By Laura E. Monroe, CPA
The 2019 National Tax Conference hosted by the AICPA was held November 13th and 14th in Washington DC. David Lifson, CPA, Partner, Crowe LLP welcomed more than 750 attendees to the 44th National Tax Conference.
Guiding & Implementing Tax Policy
David Kautter, JD, Assistant Secretary (Tax Policy) US Dept of the Treasury, started off the conference by discussing tax guidance. He noted that tax guidance is not only the regulations and Internal Revenue Bulletins, but also includes notices, FAQs, forms, instructions, and publications. In the 13 months between enactment of TCJA on December 22, 2017 and the start of the filing season on January 28, 2019, the IRS and Treasury updated over 500 forms, instructions, and publications which included over 40 new forms and instructions. In addition, over 140 software systems the IRS uses to process individual and business returns had to be updated to reflect the tax law changes. Over the past 23 months, with respect to TCJA, some form of guidance has been issued on each of the 119 sections of TCJA. Needless to say, this has been an overwhelming task for them. They are currently working on final regulations on numerous sections of TCJA and continue to put out guidance as needed.
IRS Commissioner’s Address
After having been a practitioner for 36 years, Charles Rettig, J.D., LLM was sworn in a little over a year ago as the new IRS Commissioner. He is well aware of the struggles we face – he has seen it through the practitioner’s eyes. He touched on some of the IRS accomplishments over the past year and outlined his priorities.
Security Awareness Week is the first week of December. Security is a major issue for the IRS and practitioners with the cloning of tax returns whereby the perpetrator is able to file early before the taxpayer. Through the Security Summit and other meetings, the IRS has been able to reduce tax related identity theft to 160,000 cases – down from 700,000 cases. Although this is a tremendous decrease, the IRS is continually working to reduce it down even further.
At the end of October, the Department of Justice announced the takedown of the largest child exploitation site in history which led to 337 arrests in 38 countries and the rescue of 23 actively exploited children. This site was operated through the dark web using virtual currencies. What connects this to the IRS is the fact that the lead investigative agency was the IRS Criminal Investigations division. They identified it, moved it forward, and ultimately led to the prosecution working with countries all over the world. The IRS Commissioner pointed out that the IRS is not just a tax agency. They are involved in numerous aspects and they touch more Americans than any other Federal agency.
The Taxpayer First Act was enacted on July 1, 2019, and this provides the IRS with a tremendous opportunity to shape the future of the agency. It is an opportunity to put a strategy and organization in place that will improve customer service and enhance the relationship with the IRS. They are asking for input from taxpayers, tax professionals, tax software companies, advisory groups, financial industry stakeholders, and other partners inside and outside the tax administration universe. They want to hear thoughts on the organizational structure of the IRS, the best approach for service delivery, and opportunities to provide a better experience for all involved.
A major priority for the IRS is a significant increase in enforcement actions for syndicated conversation easement transactions. Coordinated examinations are being conducted across the IRS in the Small Business & Self Employed Division, Large Business & International Division, and Tax Exempt & Government Entities Division. In addition, investigations have been initiated by the IRS’ Criminal Investigation Division. These audits and investigations cover billions of dollars of potentially inflated deductions as well as hundreds of partnerships and thousands of investors. Syndicated conservation easements are included on the IRS’s 2019 “Dirty Dozen” list of tax scams to avoid. In addition to auditing participants, the IRS is pursuing investigations of promoters, appraisers, tax return preparers and others.
Other priorities involve funding issues. The IRS needs appropriate staffing to enhance the taxpayer experience. Currently, they have major attrition issues and have hired about 9,700 employees during fiscal year 2019. This was the first significant hiring the IRS has done since 2011. They are also focused on cyberattacks, employee training, and enforcement related to crypto currencies and micro captives.
National Taxpayer Advocate Service
Nina Olsen retired after 18 years with the Taxpayer Advocate Service (TAS), and Bridget Roberts, J.D., LLM, is the Acting National Taxpayer Advocate until the next one is determined. She discussed some of the biggest issues and challenges facing TAS.
The biggest issue is inventory backlog. There has been a significant increase in inventory, and the majority is due to the “pre-refund wage verification hold” cases. These cases have gone from 20,000 in 2017 to 90,000 in 2018. These are cases where the IRS has yet to receive W-2 information. It could be from the taxpayer transposing numbers on the return, using the paystub instead of the W-2 to complete the return, or some other sort of mismatch that the IRS filters have flagged. The purpose of this program was to stop refunds based on false returns filed. Since so many returns are being pulled by IRS filters, there is a long delay to resolve those cases. As a result, there has been a significant increase in cases coming to TAS.
Another issue is the aging workforce. Many employees are starting to retire. TAS is aggressively hiring new employees but it takes about a year to 18 months to get them fully trained. Therefore, in addition to the increased workload, TAS has a decreased workforce able to handle the cases.
