The gap between taxes owed and taxes collected by the Internal Revenue Service could be approaching $1 trillion, IRS Commissioner Charles Rettig told members of the House Committee on Oversight and Reform’s Government Operations Subcommittee as he advocated for more funding for the agency.

The gap between taxes owed and taxes collected by the Internal Revenue Service could be approaching $1 trillion, IRS Commissioner Charles Rettig told members of the House Committee on Oversight and Reform’s Government Operations Subcommittee as he advocated for more funding for the agency.

During an April 21, 2022, hearing of the subcommittee, Rettig noted updated tax gap figures for the three-year period of 2012-2014, along with projections through 2019, will be released this summer. However, those projections do not account for the growth in cryptocurrency, which could be widening the tax gap beyond the current calculations and projections.

"What is not in those estimates is virtual currencies, and there is over a $2 trillion market cap for virtual currencies," Rettig testified before the committee. "Last year, there was over $14 trillion in transactions in virtual currencies and the United States, if you view relative GDP, is somewhere between 35 and 43 percent of that $14 trillion."

He said that knowledge generated from John Doe summons activity in these space reveals "that the compliance issues in the virtual currency space are significantly low."

"The tax gap estimates that the IRS prepares are based on information that the IRS is able to determine, not information that we know is out there but we are not able to determine," Rettig said, adding that the agency is trying to get more information about virtual currencies through adding questions on the Form 1040, first on Schedule L and then moving it to page one of the Form 1040 last year "to try to enhance compliance."

He added that the agency is looking to get more into that area.

The comments on the tax gap and the need to be able to tackle compliance in the cryptocurrency space underscores the agency’s need for more funding as requested in the White House budget request for fiscal year 2023.

In his written testimony submitted to the committee, Rettig noted that the agency "can no longer audit a respectable percentage of large corporations, and we are often limited in the issues reviewed among those we do audit. These corporations can afford to spend large amounts on legal counsel, drag out proceedings and bury the government in paper. We are, quite simply, ‘outgunned’ in our efforts to assure a high degree of compliance for these taxpayers."

He wrote that it is "unacceptable" that corporations and the wealthiest individuals have such an advantage to push back on the nation’s tax administrator.

"We must receive the resources to hire and train more specialists across a wide range of complex areas to assist with audits of entities (taxable, pass-through and tax-exempt) and individuals (financial products; engineering; digital assets; cross-border activities; estate and gift planning; family offices; foundations; and many others)," his written testimony states.

Rettig wrote that the agency current has fewer than 2,000 revenue officers, "the lowest number of field collection personnel since the 1970s," to handle more than 100,000 collection cases in active inventory.

He continued: "In addition to our active inventory, we have over 1.5 million cases (more than 500,000 of which are considered high priority) awaiting assignment to these same 2,000 revenue officers. We have classified roughly 85 percent of those cases as high priority, many of which involve delinquent business employment taxes."

The lack of funding is also hampering criminal investigations.

"Much like other operating divisions in the IRS, CI is close to its lowest staffing level in the past 30 years. With fewer agents, we have fewer cases and fewer successful convictions," he stated in the written testimony.

Much of this also is compounded by the ancient IT infrastructure at the agency, another reason Rettig advocated during the hearing for more funding.

"Limited IT resources preclude us from building adequate solutions for efficiently matching or reconciling data from multiple sources," he wrote. "As a result, we are often left with manual processes to analyze reporting information we receive."

Retting specifically highlighted the Foreign Account Tax Compliance Act, which Congress enacted in 2010 but, according to Retting, has yet to appropriate the funding necessary for its implementation.

"This situation is compounded by the fact that when we do detect potential non-compliance or fraudulent behavior through manually generated FATCA reports, we seldom have sufficient funding to pursue the information and ensure proper compliance," he wrote. "We have an acute need for additional personnel with specialized training to follow cross-border money flows. They will help ensure tax compliance by improving our capacity to detect unreported accounts and income generated by those accounts, as well as the sources of assets in offshore accounts."

Internal Revenue Service Commissioner Charles Rettig remained positive that the agency will be able to return to a normal backlog of unprocessed returns and other mail correspondence by the end of the year and noted progress on hiring more people to help clear the backlog.

Internal Revenue Service Commissioner Charles Rettig remained positive that the agency will be able to return to a normal backlog of unprocessed returns and other mail correspondence by the end of the year and noted progress on hiring more people to help clear the backlog.

"With respect to our current 2022 filing season, we are off to a healthy start in terms of tax processing and the operation of our IT systems," Rettig told members of the Senate Finance Committee during an April 7 hearing to discuss the White House budget request and update the panel on the current tax filing season. "Through April 1, we have processed more than 89 million returns and issued more than 63 million refunds totaling more than $204 billion."

Getting that backlog cleared has been bolstered in part by a direct hiring authority given to the agency in the recent passage of the fiscal year 2022 omnibus budget, Rettig told the committee.

The effectiveness of that hiring authority was highlighted in his written testimony submitted prior to the hearing, where Rettig stated that in-person and virtual job fairs near processing facilities in Austin, Kansas City, and Ogden, Utah, attracted eligible applicants for more than 5,000 vacancies and "we have been able to make more than 2,500 conditional offers at the conclusion of the interviews."

