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Congressional leaders highlight tax reform proposals

As the new administration and Congress get to work, tax reform is high on the agenda. Although legislative language has not been yet released, statements from tax writers in Congress shed some light on various proposals.

Tax reform

House Ways and Means Chair Kevin Brady, R-Texas, has predicted that tax reform will lower the tax rates for all businesses. "We are proposing a corporate rate of 20 percent and for small businesses, a top rate of no more than 25 percent," Brady said in February. As for the timeline of tax reform, Brady said that tax reform legislation will be unveiled in the "coming months," but "repeal and replacement of the Affordable Care Act (ACA) comes first.”

Senate Finance Committee Chair Orrin Hatch, R-Utah, has said that the Senate will work through its own tax reform process. "No one should expect the Senate to simply take up and pass a House tax reform bill," Hatch said in February. Hatch added that Senate tax writers are in the early stages of drafting a tax reform proposal. Hatch did not provide details of the proposal but said that House and Senate Republicans generally agree on basic principles, such as lower tax rates for individuals and businesses.

One area of potential friction is the House GOP’s so-called “border adjustability” proposal. Hatch has questioned if the border adjustment proposal, essentially taxing imports but not U.S. exports, is “in line with international trade obligations” and if “adjustments would need to be made to prevent shifting a tax burden onto specific industries.”

Democrats, although in agreement the tax code is in need of reform, have been critical of Republicans’ proposed solutions as appearing to focus on tax cuts for the wealthy. "They (Republicans) are for trickle-down economics…giving tax breaks to the wealthy, it trickles down and if somebody gets a job, that’s great, if they don’t, so be it,” House Minority Leader Nancy Pelosi, D-Calif., said in February. "You don’t receive economic security by tossing the rich even more tax breaks," she added.

Affordable Care Act

The Affordable Care Act (ACA) included a host of tax-related provisions. The ACA created the net investment income (NII) tax, the additional Medicare Tax, an excise tax on certain medical devices, and more. The ACA also imposes shared responsibility requirements on individuals and employers (known as the individual and employer mandates). Although President Trump and Republicans in Congress have called for repeal and replacement of the ACA, it is not clear at this time if repeal includes the ACA’s tax provisions. In February, Hatch said that all of the ACA’s taxes “need to go.”

The timeline for Congressional action on the ACA is expected to be known in March. GOP leaders in Congress have said that they will unveil an ACA repeal and replacement measure in March.

Pelosi said in February that Democrats have still not seen a repeal and replacement plan for the ACA. "They're supposed to have their plan to repeal the Affordable Care Act. We have not seen hide nor hair," Pelosi said. According to Pelosi, the GOP’s chosen route of reforming the healthcare law is a difficult endeavor "You have to know how to legislate," she said.

If you have any questions about tax reform, please contact our office.


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Tax scams proliferate during filing season

The filing season is the most active time of the year for tax scams. These scams take every shape and form, ranging from telephone calls to individuals to sophisticated schemes targeting employers and businesses. The goal of all these scams is identity theft. Using legitimate identities of unsuspecting individuals allows criminals to file fraudulent returns and claim bogus refunds.

Phone scams

Phone and email scams are among the most common scams. Every day, individuals receive calls and emails from criminals pretending to be IRS employees. Scammers often alter caller ID numbers to make it look like the IRS or another agency is calling. Criminals use IRS employee titles and fake badge numbers to appear legitimate. They may also use the victim’s name, address and other personal information to make the call sound official. The phone calls often threaten legal action or arrest if the taxpayers do not immediately make a payment, usually with a debit or gift card. Taxpayers receiving threatening telephone calls should hang up immediately. The IRS will never demand immediate payment using a specific payment method, such as a prepaid debit card, gift card or wire transfer. The IRS also will never threaten arrest.

Email scams

Email scams often ask recipients to provide personal and financial information in order “to verify” a tax obligation or claim a “refund.” The emails appear to be genuine communications from the IRS. Criminals create websites that appear legitimate in the hope that individuals will take the bait and provide money, passwords, Social Security numbers and other personal information. Scam emails also can infect a taxpayer’s computer with malware. The malware can give criminals access to the computer, laptop tablet, or other device, enabling them to access all sensitive files or track keyboard strokes, exposing login information. The IRS has repeatedly emphasized that it never initiates contact with taxpayers via email about a bill or refund. Taxpayers should delete these emails immediately.

