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The Treasury and IRS have issued final regulations excepting certain partnership-related items from the centralized partnership audit regime created by the Bipartisan Budget Act of 2015 (BBA), providing alternative examination rules for the excepted items, conforming the existing centralized audit regime regulations to Internal Revenue Code changes, and clarifying the existing audit regime rules.

The Treasury and IRS have issued final regulations excepting certain partnership-related items from the centralized partnership audit regime created by the Bipartisan Budget Act of 2015 (BBA), providing alternative examination rules for the excepted items, conforming the existing centralized audit regime regulations to Internal Revenue Code changes, and clarifying the existing audit regime rules. The regulations finalize with revisions 2020 proposed regulations ( REG-123652-18).

Centralized Partnership Audit Regime

The Bipartisan Budget Act of 2015 (BBA, P.L. 114-74) replaced the Tax Equity and Fiscal Responsibility Act (TEFRA, P.L. 97-248) partnership procedures with a centralized partnership audit regime for making partnership adjustments and tax determinations, assessments, and collections at the partnership level. These changes were further amended by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act, P.L. 114-113) and the Tax Technical Corrections Act of 2018 (TTCA, P.L. 115-141). The centralized audit regime, as amended, generally applies to returns filed for partnership tax years beginning after December 31, 2017. A partnership with no more than 100 partners may generally elect out of the centralized audit regime if all the partners are eligible partners.

Under the post-2017 centralized partnership audit regime, the IRS examines “partnership-related items” of all domestic and foreign partnerships and their partners. A "partnership-related item" is any item relevant to the determination of the income tax liability of any person. However, Code Sec. 6241(11), added by the BBA, authorizes Treasury to except “special enforcement matters” from the centralized partnership audit regime and to issue regulations providing alternative assessment and collection rules for those matters. The 2020 proposed regulations and these final regulations implement Code Sec. 6241(11) and make changes to previously issued final regulations pertaining to the centralized partnership audit regime.

Special Enforcement Matters

Code Sec. 6241(11) sets forth six categories of "special enforcement matters":

• (1) failures to comply with the requirements for a partnership partner or S corporation partner to furnish statements or compute and pay an imputed underpayment;
• (2) assessments relating to termination assessments of income tax or jeopardy assessments of income, estate, gift, and certain excise taxes;
• (3) criminal investigations;
• (4) indirect methods of proof of income;
• (5) foreign partners or partnerships; and
• (6) other matters identified in IRS regulations.

The final regulations add three new types of special enforcement matters:

• partnership-related items underlying non-partnership-related items;
• relationship of a partner to the partnership under the Code Sec. 267(b) or Code Sec. 707(b) related-party rules and extensions of the partner’s period of limitations; and
• penalties and taxes imposed on the partnership under chapter 1.

The final regulations also require the IRS to provide written notice of most special enforcement matters to taxpayers to whom the adjustments are being made.

In addition, the final regulations clarify that the IRS may adjust partnership-level items for a partner or indirect partner without regard to the centralized audit regime if the adjustment relates to termination and jeopardy assessments, the partner is under criminal investigation, or the adjustment is based on an indirect method of proof of income.

However, the final regulations provide that a determination about partnership-related items made outside of the centralized partnership regime is not binding on any person who is not a party to that proceeding. The final regulations clarify that neither the partnership nor the other partners are bound by a determination regarding a partnership-related item from a partner-level examination and that neither the partnership nor the other partners need to adjust their returns.

In addition, the special-enforcement-matter rules do not apply to the extent a partner can demonstrate that adjustments to partnership-related items in the deficiency or an adjustment by the IRS were (i) previously taken into account under the centralized audit regime by the person being examined or (ii) included in an imputed underpayment paid by a partnership (or pass-through partner) for any tax year in which the partner was a reviewed-year partner (but only if the amount exceeds the amount reported by the partnership to the partner that was either reported by the partner or included in the deficiency or adjustment).

Imputed Underpayments

The IRS and Treasury believe that a mechanism must exist for including adjustments from a centralized-regime audit in the partnership’s imputed underpayment, even if the partnership elects to “push out” the adjustment to its partners.

