Tax Newsletter – April 2019

Edition notes and highlights

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Key Issues for Practitioners

We are now knee deep in the middle of tax season. As of this writing, we are unsure how fast refunds are being issued and how far behind IRS is with correspondence. Many requests came in to discuss some key issues related to the Qualified Business Income Deduction. For those who did not attend the January 24, 2019 update of the final regulations you can purchase the one-hour webinar. We are covering some key issues of concern in the newsletter and remind you of some new requirements for the 2019 filing season.

Form 4506-T Revision Date Extension

IRS Waives Estimated Tax Penalty for Farmers, Fishermen Who File Returns and Pay Tax by April 15

IRS Expands Penalty Waiver for Those Whose Tax Withholding and Estimated Tax Payments Fell Short in 2018; Key Threshold Lowered to 80 %

A Recent Court Case Concerning Beneficiaries - Determined to be Libel for Estates Unpaid Tax Liability is a Reminder to put Your Clients on Notice

IR-2019-21 - Interest Rates Remain the Same for the Second Quarter of 2019

IRS May Charge PTIN Fees – Is This the Final in the Long Series of Court Cases?

§ 6722 Penalty Relief for Form 1065, Sch K-1 Negative Capital Account Information

Notice 2019-20 provides penalty relief under § 6722 (failure to furnish correct payee statements) and 6698 (failure to file partnership return) of the Internal Revenue Code to certain partnerships that file and furnish Schedules K-1 to Form 1065, U.S. Return of Partnership Income that fail to report information about partners' negative tax basis capital accounts for the partnership's taxable year that began after December 31, 2017 but before January 1, 2019.

Item L of Schedule K-1 to Form 1065 requires reporting of a partner's capital account. Generally, a partnership may report partner capital to a partner using tax basis, Generally Accepted Accounting Principles, § 704(b) book, or some other method. Item L now requires a partnership that does not report tax basis capital accounts to its partners to report, on line 20 of Schedule K-1 using code AH, the amount of such partner's tax basis capital both at the beginning of the year and at the end of the year if either amount is negative (negative tax basis capital account information).

Penalty Relief

The IRS will waive penalties under § 6722 for furnishing a partner a Schedule K-1 and § 6698 for filing a Schedule K-1 with a partnership return that fails to report negative tax basis capital account information if both the following conditions are met:

1. The partner Schedules K-1 are timely filed, including extensions, with the IRS and furnished to the partners and contain all other required information.

2. The partnership files with the IRS no later than 180 days after the six-month extended due date for the partnership's Form 1065 or, for a calendar year partnership, no later than March 15, 2020, a schedule setting forth, for each partner for whom the partnership is required to furnish negative tax basis capital account information, the partner's name, address, taxpayer identification number, and the amount of the partner's tax basis capital account at the beginning and end of the tax year at issue in accordance with instructions and additional guidance posted by the IRS on IRS.gov. Whether or not a partnership files a Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, it can use the six-month extended due date in calculating the due date for filing the required schedule described in this paragraph. The schedule should be sent to the following address:

1973 North Rulon White Blvd.

Ogden, UT 84404-7843

Ms 4700

Attn: Ogden PTE

This penalty relief applies only for a partnership's taxable year beginning after December 31, 2017, but before January 1, 2019. To receive a waiver of the penalty, a partnership is not required to furnish amended Schedules K-1 to its partners or to file an administrative adjustment request under § 6227, and partnerships should not delay issuing partner Schedules K-1 on account of this Notice. The timely furnishing, including extensions, of Schedules K-1 to partners is a requirement to be eligible for relief under this Notice.

2019 Form 8995 – Reporting the Qualified Business Income Deduction Computation – New Reporting Requirement for the 2019 Return

Revision of Special Enrollment Exam Delayed; Revised Test Specifications Now Available

Required Minimum Distributions Begin April 1

As a reminder, in most cases, April 1, 2019, is the date by which persons who turned age 70½ during 2018 must begin receiving payments, required minimum distributions (RMDs), from Individual Retirement Accounts (IRAs) and workplace retirement plans. Now is a good time to look at your client base and identify those who may be impacted. At the same time review the law concerning this area a short summary is below.

Two payments in the Same Year

The payments, called required minimum distributions (RMDs), are normally made by the end of the year. Those persons who reached age 70½ during 2018 are covered by a special rule, however, that allows first-year recipients of these payments to wait until as late as April 1, 2019, to get the first of their RMDs. The April 1 RMD deadline only applies to the required distribution for the first year. For all following years, including the year in which recipients were paid the first RMD by April 1, the RMD must be made by Dec. 31.

