The IRS has issued proposed and temporary regulations under Code Sec. 530A, regarding general requirements for Trump accounts, the establishment of an initial account, including automatic enrollment by the Secretary of the Treasury, and qualified general contributions. Proposed regulations issued in March 2026 (NPRM REG-117270-25) that provided guidance on establishing Trump accounts, but did not establish automatic enrollment due to time constraints in resolving legal and administrative issues, are withdrawn. The temporary regulations apply to tax years beginning on or after January 1, 2026, and expire on September 30, 2029.

The IRS has issued proposed and temporary regulations under Code Sec. 530A, regarding general requirements for Trump accounts, the establishment of an initial account, including automatic enrollment by the Secretary of the Treasury, and qualified general contributions. Proposed regulations issued in March 2026 (NPRM REG-117270-25) that provided guidance on establishing Trump accounts, but did not establish automatic enrollment due to time constraints in resolving legal and administrative issues, are withdrawn. The temporary regulations apply to tax years beginning on or after January 1, 2026, and expire on September 30, 2029.

General Requirements and Establishment of an Account

A Trump account is either (1) an initial Trump account, created or organized by the Treasury Secretary for an eligible individual or (2) a rollover Trump account, which is an account created during the growth period and funded by a qualified rollover contribution from the account beneficiary's existing Trump account. The written governing instrument of a Trump account must generally meet the rules of Code Sec. 408(a)(1) through (6) and Code Sec. 530A(b)(1)(C)(i) through (iii). Any person approved by the IRS as of December 31, 2025, to be a nonbank trustee of an IRA would have automatic approval to act as a trustee of a Trump account. The written instrument must clearly identify the account as a Trump account at the time of creation.

The Secretary may make an election to establish an auto account for a qualifying individual. Another person may elect to establish a Trump account for an eligible individual by filing Form 4547 or via the electronic application or webpage made available by the Secretary. A person may claim an auto account pursuant to Temp. Reg. §1.530A-1T(d)(1)(iv) by establishing a claimed initial Trump account and having the funds in the auto account transferred to the claimed initial Trump account. On or about October 1, 2026, the Secretary shall establish an auto account for each person whom the Secretary has determined to meet the requirements of Temp. Reg. §1.530-A-1T(b)(2) to be an eligible individual, and from whom no prior election has been made. Periodic elections to establish accounts for eligible individuals will be made after that date.

Administration of an auto account is the Secretary's responsibility. During the growth period, an account may only accept qualified general contributions under Code Sec. 530A(f) and a $1,000 pilot program contribution. An auto account's only investment must be its equitable interest in the master group trust, which is a trust established for the exclusive benefit of account beneficiaries of auto accounts for purposes of holding investments of those auto accounts and meets the applicable requirements of Rev. Rul. 81-100, as modified, and is exempt from tax under Code Sec. 408(e).

Qualified General Contributions and Qualified Stock Contributions

Temp. Reg. §1.530A-7T establishes the framework for qualified general contributions to Trump accounts. A qualified general contribution must originate from an eligible donor, be accepted by the Secretary through a Treasury acceptance agreement, be made to beneficiaries within an approved class, and be allocated equally among all beneficiaries in that class. An approved class must include at least 5,000 account beneficiaries and include all account beneficiaries who are still in their growth period, reside in the specified geographic location, and born in one or more years identified in the Treasury acceptance agreement.

The regulations also create rules for qualified stock contributions, allowing eligible donors to contribute certain publicly traded stock issued by domestic corporations directly to Trump accounts. Such stock is generally subject to a minimum holding period ending on the earlier of five years after contribution or the beneficiary’s growth period ending.

Contributions made to qualifying Code Sec. 501(c)(3) organizations to fund general funding contributions are deductible under applicable charitable deduction rules, and gifts to eligible donor organizations are treated as qualifying charitable transfers. A Code Sec. 501(c)(3) organization furthers its exempt purposes by making a qualifying general funding contribution, whether directly or through a donor-advised fund. In addition, such contributions are treated as expenditures for charitable purposes and generally are not considered grants or distributions to individuals for purposes of the private foundation and donor-advised fund expenditure responsibility rules.