Under existing regulations for calculating imputed underpayments, an adjustment to a non-income item (that is, an item that is not an item of income, gain, loss, deduction, or credit) that is related to, or results from, an adjustment to an item of income, gain, loss, deduction, or credit is generally treated as zero. The final regulations require a partnership to take into account an adjustment to a non-income item on its adjustment-year return by adjusting the item to be consistent with the adjustment, but only to the extent the item would appear on that return without regard to the adjustment. If the item already appeared on the partnership’s adjustment-year return as a non-income item or the item appeared as a non-income item on any return of the partnership for a tax year between the reviewed year and the adjustment year, the partnership does not create a new item on the partnership’s adjustment-year return.

The final regulations provide that if the partnership is required to adjust its basis in an asset, the partnership does so in the adjustment year; however, the partnership only recognizes income and gain as a result of the basis adjustment in situations in which income or gain would be recognized. The final regulations also demonstrate how adjustments to liabilities are taken into account when they do not result in an imputed underpayment, and how an amended return should reflect adjustments to non-income items.

The final regulations follow the proposed regulations in allowing either the IRS or the partnership to treat an adjustment to a non-income item as zero. The final regulations also permit a partnership to treat such an adjustment as zero if the adjustment is related to, or results from, another adjustment to a non-income item. The partnership may not, however, treat such an adjustment as zero if one adjustment is positive and the other is negative.

Partnership Ceasing to Exist

Code Sec. 6241 states that if a partnership ceases to exist before any partnership adjustments take effect, the former partners of the partnership must take the adjustments into account in the manner prescribed in regulations. The final regulations clarify that even if a partnership has ceased to exist, it may make the election to push out the adjustments, request modification of the imputed underpayment, or pay the imputed underpayment within ten days of notice and demand for payment.

A section of the proposed regulations that would define "former partners" is not included in the final regulations and remains proposed.

Effective and Applicability Dates

The final regulations, which are effective December 8, 2022, apply to tax years ending on or after November 20, 2020 (except that final Reg. § 301.6241-7(b) applies to tax years beginning after December 20, 2018).

An IRS Notice provides guidance on the prevailing wage and apprenticeship requirements that the Inflation Reduction Act of 2022 ( P.L. 117-169) added to several new and amended tax credits and deductions.

An IRS Notice provides guidance on the prevailing wage and apprenticeship requirements that the Inflation Reduction Act of 2022 ( P.L. 117-169) added to several new and amended tax credits and deductions. The IRS also anticipates issuing proposed regulations and other guidance with respect to the prevailing wage and apprenticeship requirements.

These requirements generally apply if construction of a qualified facility, or installation of qualified property in an energy efficient commercial building, begins on or after the date that is 60 days after the IRS publishes guidance. This notice serves as the guidance that starts the 60-day clock. Thus, these rules apply when a qualified facility begins construction or the installation of qualified property begins on or after January 29, 2023.

The notice also provides guidance for determining the beginning of construction of a facility for certain credits, and the beginning of installation of certain property with respect to the energy efficient commercial buildings deduction.

The notice includes examples to illustrate these rules.

Prevailing Wage Requirements

For purposes of the credits, a taxpayer must satisfy the prevailing wage requirements with respect to any laborer or mechanic employed in the construction, alteration, or repair of a facility, property, project, or equipment by the taxpayer and the taxpayer’s contractors and subcontractors. The taxpayer must also maintain and preserve sufficient records to establish compliance, including books of account or records for work performed by contractors or subcontractors.

The prevailing wage rate is generally the one published by the Secretary of Labor on www.sam.gov for the geographic area and type of construction applicable to the facility, including all labor classifications for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics.

If the Secretary has not published a prevailing wage rate for the geographic area or the particular type of work, the taxpayer may request a wage determination or wage rate from the Wage and Hour Division. The taxpayer must follow prescribed procedures in order to rely on the provided wage or rate.