Employers

Criminals are increasing disguising emails to make it appear as if the email is from a company or organization executive. Typically, this email is sent to an employee in the payroll or human resources departments, requesting a list of all employees and their Forms W-2, Wage and Tax Statement. This scam is sometimes referred to as business email compromise (BEC) or business email spoofing (BES). This scam targets all types of businesses: school districts, tribal casinos, chain restaurants, temporary staffing agencies, healthcare, and shipping and freight. Businesses that received the scam email last year also are reportedly receiving it again this year. The IRS has asked employers and businesses to forward these bogus emails to the agency at phishing@irs.gov.

Identity theft

The IRS is making progress in identifying and curbing tax-related identity theft, according to the Treasury Inspector General for Tax Administration (TIGTA). The IRS and tax professionals and the tax software community have joined together to better protect taxpayer information. The agency has upgraded its return processing identity theft filters and taken other behind the scenes measures to uncover fraudulent returns. All of these measures, TIGTA reported in February, have helped to deter tax-related identity theft but criminals continue to look for ways to trick taxpayers and the IRS.

Please contact our office if you have any questions about filing season tax scams.


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Lessons-learned TIGTA report points to changes in 2017 filing season

The Treasury Inspector General for Tax Administration (TIGTA), in its recently released final report for the 2016 filing season, highlighted the IRS’s response to what was good and what was bad about its performance. It signals what the IRS is doing during the 2017 filing season currently underway to improve things (TIGTA, Ref. No. 2017-40-014). Nevertheless, although the IRS had improved in a number of areas with respect to the 2016 filing season, TIGTA reports that the agency continues to be plagued by numerous challenges.

The overarching objective of TIGTA’s review of the previous filing season is to assess whether the IRS timely and accurately processed individual paper and e-filed tax returns during the 2016 filing season. Although the IRS agreed with TIGTA’s recommendations for addressing its shortcomings, budget cuts and a shrinking workforce will arguably limit the IRS’s success with respect to the immediate 2017 filing season.

Tax returns

TIGTA reported that of the nearly 140 million individual tax returns that the IRS received, over 123 million returns were filed electronically. This showed a continuation of the trend in increased eFiling from year to year. There was a 2.62 percent increase in electronically filed returns and a 4.92 percent decrease as for paper returns filed.

In addition, the IRS is reported to have issued over 101 million refunds in an amount of $276.5 billion. The average return was said to be $2,731. Over 83.6 million refunds were issued via direct deposit, which marked a 2 percent increase over the previous year.

Fraud detection

The TIGTA report suggests that the IRS is seeing continued success in detecting and preventing tax refund fraud. There has been a continued decreasing trend in the number of fraudulent tax refund that the IRS detects and stops, which is attributable to the IRS’s expansion of its processes to prevent fraudulent tax returns from entering the tax processing system.

The IRS continues to implement ways to combat taxpayer fraud. In fall 2016, the IRS entered a partnership with industry professionals and state revenue agencies—the Security Summit—to focus on fighting fraud. In addition, a change in the law to require all wage statements to be submitted to the IRS by January 31, were implemented with the intent to combat fraudulent filings in the 2017 filing season.

Challenges

TIGTA has consistently reported, from year to year, that a challenge that the IRS faced each year in processing tax returns was the implementation of new tax law changes and the extension of expired tax provisions. The 2016 tax season proved no differ, as the Service failed to establish or update key processes, and made numerous processing errors.

With fewer of these changes for the 2016 tax year to be faced during the current 2017 filing season, the IRS is guardedly optimistic for a smoother overall track record.

HCTC. TIGTA found that the IRS did not establish adequate processes to ensure that documentation required to support a claim for the health coverage tax credit (HCTC) was associated and reviewed before processing claims and allowing the credit. As the HCTC claims from processed manually, employee errors led to delays in refund issuance. This is significant, as the IRS received 20,437 e-filed returns claiming HCTCs that totaled approximately $40.8 million. However, as of the time that TIGTA conducted its review, the IRS had completed processing of only 5,481 of the returns claiming HCTCs, which amounts to only 27 percent of all such returns.