Rettig said the direct hiring authority is only related to those lower paygrade processing/customer service positions and the agency is going to ask Congress to expand that authority, although he did not specify what types of positions would be hired as part of that expansion.

The IRS addressed the following common myths about tax refunds:

The IRS addressed the following common myths about tax refunds:

• Myth 1: Calling the IRS or visiting an IRS office speeds up a refund. The best way to check the status of a refund is online through the “Where’s My Refund?” tool. Taxpayers can also call the automated refund hotline at 800-829-1954.

• Myth 2: Taxpayers need to wait for their 2020 return to be processed before filing their 2021 return. Taxpayers generally will not need to wait for their 2020 return to be fully processed to file their 2021 tax returns. They should file when they are ready. Individuals with unprocessed 2020 tax returns, should enter zero dollars for last year's Adjusted Gross Income (AGI) on their 2021 tax return when filing electronically.

• Myth 3: Taxpayers can get a refund date by ordering a tax transcript. Ordering a tax transcript will not inform taxpayers of the timing of their tax refund, nor will it speed up a refund being processed. Taxpayers can use a transcript to validate past income and tax filing status for mortgage, student and small business loan applications and to help with tax preparation.

• Myth 4: "Where’s My Refund?" must be wrong because there is no deposit date yet. While the IRS issues most refunds in less than 21 days, it is possible a refund may take longer for a variety of reasons. Delays can be caused by simple errors including an incomplete return, transposed numbers, or when a tax return is affected by identity theft or fraud.

• Myth 5: "Where’s My Refund?" must be wrong because a refund amount is less than expected. Different factors can cause a tax refund to be larger or smaller than expected. The IRS will mail the taxpayer a letter of explanation if these adjustments are made.

• Myth 6: Calling a tax professional will provide a better refund date. Contacting a tax professional will not speed up a refund. Tax professionals cannot move up a refund date nor do they have access to any special information that will provide a more accurate refund date.

• Myth 7: Getting a refund this year means there is no need to adjust tax withholding for 2022. Taxpayers should continually check their withholding and adjust accordingly. Adjusting tax withholding with an employer is easy and using the Tax Withholding Estimator tool can help taxpayers determine if they are withholding the right amount from their paycheck.

As of the week ending April 1, the IRS has sent out more than 63 million refunds worth over $204 billion. The IRS reminded taxpayers the easiest way to check on a refund is the "Where’s My Refund?" tool. This tool can be used to check the status of a tax return within 24 hours after a taxpayer receives their e-file acceptance notification. Taxpayers should only call the IRS tax help hotline to talk to a representative if it has been more than 21 days since their tax return was e-filed, or more than six weeks since mailing their return.

The IRS has informed taxpayers that the agency issues most refunds in less than 21 days for taxpayers who filed electronically and chose direct deposit. However, some refunds may take longer. The IRS listed several factors that can affect the timing of a refund after the agency receives a return.

The IRS has informed taxpayers that the agency issues most refunds in less than 21 days for taxpayers who filed electronically and chose direct deposit. However, some refunds may take longer. The IRS listed several factors that can affect the timing of a refund after the agency receives a return. A manual review may be necessary when a return has errors, is incomplete or is affected by identity theft or fraud. Other returns can also take longer to process, including when a return needs a correction to the Child Tax Credit amount or includes a Form 8379, Injured Spouse Allocation, which could take up to 14 weeks to process. The fastest way to get a tax refund is by filing electronically and choosing direct deposit. Taxpayers who don’t have a bank account can find out more on how to open an account at an FDIC-Insured bank or the National Credit Union Locator Tool.

Further, the IRS cautioned taxpayers not to rely on receiving a refund by a certain date, especially when making major purchases or paying bills. Taxpayers should also take into consideration the time it takes for a financial institution to post the refund to an account or to receive it by mail. Before filing, taxpayers should make IRS.gov their first stop to find online tools to help get the information they need to file. To check the status of a refund, taxpayers should use the Where’s My Refund? tool on IRS.gov. The IRS will contact taxpayers by mail when more information is needed to process a return. IRS representatives can only research the status of a refund if it has been: 21 days or more since it was filed electronically; six weeks or more since a return was mailed; or when the Where's My Refund? tool tells the taxpayer to contact the IRS.

Additionally, taxpayers whose tax returns from 2020 have not yet been processed should still file their 2021 tax returns by the April due date or request an extension to file. Those filing electronically in this group need their Adjusted Gross Income (AGI) from their most recent tax return. Those waiting on their 2020 tax return to be processed should enter zero dollars for last year's AGI on the 2021 tax return. When self-preparing a tax return and filing electronically, taxpayers must sign and validate the electronic tax return by entering their prior-year AGI or prior-year Self-Select PIN (SSP). Those who electronically filed last year may have created a five-digit SSP. Generally, tax software automatically enters the information for returning customers. Taxpayers who are using a software product for the first time may have to enter this information.

The IRS reminded educators that they will be able to deduct up to $300 of out-of-pocket classroom expenses when they file their federal income tax return for tax year 2022. This is the first time the annual limit has increased since 2002.

The IRS reminded educators that they will be able to deduct up to $300 of out-of-pocket classroom expenses when they file their federal income tax return for tax year 2022. This is the first time the annual limit has increased since 2002. For tax years 2002 through 2021, the limit was $250 per year. The limit will rise in $50 increments in future years based on inflation adjustments. For 2022, if an eligible educator is married and files a joint return with another eligible educator, the limit rises to $600 but not more than $300 for each spouse.