Similarly, for purposes of the deduction for energy efficient commercial buildings, the prevailing wage rate for installation of energy efficient commercial building property, energy efficient building retrofit property, or property installed pursuant to a qualified retrofit plan, is determined with respect to the prevailing wage rate for construction, alteration, or repair of a similar character in the locality in which the property is located, as most recently determined by the Secretary of Labor.

Apprenticeship Requirements

A taxpayer satisfies the apprenticeship requirements if:

1. The taxpayer satisfies the Apprenticeship Labor Hour Requirements, subject to any applicable Apprenticeship Ratio Requirements;
2. The taxpayer satisfies the Apprenticeship Participation Requirements; and
3. The taxpayer maintains sufficient records.

Under the Good Faith Effort Exception, the taxpayer will be considered to have made a good faith effort in requesting qualified apprentices if the taxpayer requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry.

Beginning of Construction or Installation

The beginning of construction is determined under the Physical Work Test and the Five-Percent Safe Harbor established in Notice 2013-29. The Continuity Safe Harbor established by Notice 2016-31 also applies.

The IRS has notified taxpayers, above the age of 72 years, that they can delay the withdrawal of the required minimum distributions (RMD) from their retirement plans and Individual Retirement Accounts (IRA), until April 1, following the later of the calendar year that the taxpayer reaches age 72 or, in a workplace retirement plan, retires.

The IRS has notified taxpayers, above the age of 72 years, that they can delay the withdrawal of the required minimum distributions (RMD) from their retirement plans and Individual Retirement Accounts (IRA), until April 1, following the later of the calendar year that the taxpayer reaches age 72 or, in a workplace retirement plan, retires. The Service also reminded taxpayers that they must meet the deadlines to avoid penalties and that such RMDs may not be rolled over to another IRA or retirement plan. The Service also informed taxpayers that not taking a required distribution, or not withdrawing enough, could mean a 50% excise tax on the amount not distributed.

The deadlines for the different RMDs are as follows:

• Taxpayers holding traditional IRAs , and SEP, SARSEP, and SIMPLE IRA should take their first RMD, even if they’re still working, by April 1, 2023, and the second RMD by Dec. 31, 2023, and each year thereafter.
• For taxpayers with retirement plans, the first RMD is due by April 1 of the later of the year they reach age 72, or the participant is no longer employed. A 5% owner of the employer must begin taking RMDs at age 72.
• An IRA trustee, or plan administrator, must either report the amount of the RMD to the IRA owner or offer to calculate it. They may be able to withdraw the total amount from one or more of the IRAs. However, RMDs from workplace retirement plans must be taken separately from each plan.

An RMD may be required for an IRA, retirement plan account or Roth IRA inherited from the original owner. A 2020 RMD that qualified as a coronavirus-related distribution may be repaid over a 3-year period or the taxes due on the distribution may be spread over three years. A 2020 withdrawal from an inherited IRA could not be repaid to the inherited IRA but may be spread over three years for income inclusion.

The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) that would implement the beneficial ownership information provisions of the Corporate Transparency Act (CTA) that govern access to and protection of beneficial ownership information.

The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) that would implement the beneficial ownership information provisions of the Corporate Transparency Act (CTA) that govern access to and protection of beneficial ownership information. The proposed regulations address the circumstances under which beneficial ownership information may be disclosed to certain governmental authorities and financial institutions, and how that information must be protected.

The proposed regulations would—

• specify how government officials would access beneficial ownership information in support of law enforcement, national security, and intelligence activities;
• describe how certain financial institutions and their regulators would access that information to fulfill customer due diligence requirements and conduct supervision; and
• set high standards for protecting this sensitive information, consistent with CTA goals and requirements.

The NPRM also proposes amendments to the final reporting rule issued on September 30, 2022, effective January 1, 2024, to specify when reporting companies may report FinCEN identifiers associated with entities.

