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The IRS began its "Dirty Dozen" list for 2022, which includes potentially abusive arrangements that taxpayers should avoid. The tax scams in this series focus on four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance and monetized installment sales. These are the first four entries in this year’s Dirty Dozen series.

The IRS began its "Dirty Dozen" list for 2022, which includes potentially abusive arrangements that taxpayers should avoid. The tax scams in this series focus on four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance and monetized installment sales. These are the first four entries in this year’s Dirty Dozen series.

Taxpayers who have already claimed the purported tax benefits of one of these four transactions on a tax return should consider taking corrective steps, including filing an amended return and seeking independent advice. Where appropriate, the IRS will challenge the purported tax benefits from the transactions on this list and may assert accuracy-related penalties. Further, the IRS informed that to combat the evolving variety of these potentially abusive transactions, the IRS created the Office of Promoter Investigations (OPI). The IRS has a variety of means to find potentially abusive transactions, including examinations, promoter investigations, whistleblower claims, data analytics and reviewing marketing materials.

Further, the IRS reminded taxpayers to watch out for and avoid advertised schemes, many of which are now promoted online, that promise tax savings that are too good to be true and will likely cause taxpayers to legally compromise themselves. Additionally, the IRS informed that taxpayers who have engaged in any of these transactions or who are contemplating engaging in them should carefully review the underlying legal requirements and consult independent, competent advisors before claiming any purported tax benefits.

The IRS announced that is completing the processing on a key group of individual tax returns filed during 2021. Business paper returns filed in 2021 will follow shortly after. The Service began 2022 with a larger than usual inventory of paper tax returns and correspondence filed during 2021 due to the pandemic. The IRS will continue to work on the few remaining 2021 individual tax returns that have processing issues or require additional information from the taxpayer. As of June 10, the IRS had processed over 4.5 million individual paper tax returns received in 2021.

The IRS announced that is completing the processing on a key group of individual tax returns filed during 2021. Business paper returns filed in 2021 will follow shortly after. The Service began 2022 with a larger than usual inventory of paper tax returns and correspondence filed during 2021 due to the pandemic. The IRS will continue to work on the few remaining 2021 individual tax returns that have processing issues or require additional information from the taxpayer. As of June 10, the IRS had processed over 4.5 million individual paper tax returns received in 2021.

To date, more than twice as many returns await processing compared to a typical year at this point in the calendar year. A greater percentage of this year’s inventory awaiting processing is comprised of original returns that, generally, take less time to process than amended returns. To address the unprocessed inventory by the end of this year, the IRS has taken aggressive steps including significant, ongoing overtime for staff throughout 2022, creating special teams of employees focused solely on processing aged inventory and expediting hiring of thousands of new workers and contractors. Additionally, the IRS has improved the process for taxpayers whose paper and electronically filed returns were suspended during processing for manual review and correction.

The IRS reminded taxpayers who have not yet filed their 2021 tax returns this year, including those who requested an extension until October 17, to make sure they file their returns electronically with direct deposit to avoid delays. The IRS urged taxpayers to file as soon as they are ready and to not wait until the last minute before the October 17 extension deadline. Filing sooner avoids potential delays for taxpayers and assists the larger ongoing IRS efforts to complete processing tax returns this year.

Internal Revenue Service Commissioner Charles Rettig is pushing back on assertions that the agency is spending less time targeting wealthy taxpayers for audit in favor of lower income taxpayers.

Internal Revenue Service Commissioner Charles Rettig is pushing back on assertions that the agency is spending less time targeting wealthy taxpayers for audit in favor of lower income taxpayers.

"This is damaging to tax administration in this country when people say IRS audits more lower income people than higher income people," Rettig told attendees June 23, 2022, at the NYU Tax Controversy Forum.

He asserted that audit rate figures can be skewed depending on when the calculation is taking place. For example, he noted that if data is published on rates of audit for the 2021 tax year in 2022, the numbers will be considerably off.