Educators can claim this deduction even if they take the standard deduction. Eligible educators include anyone who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during the school year. Both public- and private-school educators qualify. Educators can deduct the unreimbursed cost of:

• books, supplies, and other materials used in the classroom;
• equipment, including computer equipment, software, and services;
• COVID-19 protective items to stop the spread of the disease in the classroom; and
• professional development courses related to the curriculum they teach or the students they teach.

Qualified expenses do not include expenses for homeschooling or nonathletic supplies for courses in health or physical education. The IRS also reminded educators that for tax year 2021, the deduction limit is $250. If they are married and file a joint return with another eligible educator, the limit rises to $500 but not more than $250 for each spouse.

Taxpayers who may need to take additional actions related to Qualified Opportunity Funds (QOFs) should begin receiving letters from the IRS in April. Taxpayers who attached Form 8996, Qualified Opportunity Fund, to their return may receive Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard. This letter lets them know that information needed to support the annual certification of investment standard is missing, invalid or the calculation isn’t supported by the amounts reported. If they intend to maintain their certification as a QOF, they may need to take additional action to meet the annual self-certification of the investment standard requirement.

Taxpayers who may need to take additional actions related to Qualified Opportunity Funds (QOFs) should begin receiving letters from the IRS in April. Taxpayers who attached Form 8996, Qualified Opportunity Fund, to their return may receive Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard. This letter lets them know that information needed to support the annual certification of investment standard is missing, invalid or the calculation isn’t supported by the amounts reported. If they intend to maintain their certification as a QOF, they may need to take additional action to meet the annual self-certification of the investment standard requirement.

To correct the annual maintenance certification of the investment standard, taxpayers should file an amended return or an administrative adjustment request (AAR). If an entity that receives the letter fails to act, the IRS may refer its tax account for examination. Additionally, taxpayers may receive Letter 6502, Reporting Qualified Opportunity Fund (QOF) Investments, or Letter 6503, Annual Reporting Of Qualified Opportunity Fund (QOF) Investments. These letters notify them that they may not have properly followed the instructions for Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments. This may happen if it appears that they may not have properly followed the requirements to maintain their qualifying investment in a QOF with the filing of the form.

Finally, if these taxpayers intend to maintain a qualifying investment in a QOF, they can file an amended return or an AAR with a properly completed Form 8997 attached. Failure to act will mean those who received the letter may not have a qualifying investment in a QOF and the IRS may refer their tax accounts for examination.

The IRS informed taxpayers that it will send Notices CP2100 and CP2100A notices to financial institutions, businesses, or payers who filed certain types of information returns that do not match IRS records, beginning mid-April 2022.

The IRS informed taxpayers that it will send Notices CP2100 and CP2100A notices to financial institutions, businesses, or payers who filed certain types of information returns that do not match IRS records, beginning mid-April 2022. These information returns include:

• Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
• Form 1099-DIV, Dividends and Distributions
• Form 1099-G, Certain Government Payments
• Form 1099-INT, Interest Income
• Form 1099-K, Payment Card and Third-Party Network Transactions
• Form 1099-MISC, Miscellaneous Income
• Form 1099-NEC, Nonemployee Compensation
• Form 1099-OID, Original Issue Discount
• Form 1099-PATR, Taxable Distributions Received from Cooperatives
• Form W-2G, Certain Gambling Winnings

These notices inform payers that the information return is missing a Taxpayer Identification Number (TIN), has an incorrect name or a combination of both. Each notice has a list of payees or the persons receiving certain types of income payments with identified TIN issues. Taxpayers need to compare the accounts listed on the notice with their account records and correct or update their records, if necessary. This can also include correcting backup withholding on payments made to payees. The notices also inform payers that they are responsible for backup withholding. Payments reported on these information returns are subject to backup withholding if:

• The payer does not have the payee’s TIN when making the reportable payments.
• The payee does not certify their TIN as required for reportable interest, dividend, broker and barter exchange accounts.
• The IRS notifies the payer that the payee furnished an incorrect TIN and the payee does not certify its TIN as required.
• The IRS notifies the payer to begin backup withholding because the payee did not report all of its interest and dividends on its tax return.

The IRS has issued a guidance stating that government employees who receive returns or return information pursuant to disclosures under Code Sect. 6103(c), are subject to the disclosure restrictions, like all designees who receive returns or return information pursuant to taxpayer consent. Further, government employees who receive returns or return information pursuant to disclosures under Code Sec. 6103(k)(6) or (e), other than Code Sec. 6103(e)(1)(D)(iii) (relating to certain shareholders), are not subject to the disclosure restrictions with regard to the returns or return information received.

The IRS has issued a guidance stating that government employees who receive returns or return information pursuant to disclosures under Code Sect. 6103(c), are subject to the disclosure restrictions, like all designees who receive returns or return information pursuant to taxpayer consent. Further, government employees who receive returns or return information pursuant to disclosures under Code Sec. 6103(k)(6) or (e), other than Code Sec. 6103(e)(1)(D)(iii) (relating to certain shareholders), are not subject to the disclosure restrictions with regard to the returns or return information received.

