W-2 Reporting of Health Insurance Coverage Delayed

The 2010 health care law imposed a new reporting obligation on employers, to report the aggregate cost of employer-provided health insurance on their employees' W-2s.  This reporting is informational only; not an increase in taxable wages.  The original due date of this reporting obligation began January 1, 2011.  In IRS Notice 2010-69, the IRS made this reporting "optional" for all employers for 2011 W-2s.  Now, in new IRS Notice 2011-28, the IRS extends this voluntary reporting for small employers (those issuing fewer than 250 Forms W-2 for 2011) through 2012.

The aggregate cost to be reported includes both the portion of the premium paid by the employee and the employer, regardless of whether the employee's contributions were made on a pre-tax or an after-tax basis.  However, the aggregate cost does not include contributions to an Archer MSA, Health Savings Account, or a flexible spending arrangement.  Many other special rules exist and reference should be made to IRS guidance for the details.

UPDATE:
IRS Notice 2012-9 extends the exception from reporting employer paid health costs on W-2s for small employers to future tax years beyond 2012 until further guidance is issued by the IRS.

Expanded Form 1099 Reporting Repealed

On April 14, 2011, Pres. Obama signed legislation repealing the expanded Form 1099 reporting requirement that was part of the 2010 health care law.  The expansion was to include information reporting for payments of $600 or more each year to vendors of goods in addition to services, and to also require reporting to corporations (previously exempt from receiving Form 1099s) beginning with payments made in 2012.  The repeal reverts to the former Form 1099 reporting requirements for payments of $600 or more to non-corporations for services (except that payments to corporations for legal services and health care must be reported).

In addition, the expanded Form 1099 reporting requirement for renters of real estate that was enacted as part of the Small Business Jobs Act of 2010 is repealed.  The expansion was to include information reporting for payments of $600 or more each year for vendors of goods in addition to services, and to also require reporting to corporations (previously exempt from receiving Form 1099s), beginning with payments made in 2011.  In addition, the expansion applied to all landlords, not just those who were in the business of renting property.  The repeal reverts to the former Form 1099 reporting requirements for landlords in the business of renting property to report payments of $600 or more to non-corporations for services (except that payments to corporations for legal services and health care must be reported).

Treasury Inspector General Says IRS Should Increase Audits of Tax Returns with Real Estate Rental Losses

In a report dated December 20, 2010, the Treasury Inspector General for Tax Administration (TIG) concluded that 53% of individual taxpayers misreported their rental real estate (RRE) activity.  An estimated $12.4 billion was under reported.  The TIG recommended that the IRS analyze tax returns with RRE losses to determine which returns to include in Compliance Initiative Programs (specialized audits), revise the Form 8582 instructions to require all taxpayers with suspended RRE passive losses to include the form in each year's tax return, and to record which taxpayers claim to be real estate professionals who are exempted from the passive loss limitations.

The IRS is already gathering some additional information on RRE activities by requiring addresses of each property be reported on 2010 tax returns, indicating the type of property (e.g. residential, commercial, etc.), and reporting the number of days rented at fair value or used personally.  In addition, the Small Business Jobs Act of 2010 requires owners of RRE activities to file Form 1099s for all service providers to whom more than $600 is paid, beginning in 2011.

Clearly the government sees some abuses by taxpayers in the tax reporting of RRE activities.  It is important that taxpayers have good records and documentation of income and expenses for each activity, and that they comply with the passive activity loss regulations.  Such records and compliance may be audited more frequently in the future based upon the TIG's recommendations.

