New Mortgage Interest Information Reporting to Begin for 2016 Tax Year

Financial institutions providing home mortgages will be required to include more information on Forms 1098 furnished after 2016 as a result of the temporary highway funding act signed into law on July 31, 2015.  Form 1098 allows the IRS computers to match the information reported by the financial institution to the interest deduction claimed on your income tax return.  The purpose of the information matching program is to increase the accuracy of compliance, so that deductions in excess of the actual interest paid, or in excess of deduction limitations, are not claimed.

In recent years, the IRS has been concerned that interest on mortgages in excess of $1.1 million is being deducted.  Tax law generally restricts the interest deduction to mortgages secured on your principal residence and/or on one other residence, and that the interest deduction must be limited to the amount paid on up to $1 million of acquisition indebtedness plus $100,000 of home equity indebtedness.  Thus the total mortgage limit on which the interest deduction may be claimed is $1.1 million.  The mortgage limit can all be applied to home acquisition indebtedness instead of requiring a $100,000 home equity loan.

New information reporting rules require the financial institution to report the outstanding mortgage principal as of the beginning of the calendar year (January 1, 2016 when this new law goes into effect), the mortgage origination date, and the address of the property which secures the mortgage.  This new information will enable the IRS to find taxpayers who are deducting interest on more than $1.1 million of home indebtedness and perhaps find those deducting interest on more than one other home that is not their principal residence.

As a side note, for alternative minimum tax (AMT) purposes, only interest on mortgages used for home acquisition or improvements is deductible.  Interest on a home equity loan used for other purposes, while deductible for regular tax, is not deductible for the AMT.

Dramatic Changes in Tax Return Due Dates in Store for the 2016 Tax Year

Dramatic changes will occur to tax return due dates and extension timelines for 2016 tax returns to be filed in 2017.  The changes were enacted as part of the temporary highway funding bill enacted July 31, 2015.  The American Institute of Certified Public Accountants has been championing these changes to try and simplify and improve the flow of tax information from pass-through entities to individual taxpayers.  However, with Congress playing budgetary games with some of the due dates, these changes do not simplify the rules and will likely lead to confusion and penalties for missed due dates.  The following list is for the more common tax return types.  Other tax returns are also affected.  For purposes of the list below, a fiscal year means a taxable year other than a calendar year ending December 31^st.

Partnerships and Limited Liability Companies Treated as Tax Partnerships (Form 1065)

·       Current due date is 3 ½ months following the taxable year (April 15^th for a calendar year)

·       New due date is 2 ½ months following the taxable year (March 15^th  for a calendar year)

·       Current extension period is 5 months (September 15^th for a calendar year)

·       New extension period is 6 months (September 15^th for a calendar year)

C Corporations (Note Special Rules during a 10-Year Transition Period) (Form 1120)

·       Current due date is 2 ½ months following the taxable year (March 15^th for a calendar year)

·       New due date is 3 ½ months following the taxable year for all calendar and fiscal years other than June 30^th (April 15^th for a calendar year)

·       New due date remains 2 ½ months for C corporations with a June 30^th fiscal year until the first tax year beginning after 2025 at which time it changes to 3 ½ months.  Why did Congress do this?  To keep the tax payment due date at September 15^th for the next 10 years because the Federal budget year ends September 30^th and Congress did not want to defer tax collections to the next fiscal year.  A budgetary gimmick!

·       Current extension period is 6 months (September 15^th for a calendar year)

·       New extension period is 5 months for C corporations with a calendar year (September 15^th, again a budgetary gimmick!) until the first tax year beginning after 2025 at which time it changes to 6 months

·       New extension period is 6 months for C corporations with fiscal years other than June 30^th

·       New extension period is 7 months for C corporations having a June 30^th fiscal year (because the new original due date is temporarily 2 ½ months instead of the new normal 3 ½ months) until the first tax year beginning after 2025 at which time it changes to 6 months (because the new normal due date lengthens to 3 ½ months).