Limiting Access to Beneficial Ownership Information

The NPRM follows the final reporting rule which requires most corporations, limited liability companies, and other similar entities created in or registered to do business in the United States, to report information about their beneficial owners to FinCEN. Per CTA requirements, the proposed regulations limit access to beneficial ownership information to—

• federal agencies engaged in national security, intelligence, or law enforcement activities;
• state, local, and Tribal law enforcement agencies, if authorized by a court of competent jurisdiction;
• financial institutions with customer due diligence requirements, and federal regulators supervising them for compliance with those requirements;
• foreign law enforcement agencies, judges, prosecutors, central authorities, and other agencies that meet specific criteria, and whose requests are made under an international treaty, agreement, or convention, or via law enforcement, judicial, or prosecutorial authorities in a trusted foreign country; and
• U.S. Treasury officers and employees whose official duties require beneficial ownership information inspection or disclosure, or for tax administration.

The proposed regulation would subject each authorized recipient category to unique security and confidentiality protocols that align with the scope of the access and use provisions.

Proposed Effective Date

FinCEN is proposing an effective date of January 1, 2024, to align with the date when the final beneficial ownership information reporting rule becomes effective.

Request for Comments

Interested parties can submit written comments on the NPRM by or before February 14, 2023 (60 days following publication in the Federal Register). Comments may be submitted by the Federal E-rulemaking Portal ( regulations.gov), or by mail to Policy Division, Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-2021-0005 and RIN 1506-AB49/AB59.

The IRS and the Treasury Department have released final regulations that provide some clarity and relief with regards to certain provisions of the Affordable Care Act ( P.L. 111-148), including the definition of minimum essential coverage under Code Sec. 5000A and reporting requirements for health insurance issuers and employers under Code Secs. 6055 and 6056. The final regulations finalize 2021 proposed regulations with some clarifications ( REG-109128-21).

The IRS and the Treasury Department have released final regulations that provide some clarity and relief with regards to certain provisions of the Affordable Care Act ( P.L. 111-148), including the definition of minimum essential coverage under Code Sec. 5000A and reporting requirements for health insurance issuers and employers under Code Secs. 6055 and 6056. The final regulations finalize 2021 proposed regulations with some clarifications ( REG-109128-21).

The final regulations provide that the term "minimum essential coverage" does not include Medicaid coverage limited to COVID-19 testing and diagnostic services provided under the Families First Coronavirus Response Act ( P.L. 116-127). If an individual qualifies solely for this coverage, then it does not prevent them from claiming the premium tax credit under Code Sec. 36B. This amendment to Reg.§ 1.5000A-2 applies for months beginning after September 28, 2020.

The final regulations also provide:

• An automatic 30-day extension of time under Code Sec. 6056 for "applicable large employers" (generally employers with 50 or more full-time employees, including full-time equivalent employees) to furnish statements relating to health insurance that the applicable large employers offer to their full-time employees; ·
• An automatic 30-day extension of time under Code Sec. 6055 for providers of minimum essential coverage (such as health insurance issuers) that would provide an automatic extension of time for furnishing statements to responsible individuals; and
• An alternative method for reporting entities to furnish statements to their insured members when their shared responsibility payment is zero. The regulations under Reg.§1.6055-1(g)(4)(ii)(B) provide sample language for furnishing these statements.

The regulations under Reg. §§1.6055-1 and 301.6056-1 apply for years beginning after December 31, 2021.

The final regulations affect some taxpayers who claim the premium tax credit; health insurance issuers, self-insured employers, government agencies, and other persons that provide minimum essential coverage to individuals; and applicable large employers.

A theme running through the recent Internal Revenue Service Independent Office of Appeals Focus Guide for fiscal year 2023 is moving on past the issues created by the COVID-19 pandemic and getting back to helping taxpayers through the appeals process.

A theme running through the recent Internal Revenue Service Independent Office of Appeals Focus Guide for fiscal year 2023 is moving on past the issues created by the COVID-19 pandemic and getting back to helping taxpayers through the appeals process.

"It's time, as we leave some of those pandemic issues behind us, to focus more on our core mission in appeals, which is the quality resolution of taxpayer cases," Independent Office of Appeals Chief Andy Keyso said in a recent interview with Federal Tax Daily. "I think that's the theme you see throughout the focus guide," which was issued November 4, 2022.

To that end, Keyso highlighted two key areas that will enable the office to meet that core mission – staffing and technology upgrades.