Background

Section 2202 of the Taxpayer First Act (TFA), P.L. 116-25, amended Code Sec. 6103(a)(3) and (c) to limit redisclosures and uses of return information received pursuant to the staxpayer consent exception. Code Sec. 6103(c), as amended by the TFA, explicitly prohibits designees from using return information for any reason other than the express purpose for which the taxpayer grants consent and from redisclosing return information without the taxpayer’s express permission or request. Further, Code Sec. 6103(a)(3), as amended by the TFA, imposes disclosure restrictions on all recipients of return information under Code Sec. 6103(c). The TFA did not amend Code Sec. 6103(e) or (k)(6), or Code Sec. 6103(a) with respect to disclosures under Code Sec. 6103(e) or (k)(6).

Disclosure Restrictions

The IRS cited seven situations where disclosure restrictions of Code Sec. 6103(a) would or would not be applicable with regard to returns or return information received as a result of disclosure under:

• Code Sec. 6103(c) with the consent of the taxpayer (taxpayer consent exception),
• Code Sec. 6103(e) as a person having a material interest, but not under Code Sec. 6103(e)(1)(D)(iii) relating to disclosures to certain shareholders (material interest exception), or
• Code Sec. 6103(k)(6) for investigative purposes (investigative disclosure exception).

Effect on Other Documents

Rev. Rul. 2004-53, I.R.B. 2004-23, has been modified and superseded.

The IRS has provided a waiver for any individual who failed to meet the foreign earned income or deduction eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in a foreign country precluded the individual from meeting the requirements for the 2021 tax year. Qualified individuals may exempt from taxation their foreign earned income and housing cost amounts.

The IRS has provided a waiver for any individual who failed to meet the foreign earned income or deduction eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in a foreign country precluded the individual from meeting the requirements for the 2021 tax year. Qualified individuals may exempt from taxation their foreign earned income and housing cost amounts.

Relief Provided

The countries for which the eligibility requirements have been waived for 2021 are Iraq, Burma, Chad, Afghanistan and Ethiopia. Accordingly, an individual who left the following countries beginning on the specified date will be treated as a qualified individual with respect to the period during which that individual was present in, or was a bona fide resident of the country: (1) Iraq on or after January 19, 2021; (2) Burma on or after March 30, 2021; Chad on or after April 17, 2021; (4) Afghanistan on or after April 27, 2021, and; (5) Ethiopia on or after November 5, 2021. Individuals who left the above mentioned countries must establish a reasonable expectation that he or she would have met the requirements of Code Sec. 911(d)(1) but for those adverse conditions. Further, individuals who established residency, or were first physically present in Iraq, after January 19, 2021, are not eligible for the waiver. Taxpayers who need assistance on how to claim the exclusion, or how to file an amended return, should consult the section under the heading "Foreign Earned Income Exclusion" at https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad; consult the section under the heading How to Get Tax Help at the same web address; or contact a local IRS office.

The Supreme Court reversed and remanded a Court of Appeals decision and held that Code Sec. 6330(d)(1)’s 30-day time limit to file a petition for review of a collection due process (CDP) determination is an ordinary, nonjurisdictional deadline subject to equitable tolling in appropriate cases. The taxpayer had requested and received a CDP hearing before the IRS’s Independent Office of Appeals pursuant to Code Sec. 6330(b), but the Office sustained the proposed levy. Under Code Sec. 6330(d)(1), the taxpayer had 30 days to petition the Tax Court for review. However, the taxpayer filed its petition one day late. The Tax Court dismissed the petition for lack of jurisdiction and the Court of Appeals for the Eighth Circuit affirmed, agreeing that Code Sec. 6330(d)(1)’s 30- day filing deadline is jurisdictional and thus cannot be equitably tolled.

The Supreme Court reversed and remanded a Court of Appeals decision and held that Code Sec. 6330(d)(1)’s 30-day time limit to file a petition for review of a collection due process (CDP) determination is an ordinary, nonjurisdictional deadline subject to equitable tolling in appropriate cases. The taxpayer had requested and received a CDP hearing before the IRS’s Independent Office of Appeals pursuant to Code Sec. 6330(b), but the Office sustained the proposed levy. Under Code Sec. 6330(d)(1), the taxpayer had 30 days to petition the Tax Court for review. However, the taxpayer filed its petition one day late. The Tax Court dismissed the petition for lack of jurisdiction and the Court of Appeals for the Eighth Circuit affirmed, agreeing that Code Sec. 6330(d)(1)’s 30- day filing deadline is jurisdictional and thus cannot be equitably tolled.

Nonjurisdictional Nature of Filing Deadline

The Supreme Court analyzed the text of Code Sec. 6330(d)(1) and stated that the only contention is whether the provision limits the Tax Court’s jurisdiction to petitions filed within the 30-day timeframe. The taxpayer contended that it referred only to the immediately preceding phrase of the provision: a "petition [to] the Tax Court for review of such determination." and so the filing deadline was independent of the jurisdictional grant. The IRS, on the contrary, argued that "such matter" referred to the entire first clause of the sentence, which includes the deadline and granting jurisdiction only over petitions filed within that time. However, the Supreme Court held the nature of the filing deadline to be nonjurisdictional because the IRS failed to satisfy the clear-statement rule of the jurisdictional condition. It also stated that where multiple plausible interpretations exist, it is difficult to make the case that the jurisdictional reading is clear. Moreover, Code Sec. 6330(e)(1)’s clear statement—that "[t]he Tax Court shall have no jurisdiction . . . to enjoin any action or proceeding unless a timely appeal has been filed"—highlighted the lack of such jurisdictional clarity in Code Sec. 6330(d)(1).