Opportunity Zone Funds: Basic Rules
The Opportunity Zone Program seeks to encourage economic growth and investment in designated low-income and distressed communities by providing federal income tax benefits to taxpayers that invest in businesses located within these zones. Tony Nitti, CPA, Partner, RubinBrown, LLP and Elizabeth Stieff, JD, LLM, Associate, Venable, LLP shared their insights into the world of OZ. The tax benefits only apply to capital gains, but it’s a threefold incentive. First, a taxpayer can defer federal capital gains tax on money earned from another investment by putting it into an OZ fund. The program allows investors deferral of capital gains taxes until the end of 2026 or upon sale of this new investment (whichever is earlier) if the gain is rolled into a Qualified Opportunity Fund within 180 days from the date of the sale. Second, the longer you hold the investment, the more you can reduce the amount of rolled-over gain that will be subject to tax. Investors who hold the fund for five years receive a 10% reduction on the gain they’ll owe taxes on, and if held for seven years, they’ll receive another 5% reduction. If the investment is held for 10 years or more, the third benefit will kick in. Any gain on the investment in the fund is tax-free as long as the initial outlay was made with capital gains from a prior investment.
The Qualified Opportunity Fund is any investment vehicle organized as a corporation or partnership for the purpose of investing in qualified opportunity zone property that holds at least 90% of its assets in Zone Property. Taxpayers will file Form 8996 for the initial self-certification and for annual reporting of compliance with the 90% asset test.
The following businesses do not qualify as QOZ businesses, even if located in an OZ:
Golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racktrack or other gambling facility or liquor stores. A list of designated Qualified Opportunity Zones can be found in IRS Notices 2018-48 or 2019-42.
Commuting and Parking
One area of the Tax Cuts and Jobs Act deals with fringe benefits. Karen Field, JD, RSM US, LLP and Ruth Wimer, CPA, Partner, Winston & Strawn spoke primarily on the commuting and parking section of fringe benefits. These benefits are no longer tax deductible.
Section 274(l) basically states that no deduction shall be allowed for any expense incurred for providing transportation, payment, or reimbursement to an employee for travel between the employee’s residence and place of employment (commuting), except as necessary for ensuring the safety of the employee. Currently, there is no guidance on the definition of “ensuring the safety.” Examples they provided included death threats related to employment, relying on an Independent Security Study, and the facts and circumstances that indicate a safety concern.
Section 274(a)(4) deals with qualified transportation fringes. It states that no deduction shall be allowed for the expense of any qualified transportation fringe provided to an employee of the taxpayer. A qualified transportation fringe means any of the following –
- Transportation in a commuter highway vehicle if in connection with travel between employee’s residence and place of employment.
- Any transit pass ($265 per month for 2019 is excluded from employee income).
- Qualified parking ($265 per month for 2019 is excluded from employee income).
- Any qualified bicycle commuting reimbursement.
The Bipartisan Budget Act of 2015 (BBA) included a provision that created new partnership audit rules for years beginning on or after January 1, 2018. Holly Paz, Director LB&I Passthrough Entities Practice Area, explained that very few partnership audits were being performed, despite the fact that the number of partnerships and partners continues to rise. The BBA is intended to improve the IRS’s ability to perform partnership audits; thus allowing it to audit more entities.
These audits will be conducted at the partnership level. The partnership will be required to pay the Imputed Underpayment (IU) which is the partnership adjustments at the highest tax rate in effect. The changes will be assessed to the partnership in the year of the audit – not back to the year that is being audited. Therefore, this could burden current partners with fiduciary responsibility for audits of prior years, even if they were not partners at that time.
There are 2 exceptions – (1) Small partnerships may elect out of the centralized partnership audit regime. To qualify they must have 100 partners or less, and the partners can only be individuals, estates, C corporations, S corporations or foreign entities that would be C corporations if they were a domestic entity. This is a year by year election on the Form 1065, or (2) The partnership can elect to “push out” the adjustments to the reviewed year partners.
Unless you elect out of the centralized partnership audit regime, you must designate a “partnership representative” (PR). The PR replaces the old tax matters partner. However, this new role is much more important. The PR has the sole authority to act on behalf of the partnership in a partnership audit or judicial proceedings. The PR does not have to be a partner, and the designation must be made each year. The enhanced role of the PR means careful attention should be given to the proper designation of a PR.
Nuts & Bolts of Crypto Taxation
Stephen Chandrasekera, CPA explained the ins and outs of Cryptocurrency and how it is handled for tax purposes. Cryptocurrency is an internet-based medium of exchange that runs on blockchain technology. Bitcoin is the most common type of cryptocurrency but there are many others. Cryptocurrencies are treated as “property” for tax purposes. Stephen explained the different tax treatments depending on how the crypto currency is used.
Investors are individuals who buy and sell crypto assets for speculative purposes. They will have capital gains or losses, and the exchanges will not issue a 1099-B. The exchanges will issue an exchange transaction report which is very complex and confusing. Most investors will use a coin tracking software like CoinTracker to track the basis since it is virtually impossible to track it manually. The software automates the capital gain/loss calculation and will generate Form 8949. In addition, the information from the exchange transaction report can be imported into the software, and the resulting gain/loss information can be exported into the tax software.