"[W]hen you see these audit rates, don't jump on that train and say IRS is only auditing .0000 something," he said. "I go, Wow. Who are these folks we picked up? Right? The average audit gets picked up, particularly for high wealth taxpayer at least 16 months after that return has been filed. Why would we audit in the same calendar year that it's filed?"

Rettig noted that wealthy people may be filing later toward the extended filing deadline and filing more returns covering multiple years simultaneously, which would push back when audits take place. The would give the appearance that audits for more wealthy taxpayers may not be happening as much as for lower income taxpayers when examining a single-year audit rate.

But in reality, he said that audit rates for those who make more than $10 million "runs right around seven or eight percent. And as of this year, it’s at 8.7 percent. You will see that the $5 to $10 million group runs about 4.2%. You will see the $1 to $5 million group runs about 2.2%. Most of you have done the math and you understand exactly what I'm telling you, you go for the higher income folks."

After that, the numbers drop off "considerably," he said.

"The $1 million-and-under person is really the executive who has W-2 and 1099 income and we have that information," Rettig said. "The over $1 million person is the entrepreneur who has a lot of pass-through entities and whatnot, we don't have that information," and they get audited more because of it.

Rettig also used the forum to continue advocacy for more funding and guaranteed funding over multiple years to help improve not only enforcement, but to help improve the services that the agency provides to taxpayers, including hiring for call centers and providing better outreach.

Republican members of the Senate Finance Committee are the latest group to call on the Internal Revenue Service to implement 2-D barcoding technology on individual tax forms.

Republican members of the Senate Finance Committee are the latest group to call on the Internal Revenue Service to implement 2-D barcoding technology on individual tax forms.

"We are writing to strongly encourage the Internal Revenue Service (IRS) to work with tax return software companies to implement 2-D barcoding technology for use during the 2023 tax filing season for the 1040 family of paper returns," the GOP senators, led by Ranking Member Mike Crapo (R-Idaho), said in a May 24, 2022, letter to IRS Commissioner Charles Rettig.

Similar calls have been made by other stakeholders, including the National Taxpayer Advocate, who sent a directive to the IRS in March to implement 2-D barcoding in time for use with the 2023 tax season.

The GOP senators noted that the IRS is financially capable of doing this now. In the letter, the senators referenced the 2017 budget request of $8.4 million for implementation of 2-D barcoding and the $1 billion earmarked in the American Rescue Plan of 2021 for IT modernization, of which they state only $98.5 million so far has been spent.

The group also called on the agency to "stop chasing technological perfection" in the letter.

"If we were to wait for the promise of better technology, nothing would ever get implemented," the letter states. "To the contrary, the fact that 2-D technology is a bit older probably means it has been tested and is less expensive. Many states currently use 2-D barcoding for tax returns, so we have proof it works."

2-D barcoding came back into the forefront of needed IT upgrades for the IRS during the pandemic that caused a significant backlog of unprocessed paper returns. As of April 29, the agency still had more than 18 million unprocessed paper returns, though Commissioner Rettig has stated in numerous congressional hearings that the backlog will be back to its "normal" levels by the end of 2022.

The IRS Whistleblower Office has released the fiscal year (FY) 2021 annual report to Congress. In FY 2021, the Whistleblower Office made 179 award payments to whistleblowers totaling $36,144,926, including 20 awards paid under Code Sec. 7623(b). Whistleblower claim numbers assigned in FY 2021 grew by 55 percent year over year and claim closures increased by 13 percent. Additionally, this year’s report introduces the Code Sec. 7623 Payment and Claim Processing Analysis. The analysis shows Code Sec. 7623(b) awards were paid on average in 17 days.

The IRS Whistleblower Office has released the fiscal year (FY) 2021 annual report to Congress. In FY 2021, the Whistleblower Office made 179 award payments to whistleblowers totaling $36,144,926, including 20 awards paid under Code Sec. 7623(b). Whistleblower claim numbers assigned in FY 2021 grew by 55 percent year over year and claim closures increased by 13 percent. Additionally, this year’s report introduces the Code Sec. 7623 Payment and Claim Processing Analysis. The analysis shows Code Sec. 7623(b) awards were paid on average in 17 days.