Rebuilding Staff

On the staffing side, Keyso noted that 10 years ago, the Appeals staff was at 2,100 employees, but in that window dropped to a low of about 1,100.

"We have made a big push to restack, using any kind of approval we could get here internally, and we currently are sitting at about 1,500 employees," he said, adding that the office currently has about 1,500 employees, with a goal in 2023 to get up to 1,725.

Keyso noted that the office is different from other parts of the IRS that have an exam or a collections function.

"If you don’t have the number of people you’d like to have, you just do fewer collection actions or you do fewer audits," Keyso said. "In Appeals, we have unique challenges. We’ve got to work every case that comes in the door. We can’t say, ‘We don’t have enough people, so we are not going to work your case.’ So for us, hiring is particularly an acute issue and recruiting and hiring will be one of our focus areas for this year."

He added that the staffing targets are based on the IRS’ set budget for 2023 and do not include potential increases that could come with the additional funding provided by the Inflation Reduction Act.

Improving Technology

Like the rest of the agency, the Office of Appeals is working through its own technology issues and is in need of upgrades.

In particular, Keyso highlighted the need to get away from paper.

"I think we learned during the pandemic a few things about technology and how paper can really be our Achilles heel when you have to move paper case files," he said. "That was a particular issue during the pandemic when you didn’t have all of your people in the office to ship case files around."

Moving to a more paperless environment is a "continuing challenge," Keyso said, not only for communicating between Appeals employees, but between staff and taxpayers. "Should we really be mailing things back and forth through the U.S. Postal Service? Or is there a better way to communicate with taxpayers that’s faster and maybe preferable to taxpayers?"

As part of the technology challenges, the Independent Office of Appeals also is looking to continue to use video conferencing, something that gained traction during the pandemic.

"With the service wide return to the office, we are again offering in person conferences, which is something Appeals is very excited about," Amy Giuliano, senior advisor to the Chief and Deputy Chief in the Office of Appeal, said. "But we want video conferences to remain a permanent option to alongside in person. We requested comments in August … for people to submit input on experiences they had with video conferences with appeals that should inform our longer term guidelines. And we've received a lot of positive feedback that video conferences, when they're managed effectively, are a great way for a taxpayer to present their case to appeals."

She applauded the fact that video conferences have the benefits of a face-to-face conference in that one can see the IRS agent they are dealing with, but they avoid the logistical issues with traveling to an IRS office to conduct the meeting. It makes things more accessible, especially if the taxpayer has medical or other mobility issues.

"That's why it's so important that it remain an option going forward alongside in person and alongside telephone," she said.

Improving Overall Access

Keyso also noted that a key area of focus going forward is improving the overall access to the Independent Office of Appeals now that access has been codified into law through the Taxpayer First Act of 2019. Treasury is currently working on regulations that will implement the law.

"Our position in the Appeals Office is, you know, we want the broadest access to appeals possible for us to hear controversies or disputes between IRS and taxpayer," Keyso said. "So we will continue to push for broad access to taxpayers to appeals."

Giuliano added that "enhancing the taxpayer experience is really what sort of animates and informs everything else that we're doing."

Keyso also mentioned that Appeals is planning on continuing convening practitioner panels, during which the office invites practitioners to talk about issues they are facing as they deal with the appeals process. He noted that it was through these panels that the office made changes to letters that went out to taxpayers and their representatives that included more contact information on managers so taxpayers and their representatives have it handy if they need to escalate a situation.

Audits by the Internal Revenue Service in 2017 and 2019 were not conducted to target specific individuals, according to a new report by the Treasury Inspector General for Tax Administration.

Audits by the Internal Revenue Service in 2017 and 2019 were not conducted to target specific individuals, according to a new report by the Treasury Inspector General for Tax Administration.

The report, dated November 29, 2022, but released December 1, found that "key decisions and information related to the tax return selection process for Tax Years 2017 and 2019 were determined prior to the start of each year’s respective filing season and prior to the selection of any returns," the Treasury watchdog said in a statement. "TIGTA also confirmed that the computer program used to select tax returns worked as designed and di not included any malicious code that would force the selection of specific taxpayers for an NRP [National Research Program] audit."