Mining is the act of adding new transactions to the blockchain by solving complex mathematical problems which require computing resources. Miners get rewarded with bitcoins or other crypto currency. This income is treated as ordinary income to them since it is considered a business to them. They will have expenses and deductions to offset the income just like any other business.
Tokens can be used as a method of payment for goods and services. For the payer, the deduction is the FMV of the tokens at the date of disbursement. The disbursement should be reported on W-2 or 1099MISC as appropriate. In addition, there will be capital gain or loss to report on the transfer. The payee will include in gross income the FMV of the tokens received at the date of receipt.
Compliance with Cryptocurrency reporting is very low. Therefore, this is an area the IRS is focusing on for 2019. In October of 2019, the IRS issued Rev. Rul 2019-24 and a series of FAQs. In addition, they recently issued 10,000 tax notices. There were 3 variations of the notices. Letter 6173 was an action letter stating that the IRS knows the taxpayer has crypto transactions and if they were not reported, an amended return needs to be filed to report the gains or losses. If the taxpayer did report them on the return, the IRS wants to see the support to backup the calculations. Letter 6174 was a “soft notice” educating the taxpayer about cryptocurrency reporting. Letter 6174-A was similar to letter 6174 in that the recipient is not required to respond to the letter, but they need to report any back crypto gains as soon as possible. This letter floats the possibility of following up with future enforcement actions.
The 2019 Form 1040 Schedule 1 will have a question asking if the taxpayer bought, sold, exchanged, or acquired any financial interest in any virtual currency. The IRS is hoping this will prompt taxpayers to comply with the reporting rules. The IRS has also partnered with Chainalysis which will help them get information directly from the blockchain in order to create a matching mechanism to increase compliance. Coinbase, a secure online platform for buying, selling, transferring and storing cryptocurrency, added 8 million new users last year. As you can see, this area is growing extremely fast, and the number of taxpayers getting involved in cryptocurrency will need our help come tax time. Accountants need to be aware of cryptocurrency and understand how to handle these transactions.
Section 163(j) Limitations on Deductions for Interest
Section 163(j) limits business interest expense deductions to the sum of business interest income, 30% of adjusted taxable income, and the taxpayer’s floor plan financing interest for the tax year. Brian O’Conner, JD, LLM, Partner, Venable, LLP discussed the details related to this new section. This section is very complex and therefore, this is a brief overview.
Adjusted taxable income (ATI) is the taxable income of the taxpayer with certain adjustments. Additions to taxable income include business interest expense, NOLs, Section 199A deductions, capital losses, and depreciation and amortization deductions (but only for years beginning before January 1, 2022). Subtractions from taxable income include business interest income, floor plan financing interest expense, and certain adjustments related to sales or dispositions.
There is a small business exemption and certain excepted trades or businesses. Under the small business exemption, this limitation does not apply to any taxpayer, other than a tax shelter, that meets the gross receipts test of Section 448(c). A taxpayer meets the gross receipts test if the average annual gross receipts for the 3 preceding taxable years does not exceed $25 million. For purposes of this section, the term “tax shelter” includes a syndicate which is defined as generally a non-C corporation entity if more than 35% of the losses of such entity during the taxable year are allocable to limited partners or similar owners. Therefore, even if the taxpayer meets the gross receipts test, they may not be exempted if they are considered a tax shelter.
Certain types of trades or businesses are excepted from the Section 163(j) limitation. These include:
- The trade or business of performing services as an employee.
- Any electing real property trade or business.
- Any electing farming business.
- Any excepted regulated utility trade or business.
For partnerships, the Section 163(j) limitation is applied at the partnership level. If the partnership has excess business interest expense, the partner’s basis is reduced even though they did not receive the deduction. Brian pointed out a trap that taxpayers could fall under. If the partner subsequently sells all, or substantially all, of their partnership interest, the nondeductible suspended interest gets added back to the basis immediately before the disposition. Therefore, the taxpayer does not lose the tax benefit, but takes the interest deduction that would have been an ordinary deduction and converts it to a reduction of the capital gain upon sale. Also, this only applies if you sell all or substantially all of your interest. If you only sell 50% of your interest, you don’t add back the suspended interest to your basis. Therefore, you pay capital gains on the suspended deductions and don’t receive the benefit until you sell the remainder of your interest.
Section 461(l) Limitation on Active Losses
Brian O’Conner also briefly touched on the new Section 461(l) limitation. Section 461(l) prohibits owners of non-C Corporation businesses from offsetting trade or business losses above a certain threshold against nonbusiness income in the year of the loss. Under this new rule, the excess business losses are instead carried over to the next taxable year as a net operating loss. Therefore, the losses will be subject to the new limitation imposed on NOLs generated after December 31, 2017 which states that NOLs can only offset 80% of taxable income in the carryforward years.
An excess business loss is the amount by which the total business loss exceeds $250,000 ($500,000 for a joint return). Effectively, the new law limits a taxpayer’s deductible net business loss to the threshold amount for the year the loss was incurred.