S Corporations (Form 1120S)

·       Current due date is 2 ½ months following the taxable year (March 15^th for a calendar year)

·       New due date:  No change

·       Current extension period is 6 months (September 15^th for a calendar year)

·       New extension period:  No change

Trust and Estate Income Tax Returns (Form 1041)

·       Current due date is 3 ½ months following the taxable year (April 15^th for a calendar year)

·       New due date:  No change

·       Current extension period is 5 months (September 15^th for a calendar year)

·       New extension period is 5 ½ months (September 30^th for a calendar year)

Charitable Remainder Trust Tax Returns (Form 5227)

·       Current due date is 3 ½ months following the taxable year (April 15^th for a calendar year)

·       New due date:  No change

·       Current automatic extension period is 3 months (July 15^th for a calendar year) with an additional 3 months upon IRS approval

·       New automatic extension period is 6 months (October 15^th for a calendar year)

Exempt Organization Tax Return (Form 990)

·       Current due date is 4 ½ months following the taxable year (May 15^th for a calendar year)

·       New due date:  No change

·       Current automatic extension period is 3 months (August 15^th for a calendar year) with an additional 3 months upon IRS approval

·       New automatic extension period is 6 months (November 15^th for a calendar year)

Employee Benefit Plans (Form 5500)

·       Current due date is 7 months following the taxable year (July 31^st for a calendar year)

·       New due date:  No change

·       Current automatic extension period is 2 ½ months if filing the separate extension Form 5558 (October 15^th for a calendar year) or else 1 ½ months if relying on the corporate income tax return extension Form 7004 (September 15^th for a calendar year)

·       New automatic extension period is 3 ½ months (November 15^th for a calendar year)  UPDATE:  THE NEW 3 1/2 MONTH PERIOD FOR FORM 5500 WAS REPEALED BY THE FIXING AMERICA'S SURFACE TRANSPORTATION (FAST) ACT ON DECEMBER 4, 2015.  THE 2 1/2 MONTH PERIOD IS RESTORED FOR TAX YEARS AFTER 2015.

Foreign Bank Account Report (FBAR, FinCEN 114)

·       Current due date is June 30^th each year (the FBAR is a mandatory calendar year)

·       New due date is April 15^th each year

·       Current automatic extension period:  None

·       New automatic extension period is 6 months (October 15^th)

Individual Income Tax Return (Form 1040)

·       Current due date is April 15^th each year (essentially all individuals use a calendar year)

·       New due date:  No change

·       Current extension period is 6 months (October 15^th)

·       New extension period:  No change

We will need to see how the states react to this slate of new due dates and extension periods!  Some states will follow the Federal rules, other states have their own specific rules.

New Tax Basis Conformity and Estate Information Reporting Rules Now in Effect

The tax law generally changes the income tax basis of property inherited from a deceased person from what the basis was in the hands of the decedent to the fair market value (FMV) of the property as of the date of death.  This provision is generally beneficial in two respects:  1) property generally increases in value over time, so the increase in basis eliminates the inherent capital gain for income tax purposes, and 2) cost records for property owned by the decedent are often unavailable.  Some taxpayers have taken aggressive tax positions in order to reduce their income taxes, arguing that the FMV of the property was actually greater than the FMV used in the decedent’s estate tax return.  Now a new conformity and information reporting requirement has been enacted as part of the temporary highway funding bill signed into law July 31, 2015.

Effective for property inherited for which an estate tax return is filed after July 31, 2015, the income tax basis of property inherited cannot exceed the FMV determined for estate tax purposes.  Congress gave the IRS authority to issue regulations carrying out the conformity requirement for when an estate tax return is not required to be filed.

A new information reporting requirement also begins.  The executor of the estate must report the FMV of the property to both the IRS and to any person acquiring ownership in the property.  The report must be furnished the earlier of:  1) 30 days after the estate tax return due date (including extensions), or 2) 30 days after the filing of the estate tax return.  Any adjustment to the FMV must also be reported within 30 days of the adjustment.  Again, the IRS is empowered to prescribe the information to be reported and how executors must comply when an estate tax return is not required.  A penalty applies to the failure to file the report.  If the person inheriting the property uses a basis greater than the FMV on the report, the person will be subject to an accuracy penalty of 20% of the understated tax.