TIGTA conducted the analysis of the audit selection process following a July 2022 media report that suggested the selection for those tax years may not have been random. To answer the allegations, TIGTA hired a contractor that, according to the report, "replicated the process. Specifically, the contractor replicated each week’s original sample selection file through April 2018 and July 2020 for TYs 2017 and 2019, respectively."

Once replicated, a return-by-return comparison of the replicated files and the original sample selection was conducted to verify the files matched.

"They concluded that the tax returns in the original samples were the same tax returns selected when the process was replicated using the respective seed numbers," the report states. "TIGTA also compared the contractor’s replicated weekly output files to the original weekly output files, and same as the IRS, TIGTA determined they matched."

The report noted that a line-by-line review of the original source code was conducted "to determine whether information (i.e., TIN) was improperly coded in the program that would result in a specific taxpayer being selected for an NRP audit. The contractor concluded that no specific taxpayer information was included in the original source code."

A return or a payment that is mailed to the IRS is timely filed or paid if it is delivered on or before its due date. A return with a U.S. postmark, which is delivered after its due date, is timely filed if the date of the postmark is no later than the due date, the return was properly addressed, and the return had proper postage. The timely mailing/timely filing rule also applies when a taxpayer receives a filing extension. If an envelope has a post office postmark and a non-post office postmark, the latter is disregarded and the post office postmark determines the filing date.

A return or a payment that is mailed to the IRS is timely filed or paid if it is delivered on or before its due date. A return with a U.S. postmark, which is delivered after its due date, is timely filed if the date of the postmark is no later than the due date, the return was properly addressed, and the return had proper postage. The timely mailing/timely filing rule also applies when a taxpayer receives a filing extension. If an envelope has a post office postmark and a non-post office postmark, the latter is disregarded and the post office postmark determines the filing date.

     Comment. The timely filing, timely mailing rule requires that the return be postmarked within the prescribed filing period. Thus, an individual return postmarked April 16 and received on April 20 is considered filed on April 20.

Private carriers. A return delivered by a designated private carrier is timely if the carrier marks or records the return no later than the due date of the return. However, a return delivered by means other than the U.S. mail or a designated private carrier must be delivered to the appropriate IRS office on or before its due date to be timely.

The IRS can designate a private carrier if the carrier: is available to the general public; is as timely and reliable as U.S. first class mail; records the date on which the package was given to it for delivery; and satisfies other conditions. The IRS has identified DHL Express, Federal Express, and United Parcel Service as designated carriers.

No postmarks; other postmarks. If there is no postmark, the taxpayer may establish the mailing date by extrinsic evidence. A return in an envelope with a foreign postmark or private meter machine postmark is timely filed if the postmark is on or before the due date of the return and the return is received no later than if it had been postmarked by the postal service on the last day for filing the return.

Registered, certified. A receipt showing that a return was sent by registered or certified mail is proof that the return was delivered to the place that it was addressed. Returns sent by registered mail are deemed to be postmarked on the date of registration. Returns sent by certified mail are deemed to be postmarked on the date stamped on the receipt, under the timely mailed, timely filed rule. However, if a taxpayer mails a return certified but does not obtain a certified receipt, the postmark on the envelope determines the filing date.

     Comment. A taxpayer mailing a return on or near its due date should use registered or certified mail with a postmarked receipt. Documents sent in this manner are automatically timely filed.

Electronic. An electronically-filed return with a timely electronic postmark is timely filed, provided that the return is filed in the manner prescribed for electronic returns. An electronic postmark is a record of the date and time, in the taxpayer's time zone, that an authorized electronic return transmitter receives the e-filed document on its host system.

An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.

An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.

"Check-the-Box" Election

An LLC with more than one member can elect tax status as:

• Partnership
• Corporation
• S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

An LLC with only one member can elect tax status as:

• Disregarded entity
• Corporation
• S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

The IRS will assign the following classifications if no entity election is filed for an LLC (the default rules):

• any business entity that is not a corporation is classified as a partnership
• any entity that is wholly-owned by a single person will be disregarded as an entity separate from its owner (taxed as a sole proprietorship).