Second Chance by Aug 31, 2011 to Disclose Foreign Accounts

US taxpayers are required to disclose to the government their foreign financial accounts and to pay income tax on any earnings each year. Substantial penalties, including the risk of prison under federal criminal prosecution, exist for non-compliance.  Many people either have ignored or were unaware of these duties.  In 2009, the IRS provided a means for such people to come clean under an "Offshore Voluntary Disclosure Initiative."  Some 15,000 people met the October 15, 2009 deadline.  Many others did not.
Now comes round two, and the deadline is August 31, 2011.  The new disclosure initiative requires participants to pay any back taxes, interest, and penalties and to complete the Report of Foreign Bank and Financial Accounts (FBAR) for up to eight years.  In addition, a disclosure penalty of up to 25% of the highest financial account balance during the 2003 to 2010 time frame will be assessed.  By participating in the program, taxpayers have the protection against criminal prosecution, limited financial penalties, and no more than eight tax years to deal with.
The IRS is also encouraging taxpayers who have made so-called "quiet disclosures" to now participate in this new initiative.  A quiet disclosure is a taxpayer's attempt to become compliant by filing amended tax returns without disclosing to the IRS their prior lack of compliance and paying the substantial disclosure penalty.  The IRS says such taxpayers do not have the protection of the voluntary disclosure program and they could be subject to higher penalties, criminal prosecution, and have an unlimited number of tax years subject to examination.
Detailed information for participating the voluntary disclosure program can be found on the IRS website.  The IRS declares that those who don't come forward now to participate in this program will face higher penalties and the possibility of criminal prosecution in the future.

Update:
Taxpayers may request a 90-day extension of the deadline to complete their submission if they can demonstrate a good faith effort to fully comply by the August 31, 2011 deadline.  The request must be made in writing and include a statement of why certain disclosure items are missing and the actions being taken to obtain the missing information.

Second Update:
The IRS extended the August 31, 2011 due date until September 9, 2011 in light of the problems created by Hurricane Irene.

New Exempt Organization Filing Thresholds

The IRS dramatically altered the long-form tax return (Form 990) for tax-exempt organizations in 2008.  Use of the new long-form was phased in over several years because of the increased record keeping and costs of compliance.  For 2010 tax returns, Form 990 must be used by tax-exempt organizations if 2010 gross receipts were $200,000 or more (down from $500,000 for 2009 tax returns) or 2010 ending assets were $500,000 or more (down from $1,250,000 for 2009 tax returns).

The short-form tax return (Form 990-EZ) can be used for 2010 tax returns for those exempt organizations having 2010 gross receipts of less than $200,000 and 2010 ending assets of less than $500,000.

The so-called electronic postcard, Form 990-N, can be used for 2010 tax returns for exempt organizations having 2010 gross receipts not in excess of $50,000 (up from $25,000 for 2009 tax returns).

Private foundations must use Form 990-PF, and there are not shorter, alternative forms based upon the size of gross receipts or total assets of the foundation.

Checklist of "Other" Major 2011 Tax Changes

My recent articles reviewed some of the many tax law changes Congress enacted on December 17, 2010.  The following list highlights many of the other important changes taking effect in 2011, some of which have previously been discussed in earlier blog posts.

1. Tax return preparers must register with the IRS and obtain preparer tax identification numbers in order to prepare tax returns after 2010.
2. Tax return preparers who expect to file 100 or more individual, estate, and trust income tax returns in 2011 must do so by electronically filing the tax returns.  The threshold drops to more than 10 returns in 2012.  Clients may elect to continue to file paper tax returns, but they must sign an IRS-prescribed statement and attach new Form 8948 indicating the reason for not filing electronically.
3. Employers must pay all federal taxes after 2010 using electronic funds transfer.  The old method of making a federal tax deposit at a bank with Form 8109 is no longer permitted.
4. Securities brokers are already required to report the gross proceeds of securities sold.  Beginning in 2011, securities brokers must also report the income tax basis of the securities sold.  Basis must be tracked only for securities purchased after 2010.  The sale proceeds and basis information reporting will enable the IRS to monitor taxpayers' reporting of capital gains and losses.
5. The IRS requires corporations to file information returns reporting the impact on tax basis of stock for any corporate reorganization, such as a stock split, merger, or acquisition occurring after 2010.
6. Financial institutions must file information with the IRS reporting the gross amount of credit and debit card payments a business receives during the year, beginning after 2010.
7. Persons renting real estate to tenants must file Form 1099-MISC for payments totaling $600 or more during the year, beginning after 2010, to service providers such as a plumber, painter, grounds keeper, etc.
8. The penalties for not filing necessary information returns due after 2010 have dramatically increased.
9. The cost of over-the-counter medicines after 2010 can no longer be reimbursed by health flexible spending accounts under cafeteria plans, a health reimbursement plan of the employer, a health savings account (HSA), or an Archer medical savings account.  If a doctor prescribes such medicines, then the cost is eligible for reimbursement.
10. For tax years starting after 2010, the tax penalty on nonqualifying HSA reimbursements increases from 10% to 20%, and the penalty on nonqualifying Archer MSA reimbursements increases from 15% to 20%.