TIGTA reported that it notified IRS management throughout the filing season of its concerns regarding the inaccurate processing of HCTC claims, resulting in IRS management making a number of changes during the filing season to alleviate some of the issues. TIGTA plans to issue additional reports on the IRS’s progress in implementing the HCTC during CY 2017.

PATH Act. TIGTA found that the IRS has not taken actions to implement key provisions of the Protecting Americans From Tax Hikes Act of 2015, as the agency had not developed processes to systemically identify and disallow EITC, CTC/ACTC, and AOTC claims without the data needed to determine the issuance date of SSNs and ITINs.

With the start of the new year, the IRS has begun expiring ITINs not used for three consecutive tax years and those issued between CY 1996 and 2000. The IRS will continue these actions on ITINs issued prior to CY 2013. TIGTA will report on the IRS’s expiration of ITINs during fiscal year (FY) 2017.

Credits. TIGTA found that the IRS had not implemented computer programming changes to correct residential energy efficient property credit processing errors identified during the 2015 filing season.

Further exacerbating issues, TIGTA also found that IRS employees continued to incorrectly work residential energy efficient property credit claims. As a result, the IRS incorrectly limited the credit on 731 tax returns, amounting to $1.2 million less in credits for taxpayers than they were entitled to receive. IRS management has stated that the agency has requested revisions to computer programming for the 2017 filing season. However, at the time of the report, the IRS could not provide an implementation date, citing limited resources and competing priorities as challenges affecting completion of the work.

Taxpayer assistance. TIGTA reported that the IRS had answered 14.1 million calls and provided a 69 percent level of service during the 2016 filing season. Although this call-service data represents a significant uptick from the prior year, the IRS continued to decrease the number of taxpayers it assisted at its Taxpayer Assistance Centers (TACs), only assisting 4.5 million taxpayers in FY 2016. The IRS attributed this 20 percent decrease from FY 2015 to budget cuts and its strategy of appointment service at certain TACs, in conjunction with the agency’s push of alternative service options.

On taking office, President Trump ordered a federal government hiring freeze. Traditionally, the IRS hires temporary workers during the filing season to assist with increased call volumes. Although the hiring of temporary workers is excluded from the President’s hiring freeze mandate, it remains to be seen how budget restrictions will affect the level of in-person and phone service available to taxpayers.


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How do I?…claim the federal fuel tax credit

The first step is to determine if you qualify for the federal fuel tax credit. The IRS has uncovered significant fraud associated with the fuel tax credit and is watching for fraudulent claims. The credit is not available to most taxpayers but only to qualified taxpayers, such as taxpayers engaged in farming. However, some ineligible taxpayers claim the credit in order to inflate their refunds. Fuel tax credit fraud can result in a penalty of $5,000.

Qualified taxpayers

The credit is available to qualified taxpayers for the amount of excise taxes included in the price of gasoline used on a farm for farming purposes, for other off-highway business use, by local transit systems, and by the operators of intercity, local or school buses  A special rule applies to diesel and aviation fuel.

Form 4136

Generally, eligible taxpayers may claim fuel taxes as a credit against income tax for the year in which the qualifying use occurred. A claim for credit is made on the taxpayer's income tax return and should be accompanied by Form 4136,"Credit for Federal Tax Paid on Fuels," which is used to compute the credit.

The credit may be claimed within three years after the due date for filing the return on which the credit may be claimed or within two years from the time the tax was paid, whichever is later. If the amount of the credit would be $1,000 or more for gasoline or for diesel and special motor fuels used during any of the first three quarters of the tax year ($200 for alcohol mixture), a taxpayer may elect to file a quarterly claim for refund.

Partnerships

A special rule applies to partnerships. Partnerships (other than electing large partnerships) cannot use Form 4136. Instead, they must include a statement on Schedule K-1 (Form 1065) showing the allocation to each partner specifying the number of gallons of each fuel used during the tax year, the applicable credit per gallon, the nontaxable use or sale, and any additional information required to be submitted.