Update
The IRS issued Notice 2015-57 extending the due date of the information reports until February 29, 2016.  The IRS states that executors should wait until new forms are developed and further information is provided before filing the reports.

Update #2
On February 11, 2016, the IRS issued Notice 2016-19 extending the due date of the information reports until March 31, 2016.  The IRS states the additional one-month delay will give executors time to review the soon to be released proposed regulations before filing Form 8971 with the IRS and providing Schedule A of Form 8971 to the beneficiaries.

Update #3
On March 23, 2016, the IRS issued Notice 2016-27 further extending the due date of the information reports until June 30, 2016.

Longer Statute of Limitations for Overstating Income Tax Basis Now in Effect

Generally, the IRS has 3 years after the later of the date a tax return is filed, or the due date of the tax return, to assess additional income tax liability.  This time limit is referred to as the “statute of limitations (SOL).”  A special 6-year SOL applies if a taxpayer omits more than 25% of gross income as measured against the amount of gross income reported on the tax return.  However, if adequate disclosure is made in the tax return for why the gross income is not being included, the 3-year SOL continues to apply.

Controversy between the IRS and taxpayers erupted when the IRS tried to apply the 6-year SOL to an understatement of tax resulting from an overstatement of income tax basis.  The IRS argued that the deductions from overstated tax basis was equivalent to understating gross income.  However, the U.S. Supreme Court ruled against the IRS in Home Concrete & Supply, LLC.  Now, the U.S. Congress has overridden the Supreme Court decision by enacting a new law as part of the temporary highway funding act signed into law on July 31, 2015.

The new law treats an overstatement of income tax basis as an omission from gross income for purposes of the 6-year SOL.  Furthermore, the new law states that the adequate disclosure rule does not apply to the overstatement of basis.  The new law is effective for tax returns filed after July 31, 2015; and also to tax returns filed on or before July 31, 2015 where the SOL rules in effect before this change had not expired as of July 31, 2015.

A Few Income Tax Changes to Note in the Recent Trade Legislation

On June 29, 2015, Pres. Obama signed the Trade Preference Extension Act of 2015 and the Trade Priorities and Accountability Act of 2015.  Contained in the new legislation are a few income tax changes to take note of.

1.     The $1,000 child tax credit can be refundable for taxpayers having low adjusted gross income.  Refundable means that if there isn’t enough income tax for the credit to offset, the government will send a check.  A taxpayer working and living in a foreign country can exclude up to $100,800 (in 2015) of foreign earned income, thereby lowering AGI and perhaps qualifying for the refundable credit.  For tax years beginning after 2014, the child care credit will not be refundable to taxpayers claiming the foreign earned income exclusion.

2.     An individual may qualify for the American Opportunity Tax Credit, the Lifetime Learning Tax Credit, or to claim a deduction for AGI for qualified tuition and related expenses to attend college.  There has been no requirement that the individual first obtain a Form 1098-T (tuition statement) from the college before claiming the tax benefit.  Effective for tax years beginning after June 29, 2015 (meaning 2016 tax returns for most people), such individuals may no longer claim these tax benefits without first obtaining Form 1098-T from the college.