A taxpayer who turned 70½ in 2018 (born July 1, 1947, to June 30, 1948) and receives the first required distribution (for 2018) on April 1, 2019, for example, must still receive the second RMD by Dec. 31, 2019. To avoid having both amounts included in their income for the same year, the taxpayer can make their first withdrawal by Dec. 31 of the year they turn 70½ instead of waiting until April 1 of the following year.

Types of Retirement Plans Requiring RMD’s

The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2018 RMD, this amount is on the 2017 Form 5498 normally issued to the owner during January 2018.

Some Can Delay RMDs

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Employees who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

Grassley, Wyden Introduce 2018-2019 Tax Extenders, Disaster Tax Relief Legislation

Offering a Lump-Sum Payment Option to Retirees Currently Receiving Annuity Payments under a Defined Benefit Plan

IRS: Refunds of $1.4 Billion Waiting to be Claimed by Individuals Who Have Not Filed Federal Income Tax Returns for 2015

Publication 1345 "Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns" Disposal of Taxpayer Information After complying to Records Retention Policies Standards – New Guidance

Reporting of Potential Identity Theft Refund Fraud Activity – New Guidance

The IRS has issued a whitesheet that supplements the 2018 Form 1065 Instructions

IRS Warns of New Phone Scam using Taxpayer Advocate Service Numbers

Interim Guidance Memorandum – Application of Payment when Doubt as to Liability (DATL) and Doubt as to Collectibility (DATC) Offers are Received Simultaneously SBSE-05-0319-0005 Expiration Date: March 1, 2020 Impacted: IRM 5.8.2; IRM 5.8.10

This memorandum provides interim guidance for Collection employees regarding posting payments received when a taxpayer submits offers under DATL and DATC criteria and the processability determination has not taken place on either offer. This guidance will be incorporated into the next revision of IRM 5.8.2, Centralized Offer in Compromise Initial Processing and Processability and IRM 5.8.10, Offer in Compromise – Special Case Processing.

Background: IRM 5.8.10.14,Taxpayer Files both Doubt as to Liability and Doubt as to Collectibility Offers, discusses what actions should be taken when a taxpayer requests consideration under both DATL and DATC. IRM 5.8.10.14 (2) also discusses processing payments submitted with a DATC offer that is deemed not processable based on the submission of a Form 656-L, Doubt as to Liability offer.

Procedure:

When DATL and DATC offers are received and neither offer has been deemed processable, processability of the DATL offer will be determined first as the DATL offer will take precedence. Follow IRM 5.8.10.14, Taxpayer Files both Doubt as to Liability and Doubt as to Collectibility Offers.

If funds were submitted with the Form 656 or Form 656-L, the DATL unit or COIC Process Examiner will make a processability determination of the DATL offer within 24 hours. If the DATL offer is processable, the DATC offer will be deemed not processable and any payments received should be posted to the taxpayer’s account in accordance with guidance provided on the Form 656-L. If the DATL offer is not processable, return the DATL offer and determine processability of the DATC offer following current IRM procedures.

IRM 5.8.10.14, Taxpayer Files both Doubt as to Liability and Doubt as to Collectibility Offers

(1) If a taxpayer files Form 656-L, Doubt as to Liability (DATL), and Form 656, Doubt as to Collectibility (DATC), consideration of both offers will not occur concurrently. In instances in which both offers are received and neither offer has been deemed processable, processability of the DATL offer will be determined first.

(2) When a DATL and DATC offer are submitted and neither offer has been deemed processable, refer to IRM 5.8.2.4(2) discussion on determining processability and application of payments.

(3) If a DATL or DATC offer is submitted while another offer under a different basis is being investigated, the new offer will be returned as not processable. Any payments should be posted to the taxpayer’s account in accordance with the guidance provided on the Form 656 and/or Form 656-L.

Note: A taxpayer may submit an additional Form 656 requesting consideration under effective tax administration (ETA) while a Form 656 DATC offer is under consideration. If the IRS determines there is no grounds for compromise under DATC criteria, then the IRS may determine there are grounds for compromise under ETA criteria. The additional Form 656 should be considered an amended offer and any ETA issues presented should be considered. If an amended Form 656 is received by other than the employee who is investigating the offer, it must be provided immediately to the assigned offer examiner in COIC or faxed to the offer specialist.

(4) If a taxpayer wishes consideration of a DATL offer while an offer under DATC is being considered, the taxpayer must submit a withdrawal of the DATC offer prior to processing the DATL offer. The withdrawal of the DATC offer must be submitted within 10 workdays of the DATL offer submission or the DATL offer will be considered not processable.