Equitable Tolling of Filing Deadline

The Supreme Court remanded the case to the Court of Appeals for the Eighth Circuit to decide whether the taxpayer was entitled to equitable tolling of the filing deadline. However, the Supreme Court did emphasize that Code Sec. 6330(d)(1) did not expressly prohibit equitable tolling, and its 30-day time limit was directed at the taxpayer, not the court. Further, the deadline mentioned in the provision was not written in an emphatic form or with detailed and technical language, nor was it reiterated multiple times. The IRS’ argument that tolling the Code Sec. 6330(d)(1) deadline would create much more uncertainty, was rejected. The Supreme Court concluded that the possibility of equitable tolling for relatively small number of petitions would not appreciably add to the uncertainty already present in the process.

The Government Accountability Office (GAO) has issued a report on IRS’ performance during the 2021 tax filing season. The report assessed IRS’ performance during the 2021 filing season on: (1) processing individual and business income tax returns; and (2) providing customer service to taxpayers. GAO analyzed IRS documents and data on filing season performance, refund interest payments, hiring and employee overtime. GAO also interviewed cognizant officials.

The Government Accountability Office (GAO) has issued a report on IRS’ performance during the 2021 tax filing season. The report assessed IRS’ performance during the 2021 filing season on: (1) processing individual and business income tax returns; and (2) providing customer service to taxpayers. GAO analyzed IRS documents and data on filing season performance, refund interest payments, hiring and employee overtime. GAO also interviewed cognizant officials.

Report Findings

GAO found that the IRS faced multiple challenges and struggled to respond to an unprecedented workload that included delivering COVID-19 relief. The IRS began the 2021 filing season with a backlog of 8 million individual and business returns from the prior year. The IRS reduced the backlog of prior year returns, but in December 2021, had about 10.5 million returns to process from 2021. The IRS suspended and reviewed 35 million returns with errors primarily due to new or modified tax credits. GAO found that some categories of errors occur each year, however, the IRS does not assess the underlying causes of taxpayer errors on returns. Additionally, the IRS paid nearly $14 billion in refund interest in the last 7 fiscal years, with $3.3 billion paid in fiscal year 2021. However, the IRS does not identify, monitor, and mitigate issues contributing to refund interest payments.

Recommendations

GAO made six recommendations, including that the IRS should assess reasons for tax return errors and refund interest payments and take action to reduce them; modernize its “Where's My Refund” application; address its backlog of correspondence; and assess its in-person service model. The IRS agreed with four recommendations and disagreed with two. The IRS said its process for analyzing errors is robust and that the amount of interest paid is not a meaningful business measure.

Amounts received as an annuity are included in gross income to the extent that they exceed the exclusion ratio, which is determined by taking the original investment in the contract, deducting the value of any refund features, and dividing the result by the expected yield on the contract as of the annuity starting date. In general, the expected return is the product of a single payment and the anticipated number of payments to be received, i.e., the total amount the annuitant can expect to receive. In the case of a life annuity, the number of payments is computed based on actuarial tables provided in IRS Regulation Sec. 1.72-9.

If a contract provides for fixed payments to be made to an annuitant for a guaranteed period but specifies that the payments will cease on the annuitant's death, the expected return is computed as if the arrangement were a temporary life annuity rather than a fixed term annuity.  The applicable IRS tables under Regulation Sec. 1.72-9 contain multiples based on the guaranteed period (rounded to the nearest whole number of years) and age at the annuity starting date.  The expected return under the contract is the product of this multiple and the total annual amount of annuity payments.

Example:  Smith is to receive $100 each month for five years, beginning on his 60th birthday, but the payments will cease abruptly and all obligations will be terminated on his death.  Either Pursuant to Table IV under IRS Regulations Sec. 1.7209, a 60-year-old male receiving payments for a term of five years can expect to live 4.8 of those five years; that multiple multiplied by $1,200 yields an anticipated return of $5,760.  If Table VIII is applicable, the expected return is $5,880, based on a multiple of 4.9.

Another form of annuity provides for fixed periodic payments for the duration of the recipient's life, but for a changing amount: payments of a first amount for an initial guaranteed period, followed by payments of a reduced amount thereafter.  In determining the expected return, the contract is treated as a combination of two annuities: (1) a whole life annuity providing payments at the lower amount, commencing at the annuity starting date; and (2) a separate temporary life annuity, of the kind discussed above, providing payments in the amount of the difference between the two specified amounts.

Q: After what period is my federal tax return safe from audit? A: Generally, the time-frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals) or, if later, the date you actually filed the return on a requested filing extension or otherwise. This means that if you file your 2014 return on July 10, 2015, the IRS will have until July 10, 2018 to look at it and "assess a deficiency;" not April 15, 2018.

Q: After what period is my federal tax return safe from audit?

A: Generally, the time-frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals) or, if later, the date you actually filed the return on a requested filing extension or otherwise. This means that if you file your 2014 return on July 10, 2015, the IRS will have until July 10, 2018 to look at it and "assess a deficiency;" not April 15, 2018.