Typically, an LLC with more than one member will elect to be taxed as a partnership, whereas a single-member LLC will elect to be disregarded and taxed as a sole proprietorship.

If you have any questions relating to LLCs, their benefits, drawbacks, or their treatment under the Tax Code, please contact our offices.

One morning you reach into your mailbox or bin to find the dreaded letter from the IRS announcing that you owe unpaid taxes. As if that wasn't enough to induce panic, you may discover there are add-on charges for interest and penalties. Penalties for what, you may ask?

One morning you reach into your mailbox or bin to find the dreaded letter from the IRS announcing that you owe unpaid taxes. As if that wasn't enough to induce panic, you may discover there are add-on charges for interest and penalties. Penalties for what, you may ask?

If you violate the Tax Code, the IRS may impose civil and/or criminal penalties, depending on the type of infraction committed. Civil penalties are commonly imposed for a failure to pay taxes when due, failure to report the correct amount of tax owed, a failure to deposit federal tax deposits, filing late, or even failing to pay because of a bounced check. There are more than 100 kinds of civil penalties in the Tax Code, ranging in severity. For example, a penalty for failure to file (separate and apart from a failure to pay) carries a minimum $100 fine, while a penalty for valuation overstatement can result in a 30 percent penalty on the amount of tax owed as a result. Criminal penalties can be even more severe, and may include terms of imprisonment as well as fines.

Taxpayers, return preparers, and third parties with some connection to the tax return in question may all become subject to penalties. Common civil penalties include failure to file tax returns, failure to pay taxes due, underpaying tax due to negligence, and valuation misstatements that result in inaccurate reporting of income (and therefore an incorrect amount of tax owed).

Criminal penalties are imposed for violations of federal Tax Code and Criminal Code, which include the willful (or intentional) attempt to evade or defeat any federal tax, the failure to collect or truthfully account for and pay any federal tax as required, or the failure to keep required records, supply required information or make required returns. Generally the IRS Criminal Investigations Division will conduct investigations into allegations of criminal tax violations, and if it recommends that the government prosecuted, the case could be referred to the IRS Office of Chief Counsel, the Department of Justice, the U.S. Attorney's Office, or some combination of the three.

Hopefully you will never receive a letter from the IRS about either civil or criminal penalties. But if you do, please call our offices with any questions.

When starting a business or changing an existing one there are several types of business entities to choose from, each of which offers its own advantages and disadvantages. Depending on the size of your business, one form may be more suitable than another. For example, a software firm consisting of one principal founder and several part time contractors and employees would be more suited to a sole proprietorship than a corporate or partnership form. But where there are multiple business members, the decision can become more complicated. One form of business that has become increasingly popular is called a limited liability company, or LLC.

When starting a business or changing an existing one there are several types of business entities to choose from, each of which offers its own advantages and disadvantages. Depending on the size of your business, one form may be more suitable than another. For example, a software firm consisting of one principal founder and several part time contractors and employees would be more suited to a sole proprietorship than a corporate or partnership form. But where there are multiple business members, the decision can become more complicated. One form of business that has become increasingly popular is called a limited liability company, or LLC.

The LLC combines several favorable characteristics of a traditional partnership, in which all members are entitled to participate in the management and operation of the business, with those of a corporation, in which the owners, directors, and shareholders are generally shielded from liability for the corporation's debts. The means that in an LLC, just as in a corporation, the personal assets of the business owners' would generally be protected if the business failed, lost a lawsuit, or faced some other catastrophe. Members are only liable to the extent of their capital contribution to the business. In addition, members can fully participate in the management of the business without endangering their limited liability status.

When filing season begins, the profits (or losses) from the LLC pass through to its members, who pay tax on any income when filing their individual returns. In other words, income from the LLC is taxed at the individual tax rates. Income from corporations, on the other hand is taxed twice, once at the corporate entity level and again when distributed to shareholders. Because of this, more tax savings often results if a business formed as an LLC rather than a corporation.

