude a separate rollover within the one-year period between the individual's traditional IRAs; similarly, a rollover between traditional IRAs would preclude a rollover between Roth IRAs with the one-year period.

Some gifts to employees are too insignificant for the IRS to care about. The IRS calls these gifts de minimis fringe benefits. A de minimis fringe benefit is any gift or service with a value so small that accounting for it is unreasonable or administratively impracticable. The value must be nominal or very low. Turkeys given to employees at Thanksgiving are a good example.

Deduction for employer

If a gift is de minimis, you can deduct the cost of the gift as a business expense. It's a win-win situation for your employees too. They do not have to include the value of the gift in their taxable incomes or pay employment taxes on the gift.

Examples

The precise meaning of de minimis is difficult to define. Lots of gifts and services are treated as de minimis. Some are easy to identify; others are not. A list of de minimis gifts has been developed over many years by the IRS and the courts. It's the result of a lot of litigation.

Here are some frequent examples:

• Coffee and soft drinks;
• Doughnuts and other pastries;
• Fruit;
• Flowers;
• Holiday and birthday gifts with a low monetary value;
• Local telephone calls; and
• Photocopying.

Meals

Meals are tricky. Meals are not de minimis merely because an employer seldom feeds its employees or, when it does feed them, it fails to keep track of who had what. Substantial food and beverages are not de minimis. For example, the IRS ruled that an employer that paid between $100 and $700 per person to cater a luncheon at a business conference for its salespersons could not deduct the cost of the meal. In that case, the IRS determined that accounting for the cost of the meal was reasonable and administratively practicable.

Picnics are treated differently. So long as they are occasional and food costs are insubstantial, picnics generally qualify as de minimis fringe benefits. You can deduct the cost of the picnic and your employees don't have to include the value of the picnic in their incomes. You'll want to keep costs reasonable. An extravagant feast is not a picnic. Standard picnic foods and desserts, such as hamburgers, hot dogs and apple pie, should be deemed insubstantial. Contact our office today so we can help you plan an event for your employees that satisfies all of the de minimis rules.

The IRS has some good news for you. Under new rules, you may be able to gain a partial tax break on the full $250,000 capital gain exclusion ($500,000 if you file jointly with your spouse), even if you haven't satisfied the normal "two out of five year test" necessary to gain that tax benefit. You may qualify for an exception.

The IRS has some good news for you. Under generous tax rules, you may be qualify for a partial tax break on the full $250,000 capital gain exclusion ($500,000 if you file jointly with your spouse), even if you haven't satisfied the normal "two out of five year test" necessary to gain that tax benefit. You may qualify for an exception. However, under new rules established in the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income under Code Sec. 121 for periods that the home was not used as a principal residence.

Traditional approach

Homeowners who have owned or used their principal residence for less than two of the five years preceding the sale or exchange, or who have excluded gain from another sale or exchange during the last two years, may qualify for the reduced maximum exclusion if the sale or exchange is due to a change in place of employment, health, or unforeseen circumstances. The reduced exclusion is equal to the regular $250,000 ($500,000 for joint filers) exclusion amount multiplied by the number of days of ownership and use over the two-year period.

Reduced home sale exclusion

The 2008 Housing Act changed the homesale exclusion for home sales after December 31, 2008. Under the 2008 Housing Act, gain from the sale of a principal residence will no longer be excluded from a homeowner's gross income for periods that the home was not used as a principal residence (i.e. "non-qualifying use"). A period of absence generally counts as qualifying use if it occurs after the home was used as the principal residence.

In effect, the rule prevents the use of the Code Sec. 121 exclusion of gain from the sale of a principal residence of up to $250,000 ($500,000 for joint filers) for appreciation attributable to periods after 2008 that the home was used as a vacation home or rental property before being used as a principal residence.

Traditionally, the IRS was very reluctant to dispense people from the strict home exclusion rules. The IRS could make an exception based on a hardship or an unforeseen circumstance, but the criteria for these exceptions weren't very clear. The exceptions weren't always uniform. Now, the government has clarified the exceptions and significantly expanded them.

Criteria

Health reasons You may exclude gain if you sell your residence because of ill health. If your physician recommends a change in residence, the IRS explained that would be sufficient grounds to qualify for the exclusion. This important exclusion is also available if your spouse, the co-owner of your home or a household member must relocate for health reasons.

Change in employment If you must relocate because of a change in employment, you may be able to exclude gain from the sale of your residence. Your new place of employment must be at least 50 miles farther away. Like the special exception for health reasons, you can qualify for this exception if you, your spouse, another co-owner of your home or a household member must move for this reason.

Unforeseen circumstances This exception is very broad and can be confusing. Before you think you qualify under this exception, seek advice from a tax professional. Here are some events that qualify as an unforeseen circumstance:

--(1) Death;

--(2) Divorce or separation;

--(3) Unemployment;

--(4) Multiple births from the same pregnancy;

--(5) Moving closer to care for a close relative who is ill;

--(6) Condemnation or seizure of your home;

--(7) War or terrorism; and

--(8) Natural or man-made disasters.

In addition to these exceptions, the IRS has discretion to determine other circumstances as unforeseen. Like the health and change in employment exceptions, you may be eligible for an exclusion based on unforeseen circumstances if you, your spouse, the co-owner of your home, or a household member satisfies one of these criteria.

Professional guidance

Before you think you qualify under any of the exceptions, seek advice from a tax professional. For example, to qualify for the unemployment exception, you must be eligible for unemployment compensation. To come under the exception that accommodates moving to take care of a close relative, careful medical records and personal logs should be maintained. By gathering the proper proof in advance, major headaches with the IRS may be avoided.