Business Tax Changes in the 2010 Tax Relief Act

Several generous business tax cuts were contained in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRA), enacted on December 17, 2010.  Those of particular note are:

• Bonus Depreciation.  Under the Small Business Jobs Act of 2010 (SBJA), the old 50% bonus depreciation that had expired after 2009 was extended to qualifying property placed in service through 2010.  The TRA increases the percentage to 100% of the cost of qualifying assets placed in service from September 9, 2010 through December 31, 2011.  The TRA also extends the 50% bonus depreciation to assets placed in service during 2012.  No bonus depreciation applies after 2012 (except for certain long-term production-period property).  Unlike the Section 179 expensing election, bonus depreciation applies to all sizes of businesses and can create a net operating loss that can be carried back to refund taxes paid in prior tax years.  However, bonus depreciation only applies to "new" property, whose original use starts with the taxpayer.  As an additional benefit, property for which bonus depreciation is claimed is not subject to the alternative minimum tax depreciation adjustment.  Qualifying property typically consists of machinery, equipment, other tangible personal property, most computer software, and certain leasehold improvements.  A taxpayer may elect not to claim bonus depreciation in those cases where it might not prove beneficial.  Note that bonus depreciation is determined upon the placed in service date whereas Section 179 expensing is determined upon taxable years.
• Section 179 Expensing.  Under the SBJA, the amount of qualifying property that could be expensed was raised to $500,000 for assets placed in service during tax years beginning in 2010 and 2011.  The $500,000 is reduced dollar for dollar as the amount of total qualifying property exceeds $2 million in the taxable year.  Qualifying property typically consists of new or used personal property and software; but for tax years beginning in 2010 and 2011, a special rule permits certain purchases of qualified real property to be included, up to $250,000 of the $500,000 limit.  The TRA retains these amounts for tax years beginning in 2010 and 2011 and changes (with inflation adjustments) the expensing limit to $125,000 and the start of the phase-out to $500,000 for tax years beginning in 2012.  However, the TRA did not extend the special qualified real property expensing provision past 2011.  For tax years beginning after the 2012, the limitations will be $25,000 and $200,000 respectively.  With 100% bonus depreciation available for assets placed in service through 2011, Section 179 expensing will not prove as useful except for "used" property for which bonus depreciation is not available.
• Research and Experimental Tax Credit.  The TRA retroactively extends the research tax credit that had expired at the end of 2009 until the end of 2011 for amounts paid or accrued.  For eligible small businesses, important changes were made by the SBJA such that, for tax years beginning in 2010, the research tax credit is not limited to the excess of regular tax over AMT and any unused 2010 research credit may be carried back five tax years instead of one.  An eligible small business is (1) a corporation the stock of which is not publicly traded, (2) a partnership, or (3) a sole proprietorship, if the average annual gross receipts of the business for the three-tax-year period preceding the 2010 tax year does not exceed $50 million.
• 15-Year Depreciation of Qualifying Leasehold Improvements.  The special 15-year (instead of 39-year), straightline depreciation method available for qualifying leasehold improvements, qualified restaurant property, and qualified retail improvements, was extended to such property placed in service through 2011.  In addition, this property may also be eligible for the special Section 179 expensing provisions for qualified real property (discussed above).