Code Sec. 7623 Payment and Claim Processing Analysis

The average claim processing time for Code Sec. 7623(b) award payments made during FY 2021 increased by 2.9 percent from the prior year and average claim processing time for Code Sec. 7623(a) award payments increased by 10.4 percent. The report stated that it is likely average claim processing times will continue to increase as claim inventory continues to age while the Whistleblower Office awaits audits, exams, investigations, appeals, tech services, collection, statutes to expire, and whistleblower litigation.

Ten Most Common Allegations Submitted In FY 2021

The ten most common allegations submitted on Form 211, Application for Award for Original Information, for FY 2021 were:

• unreported income;
• general allegations of fraud, tax fraud, wire fraud, insurance fraud, and related allegations;
• false dependent exemptions;
• employee vs. subcontractor;
• failure to file;
• wage under reporter;
• capital gains tax;
• wages being paid in cash or under the table;
• rental income; and
• false deductions or expenses.

The report also provided other information including disclosures made under Taxpayer First Act, additional information on submissions received in FY 2021, information on claim numbers issued, claims remaining open and claims that were closed in each FY from 2019 to 2021, geographic location of all whistleblowers by region, open Code Sec. 7623(b) claims as of FY 2021, and reasons for closures that occurred during FY 2021.

Department of the Treasury Secretary Janet Yellen is continuing to promote the agreement on international taxes reached by most members of the Organisation for Economic Co-operation and Development on a global corporate minimum tax, but acknowledged that its overall impact will be determined by the final details.

Department of the Treasury Secretary Janet Yellen is continuing to promote the agreement on international taxes reached by most members of the Organisation for Economic Co-operation and Development on a global corporate minimum tax, but acknowledged that its overall impact will be determined by the final details.

Testifying before the Senate Finance Committee at a June 7, 2022, hearing about the White House’s fiscal 2023 budget request, Secretary Yellen noted in her opening remarks that she is "keenly focused on moving forward on the global agreement on international tax reform, including a global minimum tax that will level the playing field and raise crucial revenues to benefit people around the world."

However, she noted that because the specific details of how the international tax reforms will be defined and implemented, the impact on American businesses cannot be determined.

In response to a question as to whether the agency will provide Congress with the analysis of data currently available on whether the pillar one agreements will have a positive or negative impact, she said "that it could go either way, depending on the details which have not yet been decided. In the pillar one negotiations, the impact on fiscal revenues will be small."

Yellen continued: "Pillar two has a big impact. Pillar one will have a small impact. We're a very large market economy. We will gain revenue from our ability to tax foreign corporations that are doing business in the United States where we consume those services, we will lose some from revenue. Yet, it could be positive or negative, depending on details that have not yet been worked out. And that's why we've not provided data. We will when those details are clear."

That being said, Yellen also highlighted that countries will not be able to skirt the requirements of the treaty, responding to a question on whether China, a signee of the agreement, can be expected to comply with it when the nation has a questionable record complying with other international agreements.

Secretary Yellen testified that she expects China to comply with the terms of the agreement, but if it fails to do so, "this agreement contains an enforcement mechanism that will allow the United States or any other country that has adopted the global minimum tax to impose taxes on China's companies that would be the same as if China had complied. So there is a tough enforcement mechanism in this deal."

She also testified that Treasury will be negotiating on the details to ensure that business tax credits and subsidies will not negatively impact corporations once the international tax reforms are implemented.

Defending the Budget

During the hearing, she also addressed a number of issues that have become common themes among Biden Administration officials in recent months, including a recent focus on the tax gap and the disparities in auditing following a Government Accountability Office report that highlighted those concerns.

"Tackling that $600 billion annual tax gap is absolutely important in ensuring fiscal responsibility," Yellen told members of the Senate Finance Committee in response to a comment that the White House is requesting $80 billion over 10 years to address this. "It would generate substantial revenue in a manner that's efficient and fair. It would enable deficit reduction and help these price pressures by providing the funding a part of the funding we need for the urgent fiscal priorities."

