Sen. Charles E. Schumer D-N.Y., a member of the Senate Finance Committee (SFC) international tax working group, expressed optimism that reform in that area will take place, noting that the differences between Democrats and Republicans are not “unbreachable.” In other Senate news, SFC ranking member Ron Wyden, D-Ore., and Sen. John Hoeven, R-N.D., introduced legislation that would expand tax-exempt private activity bonds and create a new infrastructure tax credit. Meanwhile, the IRS issued proposed regulations on the application of the modified carryover basis rules, as well as temporary and proposed regulations amending the treatment of nonperiodic payments made or received pursuant to certain notional principal contracts.
Congress
Senate. Small businesses now rank tax administration as a greater burden than the financial cost, according to testimony during a May 4 Senate Small Business and Entrepreneur Committee field hearing in Livingston, La., to examine ways to reduce the federal tax burden for Louisiana small businesses (TAXDAY, 2015/05/05, C.2). Chairman David Vitter, R-La., said in his opening statement that the cost of compliance to small businesses is 70-percent higher than bigger firms, adding that one in three small businesses spend more than $10,000 on federal tax administration. “It’s an unfortunate truth, but Congress and the IRS simply do not lean towards the opinions of small businesses when crafting laws and regulations,” said Vitter.
Wyden and Hoeven on May 4 introduced legislation, the Move America Bill of 2015 (TAXDAY, 2015/05/05, C.1). The measure would expand tax-exempt private activity bonds and create a new infrastructure tax credit, which Wyden said will give states significant flexibility to pursue infrastructure projects. Under current law, if more than 10 percent of the proceeds of a bond are used for a private business use, or if more than 10 percent of the payments on the principal and interest of the proceeds are paid or secured by payments from private businesses, the bonds are deemed private activity bonds, and interest income from the bonds is included as taxable income. The proposal establishes Move America Bonds, which would generally be treated as exempt facility bonds under current law, with several exceptions. The interest income on Move America Bonds is then excluded from the Alternative Minimum Tax, which eliminates the interest rate penalty placed on states using bonds for public projects with private partners. The proposed legislation also creates Move America credits, which would leverage additional private equity investment at a lower cost for states.
As the Senate Finance Committee bipartisan working groups on tax reform approach a May 31 deadline to issue their reports, Sen. Charles E. Schumer D-N.Y., of the international tax working group, is optimistic that reform in that area will take place (TAXDAY, 2015/05/06, C.2). “I think on the international side there’s a real hope we can get something done,” Schumer said on May 5 following a meeting with his working group. “Republicans and Democrats have differences, but the chasm is hardly unbreachable.” On chances of international tax reform making its way to the president’s desk, Schumer replied: “Better than I would have thought three months ago.”
Senate Finance Committee Chairman Orrin G. Hatch, R-Utah, and Senate Judiciary Committee Chairman Charles E. Grassley, R-Iowa, are pressing Centers for Medicare & Medicaid Services (CMS) Acting Administrator Andrew Slavitt to further clarify guidance for how federal funds may be used to implement the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) within state-based marketplaces (SBMs) (TAXDAY, 2015/05/06, C.1). A recent Health and Human Services Office of Inspector General (OIG) report found that SBMs might have used, and may continue to be using, federal establishment grant funds for operating expenses, contrary to the law. In a letter dated May 4, Hatch and Grassley said that the report by the OIG notes that, “without clearer guidance from CMS as to what actions fall within prohibited uses, taxpayer monies could be—and may have already been—used for improper operational costs with State-based marketplaces.”
CRS Reports. In some ways, tax expenditures resemble direct spending programs, according to an April 30 Congressional Research Service (CRS) report (TAXDAY, 2015/05/07, C.1). The CRS indicated that, during the last 40 years, the level of tax expenditures has varied both as a function of taxes collected and as a share of the economy. It added that one possible explanation for this variability is that tax reform historically reduces the scope of tax expenditures, which otherwise grow. Moreover, growth in tax expenditures has exceeded that of discretionary spending, but not mandatory spending, over the same time period.
Under accrual basis accounting, revenue is recorded when it is earned and expenses are reported when they are incurred, regardless of when payment is actually made or received (TAXDAY, 2015/05/08, C.1). The cash basis method, however, is simpler and arguably less administratively burdensome on businesses, according to a Congressional Research Service Report entitled “Cash Versus Accrual Accounting: Tax Policy Considerations.” The Joint Committee on Taxation (JCT) considers cash accounting a departure from “normal income tax law” and, thus, classifies it as a tax expenditure. The CRS report noted that some members of Congress and the administration have put forth proposals that would expand the number of firms allowed to use cash accounting by increasing the average gross receipts limit test.
Treasury
The Treasury Inspector General for Tax Administration has issued reports finding:
The IRS has not developed processes and procedures to verify taxpayer compliance with minimum essential coverage (MEC) and shared responsibility payment requirements for the 2015 filing season because the Treasury Department delayed employer and insurer reporting of health insurance information until March 2016 (Ref. No. 2015-43-030; TAXDAY, 2015/05/08, T.1). However, the IRS planned on assessing MEC compliance on 2014 tax returns that it identifies through its normal compliance activity.
Over a 10-year period (October 1, 2003, through September 30, 2013), the IRS mitigated proposed terminations in over 60 percent of cases involving willful tax noncompliance by IRS employees and did not clearly identify why some employee terminations were mitigated (Ref. No. 2015-10-002; TAXDAY, 2015/05/07, T.1). TIGTA found that in some cases, employees with similar violations received different discipline. Moreover, in cases that were mitigated, the files included mitigating factors as well as evidence that violations of tax law were willful; however, the Commissioner’s reasons to mitigate were not clear.