There are exceptions and caveats to this general principle, however. If you file prior to April 15, the IRS still has until April 15 of the third year that follows to audit your return. This means that if you filed an income tax return on February 10, 2017, you still won't be out-of-the-woods until April 15, 2020. For taxpayers who file fraudulent returns, incorrect returns with the intent to evade tax, and those who do not file at all, the IRS may open an audit at any time.

(Don't confuse the deadline for IRS tax assessments with your right to file a refund claim for an amount that you overpaid, either on a filed return or through withholding or estimated tax payments. That deadline is the later of three years from the filing deadline or two years from your last tax payment.)

You may also find some comfort in the practical IRS audit-cycle rhythm. While you are never truly beyond an audit until the statute of limitations has properly run, there are some general standards to keep in mind. Office audits are usually done within 1 1/2 years of the time the return was filed, and field office audits are complete by 2 1/2 years. The rule of thumb is that if you haven't been contacted within this time frame, you're probably not going to be. Especially for small businesses, the IRS has promised to shorten its normal audit cycle so that those taxpayers are not "left hanging" on potential tax liabilities (with interest and penalties) until the three-year limitations period has expired. Whether this shortened period happens, however, is still open to speculation. Most businesses should continue to make it a practice to keep "tax reserves" to cover such audit liabilities.

The closely-held corporate form of entity is widely used by family-owned businesses. As its name implies, the owners of the business are typically limited to a small group of shareholders. Many businesses operate for years as closely-held corporations without giving a second thought to a little-known danger: the personal holding company tax.

The personal holding company tax lurks in the background to prevent the use of closely-held family corporations as reservoirs in which to collect investment income. The government wants corporations to distribute income rather than enabling shareholders to build an investment portfolio subject only to the corporate income tax.

The tax is triggered by a corporation's percentage of investment to total income. It is imposed on undistributed earnings and is added to the regular corporate tax. One frequent trigger for the personal holding company tax is the accumulation of income earmarked for expanding the business. Despite its ominous nature, the tax can be anticipated and maybe even averted through strategic planning.

Some triggers

Here are some scenarios that have unfortunately triggered the personal holding company tax for other businesses:

• A consolidated return group becomes unaffiliated, or an ineligible group, as the result of a change in stock ownership or a line of business
  
• A large amount of insurance proceeds are invested until replacement property can be purchased
  
• For asset protection purposes, a corporation holds investment assets or operating equipment without engaging in other operations
  
• During a plan of liquidation, a line of business is sold and the sale proceeds are invested while management is attempting to sell remaining assets or businesses
  
• As part of a plan to invest in a new line of business, a line of business is sold and the sale proceeds are invested while management is attempting to acquire a business or grow its new line of business

Two tests

It's important to remember that any corporation can be a personal holding company. The IRS has developed two tests: (1) an income test and (2) an ownership test.

Income test

The income test is met if 60 percent or more of the corporation's adjusted ordinary gross income is "personal holding company income." This type of income is frequently derived from investment properties and includes:

• Interest, dividends and royalties,
• Rents,
• Mineral, oil and gas royalties,
• Copyright royalties,
• Produced film rents,
• Amounts received in compensation for use of the corporation's property,
• Compensation from personal contracts, where the corporation is not a personal service company, and
• Estate and trust income.

There are some important exceptions to this list. Some types of royalties, for example, are excluded.

Note. The PHC income test is not a test of gross receipts. The income test compares gross receipts less the cost of goods sold to investment income less its direct costs. Gross profit margins are significant to the test and investment activities generally have few direct costs. Thus, an increase in investment income is leveraged for purposes of the PHC income test and an increase in investment income that is insignificant to total gross income can cause investment income to exceed 60 percent of adjusted gross income (AGI). Manufacturing businesses are at a disadvantage. Because of high cost of goods sold when compared to a service business that has little or no costs of goods sold.

Ownership test

The ownership test is met if five or fewer individuals owned more than 50 percent of the corporation's stock value at any time during the last half of the tax year. The ownership test also has some important exceptions. Some important - and common - types of corporations are excluded:

• S corporations,
• Tax-exempt corporations,
• Banks, lending or finance companies,
• Small business investment companies, and
• Corporations in bankruptcy.

The personal holding company tax doesn't have to be an unwelcome and expensive surprise. If your business has experienced - or is planning - any of the events that could trigger the tax, give our office a call.  Careful planning can help avoid or minimize the tax; at any rate, it can alert you to your possible liability for the tax.

Many people are surprised to learn that some "luxury" items can be deductible business expenses. Of course, moderation is key. Excessive spending is sure to attract the IRS's attention. As some recent high-profile court cases have shown, the government isn't timid in its crackdown on business owners using company funds for personal travel and entertainment.

First class travel

The IRS doesn't require that your business travel be the cheapest mode of transportation. If it did, businesspeople would be traveling across the country by bus instead of by plane. However, the expense as it is relative to the business purpose must be reasonable. Taking the Queen Mary II across the Atlantic to a business meeting in the U.K. could raise a red flag at the IRS.

As long as your business is turning a profit and is operated legitimately as a business and not a hobby, traveling first class generally is permissible. Even though a coach airline seat will get you to your business appointment just as quickly and an inexpensive hotel room is a place to sleep, the IRS generally won't try to reduce your deduction.