She reinforced a common call to better fund the Internal Revenue Service to make sure it has the proper personnel in place to do things such as conducting more complicated audits to ensure the top earners are paying their fair share of taxes, in addition to helping the IRS serve the overall population and update its information technology infrastructure.

"We absolutely have to invest in the IRS to close that tax gap, which reflects opaque sources of income, mainly by high income earners that are not taxed," she said. "And they need the resources to serve taxpayers to be able to answer their phones to be able to ensure that they receive the payments that they are due, and they need to modernize their technology which is really the oldest dating back to the [19]60s in the federal government."

Yellen also took the opportunity to encourage Congress to extend the child tax credit, noting that while it may have played a minor role in contributing to the inflation issues the nation is tackling, it has had a significant effect on helping to reduce childhood hunger.

"It enabled families to get a little bit of breathing room and to help their kids afford nutritious food and clothing and back to school supplies." Yellen said.

She also mentioned during the Senate Finance Committee hearing that the Treasury Department is looking forward to working with Congress to get a tax deduction for union dues reinstated after it was cut in 2017.

A day later, on June 8, 2022, Secretary Yellen appeared before the House Ways and Means Committee in a hearing also advertised as a review of the White House budget but one that focused heavily on inflation, current energy policy, and international tax reform.

The American Institute of CPAs is calling on Congress to fund the Internal Revenue Service at the level requested by the White House in its fiscal year 2023 budget request. Separately, the group offered its suggestions on the IRS Guidance Priority List. "In advance of the Fiscal Year 2023 appropriations cycle, we request that you fund the Internal Revenue Service (IRS) at necessary levels to allow it to handle all the duties required of it by Congress, including properly administering and enforcing our nation’s tax laws as well as providing needed assistance to taxpayers and their advisers in a timely and professional manner," AICPA said in a May 25, 2022, letter to Democratic and Republican leadership in both the House and Senate Appropriations Committees.

The American Institute of CPAs is calling on Congress to fund the Internal Revenue Service at the level requested by the White House in its fiscal year 2023 budget request. Separately, the group offered its suggestions on the IRS Guidance Priority List. "In advance of the Fiscal Year 2023 appropriations cycle, we request that you fund the Internal Revenue Service (IRS) at necessary levels to allow it to handle all the duties required of it by Congress, including properly administering and enforcing our nation’s tax laws as well as providing needed assistance to taxpayers and their advisers in a timely and professional manner," AICPA said in a May 25, 2022, letter to Democratic and Republican leadership in both the House and Senate Appropriations Committees.

AICPA expressed concern that "service challenges will persist long after the pandemic has ended unless sufficient, targeted funding for technology improvements, human talent and training, and taxpayer services are appropriated."

The organization also noted that there needs to be more than money thrown at the agency to help its functioning. "It should be clear that funding alone will not solve the IRS’s problems,” AICPA wrote. “Structural reforms and organizational alignment from Congress, the President, the Secretary, and the Commissioner are necessary to delivering the promised goals. We look forward to working with all parties involved to this end and create an IRS that taxpayers deserve."

Priority Guidance Recommendations

In a separate letter sent to the IRS May 24, 2022, AICPA outlined its suggestions for the guidance that the agency should be prioritizing. The guidance recommendations cut across a range of programs and legislation, such as the Tax Cuts and Jobs Act, the SECURE Act, and the CARES Act and covering a number of areas such as corporation and shareholder taxation, employee benefits taxation, individual taxation, and international taxation.

R&E Recommendations

AICPA is also recommending the Internal Revenue Service issue specific regulations related to the treatment of research and experimental (R&E) expenditures under Sec. 174.

In a May 26, 2022, letter to the IRS, AICPA said that the Department of the Treasury and the IRS should "issue regulations providing that section 174(a) expenditures include direct costs, including employee compensation, contract labor, and materials, and at the taxpayer’s election, allocable indirect and overhead costs."