Please contact our office if you have any questions about the federal fuel tax credit.


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FAQ…I received a letter from the IRS inquiring about a suspicious return

Tax-related identity theft spikes during the filing season. Many taxpayers discover for the first time that they are victims of identity theft when they receive a letter from the IRS.

A taxpayer may receive a letter when the IRS stops suspicious tax returns that have indications of being identity theft but contains a real taxpayer’s name and/or Social Security number. Once the identity is verified, the taxpayers can confirm whether or not they filed the return in question. If they did not file the return, the IRS can take steps at that time to assist them

One communication that the IRS uses is Letter 5071C. This letter is mailed through the U.S. Postal Service to the address on the return. It asks the taxpayer to verify his or her identity in order for the IRS to complete processing of the return if the taxpayer did file it or reject the return if the taxpayer did not file it. The IRS will explain how taxpayers can contact the agency. The IRS has recommended that taxpayers should have available a copy of the letter they received, their prior year’s return (if one was filed) and the current year’s return (if one was filed), including supporting documents for each return. This would encompass Forms W-2’s, 1099’s, Schedule C, Schedule F, and other supporting documents.

Note. The IRS never asks a taxpayer to verify his or identity by email. If a taxpayer receives such an email, it is a scam, sent by criminals trying to trick the taxpayer into revealing personal and financial information.

Another communication that the IRS uses is Letter 4883C. This letter also is mailed through the U.S. Postal Service and asks taxpayers to verify their identities. The IRS will explain what steps to take.

If you have received a letter from the IRS related to possible identity theft, please contact our office. We can help you navigate the IRS and respond to the agency’s questions.


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March 2017 tax compliance calendar

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 federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of March 2017.

March 1

Employers. Semi-weekly depositors must deposit employment taxes for Feb 22–Feb 24.

Farmers and fishermen. File 2016 income tax return (Form 1040) and pay any tax due. However, the deadline is extended to April if paid the 2016 estimated tax by January 17, 2017.

March 2

Health coverage reporting. Must provide Form 1095-C to full-time employees and provide Form 1095-B to responsible individuals.

March 3

Employers. Semi-weekly depositors must deposit employment taxes for Feb 25–Feb 28.

March 8

Employers. Semi-weekly depositors must deposit employment taxes for Mar 1–Mar 3.

March 10

Employers. Semi-weekly depositors must deposit employment taxes for Mar 4–Mar 7.

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

March 15

Employers. Semi-weekly depositors must deposit employment taxes for Mar 8–Mar 10.

Employers. For those to whom the monthly deposit rule applies, deposit employment taxes and nonpayroll withholding for payments in February 2017.

Partnerships. File Form 1065 and provide each partner with a copy of their Form 1065 (Schedule K-1).

Electing large partnerships. File Form 1065-B and provide each partner with a copy of their Form 1065-B (Schedule K-1). May request an automatic 6-month extension of time to file the return by filing Form 7004.

S corporations. File Form 1120S, pay any tax due, and provide each shareholder with a copy of their Form 1120S (Schedule K-1). May request an automatic 6-month extension of time to file the return by filing Form 7004.

S corporation election. File Form 2553 to elect to be treated as an S corporation beginning with calendar year 2017.

March 17

Employers. Semi-weekly depositors must deposit employment taxes for Mar 11–Mar 14.

March 22

Employers. Semi-weekly depositors must deposit employment taxes for Mar 15–Mar 17.

March 24

Employers. Semi-weekly depositors must deposit employment taxes for Mar 18–Mar 21.

March 29

Employers. Semi-weekly depositors must deposit employment taxes for Mar 22–Mar 24.

March 31

Employers. Semi-weekly depositors must deposit employment taxes for Mar 25–Mar 28.

Payers of gambling winnings. If filing electronically, file copies of all Forms W-2G issued for 2016.

Large food and beverage establishment employers. If filing electronically, file Forms 8027 for 2016.

Applicable large employers. If filing electronically, file Forms 1094-C and 1095-C for 2016.

April 5

Employers. Semi-weekly depositors must deposit employment taxes for Mar 29–Mar 31.


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