However, if your trip lacks a business purpose, the IRS will deny your travel-related deductions. Don't try to disguise a family vacation as a business trip. Many people are tempted; it's not worth the consequences, especially in today's environment where the IRS is aggressively looking for business abuses.

Conventions

Convention expenses are deductible if a sufficient relationship exists to your profession or business and the convention is in North America. No deduction is allowed for attending conventions or seminars about managing your personal investments.

Overseas conventions definitely get the IRS's attention. If you want to deduct the costs of attending a foreign convention, you have to show that the convention is directly related to your business and it is as reasonable to hold the convention outside North America as within North America.

Country clubs expenses

Country club dues are not deductible. In fact, no part of your dues for clubs organized for business, pleasure, recreation, or social purposes is deductible.

Some country club costs may be partially deductible if you can show a direct business purpose and you meet some tough written substantiation requirements. These include greens fees as well as food and beverage expenses. They may be deductible up to 50 percent.

Meals and entertainment

Younger colleagues don't remember when business meals were 100 percent deductible and deals were brokered at "three martini lunches." Meals haven't been 100 percent deductible for a long time and, like other entertainment expenses, the IRS combs them carefully for abuses.

Expenditures for meals, entertainment, amusement, and recreation are not deductible unless they are directly related to, or associated with, the active conduct of your business. The IRS also requires you to keep a written or electronic log, made at the time you make the expenditure, recording the time, place, amount and business purpose of each expense.

Even if you pass the two tests, only 50 percent of meal and entertainment expenses are deductible.  If you write-off business meals through your company and there is a proper reimbursement arrangement in place, you won't be charged with any imputed income for the half that is not deductible, but your company will be limited to a 50 percent write-off.

Whether a parent who employs his or her child in a family business must withhold FICA and pay FUTA taxes will depend on the age of the teenager, the amount of income the teenager earns and the type of business.

FICA and FUTA taxes

A child under age 18 working for a parent is not subject to FICA so long as the parent's business is a sole proprietorship or a partnership in which each partner is a parent of the child (if there are additional partners, the taxes must be withheld). FUTA does not have to be paid until the child reaches age 21. These rules apply to a child's services in a trade or business.

If the child's services are for other than a trade or business, such as domestic work in the parent's private home, FICA and FUTA taxes do not apply until the child reaches 21.

The rules are also different if the child is employed by a corporation controlled by his or her parent. In this case, FICA and FUTA taxes must be paid.

Federal income taxes

Federal income taxes should be withheld, regardless of the age of the child, unless the child is subject to an exemption. Students are not automatically exempt, though. The teenager has to show that he or she expects no federal income tax liability for the current tax year and that the teenager had no income tax liability the prior tax year either. Additionally, the teenager cannot claim an exemption from withholding if he or she can be claimed as a dependent on another person's return, has more than $250 unearned income, and has income from both earned and unearned sources totaling more than $800.

Bona fide employee

Remember also, that whenever a parent employs his or her child, the child must be a bona fide employee, and the employer-employee relationship must be established or the IRS will not allow the business expense deduction for the child's wages or salary. To establish a standard employer-employee relationship, the parent should assign regular duties and hours to the child, and the pay must be reasonable with the industry norm for the work. Too generous pay will be disallowed by the IRS.

Owning a vacation home is a common dream that many people share...a special place to get away from the weekday routine, relax and maybe, after you retire, a new place to call home. When thinking about buying a vacation home, you should also think about what you will ultimately do with it. Will it one day be your principal residence? Will you sell it in five, 10 or 20 years? Will you rent it? Will you leave it to your children or other family members? These decisions have important tax consequences.

You'll want to think about:

Capital gains

The maximum long-term capital gains tax rate for 2009 is currently 15 percent taxpayers in the highest brackets. For taxpayers in the 10 and 15 percent brackets, the maximum long-term capital gains rate is zero through 2010. However, these lower rates expire at the end of 2010. The maximum rate is set to rise to 20 percent in 2011. Congress also eliminated a special holding period rule but, again, only through the end of 2011.

The process of computing capital gains because of all these changes is very complicated. Yet, "doing the math" up front in assessing the benefits of a vacation home as a long term investment as well as a source of personal enjoyment is recommended before committing to such a large purchase. Our office can help you make the correct computations.

Renting your vacation home

Renting your vacation home to help defray some or a good portion of your carrying costs, especially in the early years of ownership, can be a sound strategy. Be aware, however, that renting raises many complex tax questions. Special rules limit the deduction you can take. The rules are based on how long you rent the property. If you rent your vacation home for fewer than 15 days during the year, all deductions directly attributable to the rental are not allowed, but you don't have to report any rental income. If you rent your vacation home for more than 15 days, you must recognize the rental income while being allowed deductions only on certain items depending on your personal use of the property. The methodology is very complicated. We can help you pin down your deductions and plan the true cost of ownership, especially if you're planning to swing a vacation home purchase on plans to rent it out.

Home sale exclusion

One of the most generous federal tax breaks for homeowners is the home sale exclusion. If you're single, you can generally exclude up to $250,000 of gain from the sale of your principal residence ($500,000 for married joint filers). Generally, you have to have owned your home for at least two of the five years before the sale, but like all the tax rules, there are exceptions.