AICPA also said that Treasury and the IRS "should issue regulations that illustrate, using detailed examples, which costs are ‘incident to’ the development or improvement of a product as per Reg. §1.174-2."

If the agency doesn’t issue new regulations, AICPA recommended guidance to cover these requests.

Additionally, AICPA identified issues that have arisen with Rev. Proc. 2000-50, which covers the treatment of costs paid or incurred to develop, purchase, or lease computer software.

"IRS should modify the scope limitation under section 4 of Rev. Proc. 2000-50 to clarify that the limitation on costs that a taxpayer has treated as R&E expenditures under section 174 only applies to costs previously subject to an irrevocable election under section 174, including 174(b) or charging the expenses to capital account."

The Department of the Treasury is continuing its push to get funding for much needed information technology infrastructure upgrades from Congress.

The Department of the Treasury is continuing its push to get funding for much needed information technology infrastructure upgrades from Congress.

During a June 14, 2022, hearing before the Senate Appropriations Committee’s Subcommittee on Financial Services and General Government, Treasury Deputy Secretary Wally Adeyemo testified as to why the funds were needed.

The "IRS’ technology is decades out of date, written in a programming language no longer taught, and incredibly expensive to maintain the master file that under grids," Adeyemo told the committee in his opening statement. "The tax system dates back to the 1960s when there was no internet, no cell phones, and no spreadsheets or automatic payments."

The White House is requesting a 12 percent budget increase in fiscal year 2023 compared to 2022 enacted levels "to begin to remedy this mismatch between the IRS’ responsibilities and its resources."

Treasury’s request for increasing funds to help address IT infrastructure upgrades for the IRS did not come up during the hearing’s question-and-answer period, as the committee focused its attention on Russian sanctions, the role of using cryptocurrency to evade sanctions, energy policy and independence, and other criminal-focused activities.

The U.S. Supreme Court has granted a petition for certiorari in the case of A. Bittner, CA-5, 2021-2 USTC ¶50,242 . In Bittner, the U.S. Court of Appeals for the Fifth Circuit held that each failure to report a qualifying foreign account on the annual Report of Foreign Bank and Financial Accounts (FBAR) constituted a separate reporting violation subject to penalty. This means that the penalty applies on a per-account basis, not a per-form basis. The Fifth Circuit disagreed with a Ninth Circuit panel that adopted a per-form interpretation ( J. Boyd, CA-9, 2021-1 USTC ¶50,112).

The U.S. Supreme Court has granted a petition for certiorari in the case of A. Bittner, CA-5, 2021-2 USTC ¶50,242 . In Bittner, the U.S. Court of Appeals for the Fifth Circuit held that each failure to report a qualifying foreign account on the annual Report of Foreign Bank and Financial Accounts (FBAR) constituted a separate reporting violation subject to penalty. This means that the penalty applies on a per-account basis, not a per-form basis. The Fifth Circuit disagreed with a Ninth Circuit panel that adopted a per-form interpretation ( J. Boyd, CA-9, 2021-1 USTC ¶50,112).

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Background

U.S. citizens and residents must keep records and/or file reports when the person makes a transaction or maintains a relation for any person with a foreign financial agency ( 31 USC 5314). Each person with a financial interest in a financial account in a foreign country must report the relationship to the IRS for each year the relationship exists by providing specified information on and filing the FBAR. The FBAR generally must be filed by June 30 of each calendar year for foreign financial accounts over $10,000 maintained during the previous calendar year (31 C.F.R. §§1010.350, 1010.306).

If the person fails to file the FBAR, the IRS can impose a penalty of up to $10,000 for non-willful violations, unless the violation was due to reasonable cause. For a willful violation, the maximum penalty is the greater of $100,000 or 50 percent of (1) the amount of the transaction when a violation involves a transaction, or (2) the balance in the account at the time of the violation when a violation involves a failure to report the existence of an account. There is no reasonable cause exception for willful violations ( 31 USC 5321).