Taxpayers should note, however, that Congress recently increased the top marginal individual income tax rate to 39.6 percent, has placed a .09 percent additional Medicare tax on wages over $200,000 (single taxpayers), and has imposed a 3.8 percent net investment income tax on higher-income taxpayers. At the same time, there is strong talk among members of both political parties of lowering the corporate rate from the current 35 percent to something around 28 or 25 percent to make the United States more competitive with foreign nations. If this happens, many highly profitable LLC businesses may need to rethink their situation and consider switching to a corporate form.

Forming an LLC involves many requirements, but the benefits can be substantial. Please call our offices if you have any questions.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS cites that over three million taxpayers in recent tax years have claimed deductions for business use of a home, which normally requires the taxpayer to fill out the 43-line Form 8829. Under the new procedure, a significantly simplified form is used. The new method is expected to reduce paperwork and recordkeeping for small businesses by an estimated 1.6 million hours annually, according to the IRS. The new optional deduction is limited to $1,500 per year, based on $5 per square foot for up to 300 square feet.

The simplified method is not effective for 2012 tax year returns being filed during the current 2013 filing season, but it will become effective for 2013 tax year returns filed in 2014. Taxpayers may want to investigate now whether they could benefit from the election for the 2013 tax year. Acting IRS Commissioner Steven Miller advised upon announcement of the safe harbor that "The IRS … encourages people to look at this option as they consider tax planning in 2013."  A final decision on the election need not be made until 2014, when 2013 returns are filed.

Basic home office deduction rule

Under Code 280A, which governs the home office deduction rules on the simplified method election, a taxpayer may deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis. This generally means usage as:

• The taxpayer's principal place of business for any trade or business
• A place to meet with the taxpayer's patients, clients, or customers in the normal course of the taxpayer's trade or business, or
• In the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer's trade or business.

The new simplified method does not remove the requirement to keep records that prove exclusive use, on a regular basis, for one of the three designated uses listed above. It does help, however, in other ways.

Simplified safe harbor

Using the new simplified safe harbor method, a taxpayer determines the amount of deductible expenses for qualified business use of the home for the tax year by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the portion of a home used in a qualified business use of the home, but not to exceed 300 square feet. The prescribed rate is $5.00 per square foot.

Taxpayers who itemize their returns and use the safe harbor method may also deduct, to the extent allowed by the Tax Code and regs, any expense related to the home that is deductible without regard to whether there is a qualified business use of the home for that tax year, the IRS explained. As a result, they will be able to claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A of Form 1040. These deductions do not need to be allocated between personal and business use, as is required under the regular method.

Depreciation

Taxpayers using the safe harbor cannot deduct any depreciation for the portion of the home that is used in a qualified business use of the home for that tax year. For many taxpayers, depreciation is the largest component of the home office deduction under the regular method that must be sacrificed if the new safe harbor method is used.  Depending upon the value of your home and the space devoted to an office at home, using the regular method may prove to be the far better choice than electing the simplified method.

Election

Taxpayers may elect from tax year to tax year whether to use the safe harbor method or actual expense method. Once made, an election for the tax year is irrevocable.  The IRS has provided rules for calculating the depreciation deduction if a taxpayer uses the safe harbor for one year and actual expenses for a subsequent year. The deduction of expenses that are not related to the home, such as wages and supplies, is unaffected and those deductions are still available to those using the new method.

Limitations

The IRS set various limits on the safe harbor, including:

• Taxpayers with more than one qualified business use of the same home for a tax year and who elect the safe harbor must use the safe harbor for each qualified business use of the home.
• Taxpayers with qualified business uses of more than one home for a tax year may use the safe harbor for only one home for that tax year.
• A taxpayer who has a qualified business use of a home and a rental use of the same home cannot use the safe harbor for the rental use.

If you are currently claiming a home office deduction, or if you have considered taking the deduction in the past but were discouraged by all of the paperwork and calculations required, you should consider whether the new, simplified safe harbor method is right for you. Please feel free to contact this office for further details.