Congress modified the home sale exclusion for home sales occurring after December 31, 2008. Under the new law, gain from the sale of a principal residence home will no longer be excluded from gross income for periods that the home is not used as a principal residence. This is referred to as "non-qualifying use." The rule is intended to prevent use of the home sale exclusion of gain for appreciation attributable to periods after 2008 during which the residence was used as a vacation home, or as a rental property before being used as a principal residence. However, the new income inclusion rule is based only on periods of nonqualified use that start on or after January 1, 2009, good news for vacation homeowners who have already owned their properties for a number of years.

Buying a vacation home is a big investment. We can help you explore all these and other important tax consequences.

A remainder interest is the interest you receive in property when a grantor transfers property to a third person for a specified length of time with the provision that you receive full possessory rights at the end of that period. The remainder is "vested" if there are no other requirements you must satisfy in order to receive possession at the end of that period, such as surviving to the end of the term. This intervening period may be for a given number of years, or it may be for the life of the third person. Most often, this situation arises with real estate, although other types of property may be transferred in this fashion as well, such as income-producing property held in trust. The holder of a remainder interest may wish to sell that interest at some point, whether before or after the right to possession has inured.

To determine the amount of gain or loss on the sale of an interest in property, you must first need to know the basis in that property. Generally, the basis of property is either the transferor's basis, if the transferor made a gift of the property while still living, or the fair market value at the time of the transfer if it was a testamentary gift. However, the value of a remainder interest is not the full value of the property, because someone else has an intervening right to its use.

The value of the remainder interest is equal to the undivided value of the property minus the value of the intervening interest. The value of this interest depends on applicable interest rates and the duration of the interest. In the case of a life estate, the duration depends on the age of the recipient and is determined with reference to mortality tables published in the Treasury regulations. The applicable interest rate is specified in Code Sec. 7520 as being 120 percent of the applicable federal rate (AFR) for that month, rounded to the nearest 0.2 percent. You may find these tables at the IRS web site.

IRS Pub. 1457 is known as Actuarial Values Book Aleph and contains tables that express the values of life estates, term interests and remainders. In this publication, you will need to select the appropriate section based on whether the interest is a term for years or a life estate. In each section is a series of tables based on interest rates ranging from 2.2 to 22.2 percent. Find the age of the life estate holder or duration of the term in the first column of the table. Next to it, under the column for remainder interests, is a decimal representation of the fractional interest represented by the remainder. Multiply this decimal by the basis of the property and you have the basis of the remainder interest.

Examples: Bob's grandfather died in March of 2009 and left a house valued at $100,000 to his mother for life, with the remainder interest to Bob. Bob's mother is 65 years old. The Sec. 7520 rate for that month is 2.4 percent, and the fractional value of the remainder is .67881. The value of Bob's interest in the house is $67,881.

For U.S. taxpayers, owning assets held in foreign countries may have a variety of benefits, from ease of use for frequent travelers or those employed abroad to diversification of an investment portfolio. There are, however, additional rules and requirements to follow in connection with the payment of taxes. Some of these rules are very different from those for similar types of domestic income, and more than a few are quite complex.

Two documents do not apply directly to federal income taxation, but are nevertheless highly important. The first of these is a Treasury form, Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. Any individual or organization that owns or has control over a bank or brokerage account must complete this form if the aggregate value of all such accounts under that taxpayer's ownership or control exceeds $10,000. The second such form is not a requirement per se, but taxpayers who have income in a foreign country with which the United States has a treaty would be seriously remiss in failing to complete it. IRS Form 8802, Application for United States Residency Certification, helps to speed and simplify the application process for eligible taxpayers claiming the benefits of tax treaties in connection with foreign taxes paid. Requirements for organizations that may have dual or layered status offer complications that depend on the type of entity, so these instructions must be parsed carefully.

Taxes on real and personal property held overseas are treated quite differently for purposes of federal income taxation, as opposed to the treatment of domestic property. Individuals may claim foreign real property taxes as itemized deductions on Schedule A of Form 1040, just as they would with U.S. real estate. However, taxes on personal property may only be deductible if used in connection with a trade or business or in the production of income.

U.S. taxpayers who own homes in foreign countries are eligible for the capital gains exclusion on the sale of a principal residence subject to the same requirements as domestic homeowners. Likewise, if a taxpayer derives rental income from a home, the rules for reporting income and deductions are the same. However, claiming depreciation expenses in connection with rental income subjects taxpayers to a different set of rules. Code Sec. 168(g) indicates that tangible property used predominantly outside the United States must be depreciated using the alternative depreciation system (ADS), rather than the modified accelerated cost recovery system (MACRS), and involves longer recovery periods. This is true whether the tangible property in question is the residence itself or household appliances contained therein, as well as any other tangible property.

Intangible property such as patents, licenses, trademarks, copyrights and securities produce a variety of types of income, and the taxation of such income may be subject to different rules than similar domestic income. The provisions for taxation of foreign income are often subject to modification by treaty, and the United States has negotiated treaties with over sixty nations.

Income from all sources must be reported in U.S. dollars, regardless of how it is paid. One exception to this rule is that if income is received in a currency that is not convertible to U.S. dollars because of prohibitions placed on conversion by the issuing country, then the taxpayer may choose when to report the income. The income may be reported either in the year earned, according to the most accurate valuation means available, with the taxes paid from other income, or the taxpayer may choose to wait until the currency becomes convertible again.