Fifth Circuit: FBAR Penalty Per Account

In A. Bittner, the Fifth Circuit ruled that the text, structure, history, and purpose of the relevant statutory and regulatory provisions showed that the "violation" of 31 USC 5314 contemplated by the 31 USC 5321 penalty was the failure to report a qualifying account, not the failure to file an FBAR. Therefore, the $10,000 penalty cap applied on a per-account basis, not a per-form basis.

The Fifth Circuit agreed with the government that the district court had erred in determining what constituted a "violation" under 31 USC 5314 by focusing on the regulations under section 5314 to the exclusion of section 5314 itself. Section 5314 does not create the obligation to file a single report, stated the Fifth Circuit, but instead gives the Treasury Secretary discretion to prescribe how to fulfill the statute’s requirement of reporting qualifying accounts.

The Fifth Circuit observed that by authorizing a penalty for any "violation of ... any provision of section 5314," as opposed to the regulations under section 5314, section 5314 "naturally reads" as referring to the statutory requirement to report each account, not the regulatory requirement to file FBARs in a particular manner. Further, the circuit court stated that the reasonable cause exception for non-willful violations was framed in terms of "the transaction" and "the account," and thus it also "naturally reads" as excusing the failure to report a transaction or account, not the failure to file an FBAR.

Ninth Circuit: FBAR Penalty Per Form

In J. Boyd, the Ninth Circuit ruled that the IRS can impose only one non-willful penalty when an untimely but accurate FBAR is filed, regardless of the number of foreign financial accounts. The Ninth Circuit determined that the statutory and regulatory scheme under 31 USC 5314 authorizes a single non-willful penalty for the failure to file a timely FBAR, and that the taxpayer’s conduct in failing to timely file the FBAR amounted to one non-willful violation.

The Ninth Circuit was not persuaded by the government's argument that, based on the statutory scheme as a whole and legislative intent, the penalty amount could be assessed on a per-account basis. The Ninth Circuit found nothing in the statute or regulations to suggest that the penalty could be calculated that way for a single failure to file a timely FBAR that is otherwise accurate. The Ninth Circuit presumed that Congress had purposely excluded the per-account language from the non-willful penalty provision because it had included such language in the previously-enacted willful penalty provision. Further, the inclusion of per-account language in the reasonable cause exception supported the view that Congress had intentionally omitted per-account language from the non-willful penalty provision.

In what undeniably came down to the wire in the early hours of January 1, 2013, the Senate passed the American Taxpayer Relief Act of 2012, which, along with many other provisions, permanently extends the so-called Bush-era tax cuts for individuals making under $400,000 and families making under $450,000 (those above those thresholds now pay at a 39.6 percent rate). The House followed with passage late in the day on January 1; and President Obama signed the bill into law on January 2. Thus, the more than decade-long fight over the fate of the tax cuts, originally enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), accelerated under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and extended by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) comes to an end.

In what undeniably came down to the wire in the early hours of January 1, 2013, the Senate passed the American Taxpayer Relief Act of 2012, which, along with many other provisions, permanently extends the so-called Bush-era tax cuts for individuals making under $400,000 and families making under $450,000 (those above those thresholds now pay at a 39.6 percent rate). The House followed with passage late in the day on January 1; and President Obama signed the bill into law on January 2. Thus, the more than decade-long fight over the fate of the tax cuts, originally enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), accelerated under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and extended by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) comes to an end.

Prelude to the Fiscal Cliff

On May 26, 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The legislation was hailed as the largest tax cut in 20 years and dramatically changed the landscape of the federal tax code. Two years later, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) was signed into law and accelerated many of the tax cuts set in motion under EGTRRA. Originally scheduled to sunset, or expire, after December 31, 2010, Congress extended these popular provisions for another two years in late 2010 with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In 2010, Congress acted before the end of the year to extend the cuts. At the end of 2012, Congress and President Obama engaged in intense negotiations over the “fiscal cliff,” a term that came to combine many federal laws that had a deadline of December 31, 2012, including the Bush-era tax cuts. Congress then passed the American Taxpayer Relief Act of 2012 on New Year’s Day, 2013, effectively averting the fiscal cliff.