3.     Congress has enacted high financial penalties for companies failing to file correct information returns (e.g., Forms 1099).  These high penalties have been scored as revenue raisers to the government, so Congress can spend more money.  Now this bad public policy has been made even worse by increasing penalties effective for information returns due after 2015.  Our elected representatives have designed these penalties to financially destroy businesses that do not comply with the government’s information reporting rules!  And, it is not always easy to comply with these rules, given the complexity of the law and the short time frame from the end of the year to the January 31^st due date.  The penalty is tiered, such that as more time goes by after the due date before the correct filing is made, the higher the penalty.

a.      For corrections made 30 days or less after the due date, the new law increases the penalty from $30 to $50 per item.  The new law doubles the maximum penalty for a year from $250,000 to $500,000.  “Small” taxpayers are exposed to a lesser maximum yearly penalty.  For small taxpayers the yearly maximum increases from $75,000 to $175,000.  A small taxpayer is defined as one having average annual gross receipts of $5 million or less.

b.     If the failure is corrected after 30 days past the due date but by August 1^st, the penalty increases from $60 to $100 per item.  The maximum penalty for a year triples from $500,000 to $1,500,000.  However, for a “small” taxpayer, the maximum penalty increases from $200,000 to $500,000.

c.      For corrections made after August 1^st, the penalty increases from $100 to $250 per item, with the maximum penalty during a calendar year doubling from $1.5 million to $3.0 million.  For a “small” taxpayer, the maximum penalty increases from $500,000 to $1,000,000.

d.     An intentional disregard of the rules to file information return is penalized at $500 per item with no cap on the total penalty that can be assessed!

New Utah Mandate to Electronically File Tax Forms Reporting Income Tax Withholding, and Delay in Issuing Individual Tax Refunds until March 1st

The 2015 Utah Legislature passed Senate Bill 250 which is effective January 1, 2016.  The new law requires an employer to electronically file W-2s and Forms 1099 having state income tax withholding by January 31^st.  There does not appear to be an exception for small employers, and so this requirement impacts all businesses reporting Utah income tax withholdings for 2015 and later.  Information can be found here on the Utah State Tax Commission’s website.  The Tax Commission will provide more information as it works to implement the new law.

Failure to electronically file this information on time will result in significant penalties.  The penalties are complex and increase depending upon how late the information is provided.  If the information is provided more than 14 days after the due date but not later than 30 days after the due date, the penalty is $30 per form not to exceed $75,000.  If the information is filed more than 30 days late but by June 1^st the penalty is $60 per form not to exceed $200,000.  The penalty for filing after June 1, or for failing to file at all, is $100 per form not to exceed $500,000.

The new law also prohibits the Tax Commission from issuing individual income tax refunds prior to March 1^st unless the employer and the employee have both filed forms and returns as required.  This delay will allow the Tax Commission time to match the withholding reported with the tax return claiming the credit.

The purpose of this new law is to cut down on fraudulent tax refunds.  The Tax Commission discovered its computers were compromised on February 1, 2015 and had to suspend issuing 2014 tax refunds for a period of time, and this new law is clearly a response to that event.

Estate Tax Closing Letters No Longer to be Automatically Provided by IRS

In line with IRS Commissioner John A. Koskinen's infamous retort of "doing less with less" in response to Congress' slashing of his budget, the IRS announced last week that it will no longer issue estate tax closing letters for estate tax returns filed on or after June 1, 2015.  Providing such letters automatically is an important service to taxpayers.  Now, more paperwork is necessary in order to obtain the closing letter.  The IRS says that it will issue the letters upon request, but that taxpayers must wait at least four months after filing the estate tax return before making the request.  This places an unnecessary burden on the public and increases government inefficiency.

An estate tax closing letter provides the assurance the decedent's personal representative (PR) needs to close the estate and distribute the estate assets to the beneficiaries.  Distributing assets before such letter is received increases the PR's risk of personal financial liability for any unexpected additional tax.  So the IRS' new policy will only serve to delay the distribution of assets to estate beneficiaries or else increase the PR's personal liability if distributed without the letter.

Update

The IRS has created another option to receive confirmation that the estate tax return was accepted as filed or that any audit has been completed.  The IRS has added Code 421 to the account transcript of the estate to indicate acceptance of the estate tax return.  If that code does not appear on the transcript, the tax return is still under review.  The IRS advises the PR to wait six months from the date of filing the estate tax return before requesting a copy of the transcript.  For more information on this procedure, click here.