§ 355 - Distributions of Stock and Securities of a Controlled Corporation

Rev. Rul. 2019-09 suspends Rev. Rul. 57-464 and Rev. Rul. 57-492, pending the completion of a study by the Department of the Treasury (Treasury Department) and the Internal Revenue Service (Service) regarding the active trade or business requirement under § 355(a)(1)(C) and (b) of the Internal Revenue Code.

§ 355(a)(1) provides that, if certain requirements are met, a corporation may distribute stock and securities of a controlled corporation to its shareholders and security holders without recognition of gain or loss or income to the recipient shareholders or security holders. Among those requirements, both the distributing corporation and the controlled corporation must be engaged in an active trade or business (ATB) immediately after the distribution. Each trade or business must have been actively conducted throughout the five-year period ending on the date of the distribution. § 1.355-3(b)(2)(ii) describes a “trade or business” as “a specific group of activities [that] are being carried on by the corporation for the purpose of earning income or profit, and the activities included in such group include every operation that forms a part of, or a step in, the process of earning income or profit.” In particular, “[s]uch group of activities ordinarily must include the collection of income and the payment of expenses.

In Rev. Rul. 57-464, the Service considered the § 355 qualification of a corporation’s separation of a manufacturing business from a group of real estate assets consisting of an old factory building used for storage and four other buildings: a duplex apartment building rented to employees of the corporation, a small office building rented to a single tenant, and two houses, one of which was occupied by a sister-in-law of the president of the corporation. The use of the old factory building for storage “was not in itself the active operation of a business as defined in the regulations.” The rental activities “produced only a nominal rental” and “negligible” net income, and the properties “were acquired either as an investment or as a convenience to employees of the manufacturing business.” The Service held that the separation did not satisfy the ATB requirement.

In Rev. Rul. 57-492, a corporation engaged in refining, transporting, and marketing petroleum products began a separate operation to explore for and produce oil. The exploration and production operation incurred substantial expenditures but “did not include any income producing activity or any source of income” until less than five years preceding its separation from the primary refining, transportation, and marketing operation. The Service held that the exploration and production operation failed to qualify as an ATB because, “[b]efore oil was discovered in commercial quantities …, the venture … did not include any income producing activity or any source of income.”

The Treasury Department and the Service are conducting a study to determine, for purposes of § 355, “whether a business can qualify as an ATB if entrepreneurial activities, as opposed to investment or other non-business activities, take place with the purpose of earning income in the future, but no income has yet been collected.” The ATB analysis underlying the holdings in Rev. Rul. 57-464 and Rev. Rul. 57-492 focuses, in significant part, on the lack of income generated by the activities under consideration. Consequently, these rulings could be interpreted as requiring income generation for a business to qualify as an ATB.

Accordingly, Rev. Rul. 57-464 and Rev. Rul. 57-492 are suspended pending completion of the study.

Qualified Buisness Income Deduction – Complex Worksheet

IRS Revises EIN Application Process; Seeks to Enhance Security

As part of its ongoing security review, the Internal Revenue Service announced starting May 13 only individuals with tax identification numbers may request an Employer Identification Number (EIN) as the “responsible party” on the application. An EIN is a nine-digit tax identification number assigned to sole proprietors, corporations, partnerships, estates, trusts, employee retirement plans and other entities for tax filing and reporting purposes.

The change will prohibit entities from using their own EINs to obtain additional EINs. The requirement will apply to both the paper Form SS-4, Application for Employer Identification Number, and online EIN application.

Individuals named as responsible party must have either a Social Security number (SSN) or an individual taxpayer identification number (ITIN). By making the announcement weeks in advance, entities and their representatives will have time to identify the proper responsible official and comply with the new policy.

The Form SS-4 Instructions provide a detailed explanation of who should be the responsible party for various types of entities. Generally, the responsible party is the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. In cases where more than one person meets that definition, the entity may decide which individual should be the responsible party.

Only governmental entities (federal, state, local and tribal) are exempt from the responsible party requirement as well as the military, including state national guards.

There is no change for tax professionals who may act as third-party designees for entities and complete the paper or online applications on behalf of clients.

The new requirement will provide greater security to the EIN process by requiring an individual to be the responsible party and improve transparency. If there are changes to the responsible party, the entity can change the responsible official designation by completing Form 8822-B, Change of Address or Responsible Party. A Form 8822-B must be filed within 60 days of a change.

What this edition covers