What Does This Mean for You?

The new law extends a majority of the Bush-era tax cuts in the same form as they have existed since 2001 or 2003 when initially enacted. However, major exceptions include a rise in rates, including a maximum 20 percent on capital gains and dividends, on higher-income individuals, as described above, and an increase in the estate tax rate from 35 to 40 percent. In addition to a general extension of the tax rates, many other provisions, including some not affected by the sunset of the Bush-era tax cuts, are significantly or permanently extended, including:

• Marriage penalty relief;
• Inflation protection against the alternative minimum tax (AMT);
• Deductions for student loan interest and tuition and fees;
• Enhanced child tax and child and dependent care credits;
• Simplified earned income credit;
• Deductions for primary and secondary school teacher expenses;
• Deductions for state and local sales taxes;
• Research credits;
• Energy-efficiency credits for homes and vehicles; and
• Many more provisions.

Unfortunately, the new law is also significant in what it does not do in one important respect. It does not renew the so-called payroll tax holiday that had been in effect during 2011 and 2012. As a result, employees and self-employed individuals will be paying 2 percent more employment tax on their earnings up to the Social Security wage base (which is up to $113,700 for 2013).

Finally, the American Taxpayer Relief Act also includes extensions of provisions that expired at the end of 2011, but now apply to the 2012 tax year. That means it has immediate effect on the 2013 filing season.

The landscape of federal tax law has changed once again, and with it the need to reassess present tax strategies. Please call this office if you have any questions about the new law or how it impacts you directly.

Beginning with 2012 Forms W-2, large employers must report the aggregate cost of employer-sponsored health insurance provided to employees. 2012 Form W-2s must be furnished to employees by January 31, 2013.

Beginning with 2012 Forms W-2, large employers must report the aggregate cost of employer-sponsored health insurance provided to employees. 2012 Form W-2s must be furnished to employees by January 31, 2013.

For tax years beginning on or after January 1, 2011, the Patient Protection and Affordable Care Act (PPACA) required that employers report the aggregate cost of employer-sponsored health insurance provided on Form W-2, Wage and Tax Statement. The IRS then exempted all employers from the requirement for 2011, making 2011 reporting optional.

Reporting took effect in early 2012, but only for large employers filing 250 or more Forms W-2 for the preceding calendar year (2011). Small employers are exempt from reporting for 2012 and beyond, until the IRS issues further guidance. An employer does not have to report the cost if it is not required to issue a Form W-2. This would be the case for a retiree or other former employee who does not receive compensation.

The aggregate reportable cost should be shown on Form W-2, Box 12, using Code DD. The IRS has reiterated that reporting is for informational purposes only, and that the cost of health insurance generally remains excludable from income.

Reporting applies to applicable coverage under any group health plan provided by an employer or employee organization, if the coverage is excludable from the employee's income or would have been excludable if provided by the employer. Costs for self-insured plans and plans of self-employed persons are covered, unless the only coverage provided by the employer is a self-insured plan that is not subject to COBRA continuation coverage requirements (e.g. a self-insured church plan). Coverage does not include long-term care; accident or disability coverage; coverage for treatment of the mouth; and coverage only for a specified illness or disease.

Reportable costs include both employer costs and employee costs for the health insurance, even if the employee paid his or her share through pre-tax or salary reduction contributions. The aggregate cost includes the cost of coverage included in the employee's income, such as the cost of coverage for a person who is not a dependent or a child under age 27.

However, costs do not include amounts contributed to an Archer Medical Savings Account, health savings account, or health reimbursement arrangement, and salary reduction contributions made to a flexible spending arrangement.

Reporting is required of most employers, including federal, state, and local governments, and churches and other religious organizations.

Please contact this office if you would like further information on how these new reporting obligations may apply to your business.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of January 2013.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of January 2013.

January 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 26-28.

January 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 29-January 1.

January 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 2-4.