More than 3.6-million taxpayers (claiming more than 3.8-million students) received more than $5.6 billion in potentially erroneous education credits ($2.5 billion in refundable credits and $3.1 billion in nonrefundable credits) (Ref. No. 2015-40-027; TAXDAY, 2015/05/06, T.1). Additionally, TIGTA identified 765,943 taxpayers (21 percent) claimed both a student for which the IRS had no Form 1098-T, Tuition Statement, and listed an ineligible institution on their Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).
IRS
Proposed Regulations/Modified Carryover Basis. The IRS has issued proposed regulations on the application of the modified carryover basis rules of Code Sec. 1022 (NPRM REG-107595-11; TAXDAY, 2015/05/11, I.1). Specifically, the proposed regulations will modify provisions of the Treasury Regulations involving basis rules by including a reference to Code Sec. 1022 where appropriate.
Final and Temporary Regulations/Notional Principal Contracts. The IRS has released final, temporary and proposed regulations amending the treatment of nonperiodic payments made or received pursuant to certain notional principal contracts (T.D. 9719, NPRM REG-102656-15; TAXDAY, 2015/05/08, I.1). The final regulations provide that, subject to certain exceptions, a notional principal contract with a nonperiodic payment must be treated as two separate transactions consisting of one or more loans and an on-market, level payment swap.
Depreciation of Unrecoverable Precious Metals. The IRS has ruled that the capitalized cost of unrecoverable precious metals that are used in a manufacturing process are depreciable under the Modified Accelerated Cost Recovery System (MACRS) (Rev. Rul. 2015-11; TAXDAY, 2015/05/08, I.4). The capitalized cost of the recoverable portion of such metals is not depreciable.
IRS Updates List of Designated Private Delivery Services. The IRS’s list of designated private delivery services (PDSs) has been updated to add four new delivery services to the list of designated delivery services, and five delivery services previously designated have been removed (Notice 2015-38; TAXDAY, 2015/05/07, I.1).
Tax Relief for Kentucky Disaster Victims. Victims of severe storms, tornadoes, flooding, landslides and mudslides that took place beginning on April 2, 2015, in parts of Kentucky may qualify for certain filing and penalty tax relief if they reside or have a business in parts of Kentucky that have been declared part of the federal disaster area (KY-2015-08; TAXDAY, 2015/05/07, I.2). The president has declared the counties of Bath, Bourbon, Carter, Elliott, Franklin, Jefferson, Lawrence, Madison, Rowan and Scott a federal disaster area.
Hawkins Steps Down as OPR Director. Karen L. Hawkins announced on May 6 that she will be leaving the IRS after six years as director of the IRS’s Office of Professional Responsibility (OPR) (TAXDAY, 2015/05/07, I.3). Hawkins last day will be July 11.
MeF Unavailability. The Modernized e-File (MeF) Production and Assurance Testing Systems (ATS) will be unavailable on Saturday, May 16, 2015, and also on Saturday, June 6, 2015, the IRS has announced (TAXDAY, 2015/05/07, I.4). The IRS will be conducting system maintenance on those dates from 7:00 a.m. until 3:00 p.m. ET.
Proposed Regulations/Minerals or Natural Resources. The IRS has issued proposed regulations in response to a growing number of requests for private letter rulings presenting questions about the specific application of Code Sec. 7704(d)(1)(E), which provides that income and gains derived from the exploration, development, mining or production, processing, refining, transportation, or marketing of minerals or natural resources is qualifying income for purposes of the publicly-traded partnership rules (NPRM REG-132634-14; TAXDAY, 2015/05/06, I.1). Among other things the regulations attempt to clarify when income from support activities will be considered qualifying income for purposes of Code Sec. 7704(c) exception to the requirement that publicly-traded partnerships be treated as corporations for federal income tax purposes.
May 15 Deadline for Form 990 Filers. The IRS has reminded calendar-year tax-exempt organizations to file their Form 990-series returns by May 15 (IR-2015-78; TAXDAY, 2015/05/06, I.2). Organizations that fail to file returns for three consecutive years will have their exempt status revoked.
Nationwide Tax Forums. The IRS has reminded tax professionals to register for the 2015 IRS nationwide tax forums, beginning in July (IR-2015-79; TAXDAY, 2015/05/06, I.4). The forums provide up to 18 continuing professional education (CPE) credits for enrolled agents, certified public accountants, certified financial planners, Annual Filing Season Program (AFSP) participants and other tax professionals.
Revenue Ruling/Code Sec. 351 Transfer. The IRS has determined in two revenue rulings that certain transactions were properly treated as Code Sec. 351 transfers of a foreign operating subsidiary’s stock, followed by Code Sec. 368(a)(1)(D) reorganizations (Rev. Ruls. 2015-9 and 2015-10; TAXDAY, 2015/05/06, I.5, I.6). The stock transfers satisfied the formal requirements of Code Sec. 351.
Applications for VITA/TCE Grants. The IRS is accepting applications for the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) grant programs (IR-2015-77; TAXDAY, 2015/05/05, I.1). The applications will be accepted only through http://www.Grants.gov until June 2, 2014.
2016 HSA Contribution Limits. The IRS has released the 2016 inflation-adjusted amounts for health savings accounts under Code Sec. 223 (Rev. Proc. 2015-30; TAXDAY, 2015/05/05, I.3). For calendar year 2016, the annual limitation on deductions under Code Sec. 223(b)(2) for an individual with self-only coverage under a high-deductible plan is $3,350 ($6,750 for an individual with family coverage).
By Jeff Carlson and Jennifer Cordaro, Wolters Kluwer News Staff