Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Key developments during the third quarter of 2009 (MS Word)
Key developments during the third quarter of 2009 (.pdf)
Key developments during the third quarter of 2009
Dear Reader:
The following is a summary of the most important tax developments
that have occurred in the past three months that may affect you,
your family, your investments, and your livelihood. Please call us
for more information about any of these developments and what steps
you should implement to take advantage of favorable developments and
to minimize the impact of those that are unfavorable.
New guidance and rollover relief for waiver of 2009 RMDs.
IRS has issued additional guidance on the waiver of 2009 required
minimum distributions (RMDs). It provides transition relief through
Nov. 30, 2009, so that a plan won't be treated as having an
operational failure for allowing waivers of 2009 RMDs and related
payments before being amended, and rollover relief for 2009 RMD
waivers and related payments. In general, retirement plan or IRA
withdrawals that were made despite the 2009 RMD waiver won't face
tax if rolled over to a retirement plan within 60 days. The new
guidance includes an extension of the 60-day rollover period to Nov.
30, 2009, for certain distributions. However, no more than one
distribution from an IRA may be rolled over. The rollover relief
gives older taxpayers an unusual opportunity to correct an
inadvertent mistake that otherwise would unnecessarily increase
their taxable income for 2009. It also give some individuals a
“retroactive” chance to reduce their tax bill if their financial
circumstances have improved during the course of 2009.
Administration launches new initiative to boost retirement savings. The Administration has issued a barrage of guidance designed to
increase retirement savings. Three revenue rulings, four notices,
and new IRS website explanations make it easier for employers to
provide for automatic retirement plan enrollments and automatic
contribution increases, permit unused leave to be converted into
retirement savings, give employees a clearer understanding of
rollover options, and permit income tax refunds to be used to
purchase U.S. Savings Bonds. The new developments will, to be sure,
make it easier for employers to offer automatic enrollments, and
enhance the chances that taxpayers won't spend their lump-sum
payouts. However, the real trail blazers are the ruling that permits
the dollar value of unused paid time off to be contributed to a
401(k) plan, and Treasury's new policy of allowing taxpayers to
funnel tax refunds directly into U.S. Savings Bonds.
IRS halts enforcement of tax shelter penalty in some cases.
The IRS has suspended through the end of this year its efforts to
collect penalties under IRC §6707A in some cases. This provision
imposes a penalty of $100,000 per individual and $200,000 per entity
for each failure to make special disclosures with respect to a
transaction that IRS characterizes as a “listed transaction” or
“substantially similar” to a listed transaction. The suspension
applies where the annual tax benefit from the transaction is less
than $100,000 for individuals or $200,000 for other taxpayers. The
IRS implemented the suspension after Congressional leaders
complained that IRC §6707A can result in disproportionate penalties
for small businesses that thought they were investing in legitimate
benefits plans, but unknowingly invested in listed tax shelter
transactions. Taxwriters informed IRS that an effort is under way to
enact legislation that would ease IRC §6707A's application.
Basis overstatement can trigger 6-year limitations period under new
regs. The IRS has issued temporary regulations under which an
understated amount of gross income reported on a return resulting
from an overstatement of unrecovered cost or other basis is an
omission of gross income for purposes of the 6-year period for
assessing tax and the minimum period for assessment of tax
attributable to partnership items. The 6-year limitations period
applies when a taxpayer omits from gross income an amount that's
greater than 25% of the amount of gross income stated in the return.
Several courts have held that a basis overstatement is not an
omission of gross income for this purpose. In response to these
decisions, the IRS issued temporary regulations to clarify that an
omission can arise in that fashion. How courts will react to the
clarification remains to be seen.
Roth IRA was not an eligible S corporation shareholder.
The Tax Court agreed with the IRS that a Roth IRA can't be the
shareholder of an S corporation. As a result, the corporate taxpayer
was taxable as a C corporation for the year involved. Had the Court
agreed with the taxpayer, the corporation's earnings would have
escaped taxes altogether. They would not be taxed each year as they
passed through to the Roth IRA (the corporation's sole shareholder)
and, if applicable Roth IRA requirements were met, would not be
taxed when withdrawn from the Roth IRA. The Court prevented that
result but the decision was not unanimous. Some judges dissented and
others wrote their own concurring opinions.
Next year's tax figures increase slightly if at all.
Inflation data that is finalized each August is used by the IRS to
compute the following year's standard deductions, exemptions, tax
brackets and other key items. IRS has determined that, because of
the extremely low inflation over the past 12 months, for the first
time ever, many key tax items will not increase next year or will
increase only slightly (see ¶12 ).
Items that won't increase include the personal exemption and the
standard deduction for all but heads of household. Some tax brackets
will remain the same but most will increase slightly.
IRS can examine tax accrual workpapers.
A Federal appellate court has held that so-called tax accrual
workpapers are not protected by the work-product privilege. That
privilege protects work done for litigation, not in preparing
financial statements, and the workpapers were prepared to support
financial filings and gain auditor approval. As a result, the IRS
could examine the tax accrual workpapers in auditing the taxpayer.
Electing deferral of income on repurchased debt.
A business generally will wind up with debt discharge income if it
repurchases its debt for less than the outstanding amount of the
debt. However, under a provision added to the tax law earlier this
year, debt discharge income from reacquisition of business debt at a
discount in 2009 and 2010 can be deferred until 2014, and then
included in income ratably over five years. The IRS has now issued
procedures for taxpayers who wish to elect to defer recognizing
cancellation of debt income under this new provision, including the
time and manner for making the election and specific procedures for
partnerships, S corporations, tiered pass-through entities, and
foreign entities.
Simplified per diem rates increased effective Oct. 1, 2009.
Reimbursements of an employee's business travel costs (lodging, meal
and incidental expenses (M&IE)) at a per diem rate are payroll-and
income-tax free if simplified substantiation is provided and the
daily rate doesn't exceed the federal per diem rate (the maximum
amount that the federal government reimburses its employees) for the
locality of travel for that day. While the per diem rates vary by
travel destination, employers can make reimbursements at the
simplified “high-low” per diem rates, which assign one per diem rate
to high-cost areas within the continental U.S., and another to
non-high-cost areas. The IRS has issued the “high-low” simplified
per diem rates for post-Sept. 30, 2009, travel. An employer may
reimburse up to $258 for high-cost localities ($193 for lodging and
$65 for M&IE) and $163 for other localities ($111 for lodging and
$52 for M&IE). The list of high-cost areas is also updated.