January 10
Employees who work for tips. Employees who received $20 or more in tips during December must report them to their employer using Form 4070.

January 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 5-8.

January 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 9-11.

January 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 12-15.

January 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 16-18.

January 25
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 19-22.

January 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 23-25.

February 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 26-29.

February 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 30-February 1.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

Additional tax on higher-income earners

There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.

The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).

Passthrough treatment

For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.

Withholding rules

Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.

Planning techniques

One planning device to minimize the tax  would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.

Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.

If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.

No use worrying. More than five million people every year have problems getting their refund checks so your situation is not uncommon. Nevertheless, you should be aware of the rules, and the steps to take if your refund doesn't arrive.

Average wait time

The IRS suggests that you allow for "the normal processing time" before inquiring about your refund. The IRS's "normal processing time" is approximately:

• Paper returns: 6 weeks
• E-filed returns: 3 weeks
• Amended returns: 12 weeks
• Business returns: 6 weeks

IRS website "Where's my refund?" tool

The IRS now has a tool on its website called "Where's my refund?" which generally allows you to access information about your refund 72 hours after the IRS acknowledges receipt of your e-filed return, or three to four weeks after mailing a paper return. The "Where's my refund?" tool can be accessed at www.irs.gov.

To get out information about your refund on the IRS's website, you will need to provide the following information from your return:

• Your Social Security Number (or Individual Taxpayer Identification Number);
• Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
• The exact whole dollar amount of your refund.

 Start a refund trace

If you have not received your refund within 28 days from the original IRS mailing date shown on Where's My Refund?, you can start a refund trace online.

Getting a replacement check

If you or your representative contacts the IRS, the IRS will determine if your refund check has been cashed. If the original check has not been cashed, a replacement check will be issued. If it has been cashed, get ready for a long wait as the IRS processes a replacement check.

The IRS will send you a photocopy of the cashed check and endorsement with a claim form. After you send it back, the IRS will investigate. Sometimes, it takes the IRS as long as one year to complete its investigation, before it cuts you a replacement check.

A bigger problem

Another problem may come to the fore when the IRS is contacted about the refund. It might tell you that it never received your tax return in the first place. Here's where some quick action is important.

First, you are required to show that you filed your return on time. That's a situation when a post-office or express mail receipt really comes in handy. Second, get another, signed copy off to the IRS as quickly as possible to prevent additional penalties and interest in case the IRS really can prove that you didn't file in the first place.

Minimize the risks

When filing your return, you can choose to have your refund directly deposited into a bank account. If you file a paper return, you can request direct deposit by giving your bank account and routing numbers on your return. If you e-file, you could also request direct deposit. All these alternatives to receiving a paper check minimize the chances of your refund getting lost or misplaced.

If you've moved since filing your return, it's possible that the IRS sent your refund check to the wrong address. If it is returned to the IRS, a refund will not be reissued until you notify the IRS of your new address. You have to use a special IRS form.

IRS may have a reason

You may not have received your refund because the IRS believes that you aren't entitled to one. Refund claims are reviewed -usually only in a cursory manner-- by an IRS service center or district office. Odds are, however, that unless your refund is completely out of line with your income and payments, the IRS will send you a check unless it spots a mathematical error through its data-entry processing. It will only be later, if and when you are audited, that the IRS might challenge the size of your refund on its merits.

IRS liability

If the IRS sends the refund check to the wrong address, it is still liable for the refund because it has not paid "the claimant." It is also still liable for the refund if it pays the check on a forged endorsement. Direct deposit refunds that are misdirected to the wrong account through no fault of your own are treated the same as lost or stolen refund checks.

The IRS can take back refunds that were paid by mistake. In an erroneous refund action, the IRS generally has the burden of proving that the refund was a mistake. Nevertheless, although you may be in the right and eventually get your refund, it may take you up to a year to collect. One consolation: if payment of a refund takes more than 45 days, the IRS must pay interest on it.

If you are still worrying about your refund check, please give this office a call. We can track down your refund and seek to resolve any problem that the IRS may believe has developed.