T.D. 10056

CC-00226466-26

The IRS has released the 2026-2027 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

• 1. the special transportation industry meal and incidental expenses (M&IE) rates,
• 2. the rate for the incidental expenses only deduction,
• 3. and the rates and list of high-cost localities for purposes of the high-low substantiation method.

The IRS has released the 2026-2027 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

• 1. the special transportation industry meal and incidental expenses (M&IE) rates,
• 2. the rate for the incidental expenses only deduction,
• 3. and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

• $80 for any locality of travel in the continental United States (CONUS), and
• $86 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate

The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2026-2027 special per diem rates are:

• $329 for travel to any high-cost locality, and
• $230 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

Notice 2025-54, I.R.B. 2025-41, 479 is superseded.

Notice 2026-60

For 2027, the Social Security wage cap will be $192,300, and Social Security and Supplemental Security Income (SSI) benefits will increase by 3.6 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2027, the Social Security wage cap will be $192,300, and Social Security and Supplemental Security Income (SSI) benefits will increase by 3.6 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax

The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2027, the wage base is $192,300. Thus, OASDI tax applies only to the taxpayer’s first $192,300 in wages or net earnings from self-employment. Taxpayers do not pay OASDI tax on earnings that exceed $192,300.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2027

For workers who earn $192,300 or more in 2027:

• an employee will pay a total of $11,922.60 in social security tax ($192,300 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $23,845.20 in social security tax ($192,300 x 12.4 percent).

Additional Medicare Tax

Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefit Increase for 2027

Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2027 by 3.6 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

Social Security Fact Sheet: 2027 Social Security Changes

SSA Press Release: Social Security Announces 3.6 Percent Benefit Increase for 2027

The IRS established the IRA Compliance Resolution System (ICRS) to permit IRA owners and custodians to correct failures related to individual retirement arrangements by submitting a request to the IRS. Failures eligible for ICRS include required minimum distribution failures and nonspouse beneficiary rollover failures. The revenue procedure will also govern requests for waivers from the 60-day rollover requirement from IRAs as well as qualified employer-sponsored plans. The revenue procedure is effective May 1, 2027.

The IRS established the IRA Compliance Resolution System (ICRS) to permit IRA owners and custodians to correct failures related to individual retirement arrangements by submitting a request to the IRS. Failures eligible for ICRS include required minimum distribution failures and nonspouse beneficiary rollover failures. The revenue procedure will also govern requests for waivers from the 60-day rollover requirement from IRAs as well as qualified employer-sponsored plans. The revenue procedure is effective May 1, 2027.

Self-Correction Not Available

The new system implements provisions of the SECURE 2.0 Act of 2022, P.L. 117-328, requiring expansion of the Employee Plans Compliance Resolution System (EPCRS) for qualified retirement plans to allow IRA custodians to address eligible inadvertent failures involving IRAs. The new ICRS consists of the IRA Voluntary Correction Program (IVCP), although additional correction programs may be introduced later. Self-correction of IRA failures is not currently available under ICRS. Instead, the IRA custodian or owner must make a submission to the IRS using the provided procedures and pay a fee on the Pay.gov website.

60-Day Rollover Waiver Requests

The procedure also establishes a process for requesting waivers of the 60-day rollover requirement under Code Secs. 402 and 408 through ICRS. During 2027, eligible applicants may request waivers through either ICRS or the existing private letter ruling process. Beginning in 2028, the IRS anticipates that such requests will be permitted only under ICRS.

Waiver requests may involve eligible rollover distributions from IRAs, qualified retirement plans, annuity plans, tax-sheltered annuities and governmental deferred compensation plans. Automatic waivers and waiver relief under previous guidance remains available.

Rev. Proc. 2026-33

The IRS updated the Employee Plans Compliance Resolution System (EPCRS), its comprehensive system of corrections programs for employer-sponsored qualified retirement plans. The updates reflect significant changes to EPCRS made by the SECURE 2.0 Act (P.L. 117-328) and subsequent guidance. Former procedures under Rev. Proc. 2021-30 are modified and superseded. The revised procedures are effective October 22, 2026.

The IRS updated the Employee Plans Compliance Resolution System (EPCRS), its comprehensive system of corrections programs for employer-sponsored qualified retirement plans. The updates reflect significant changes to EPCRS made by the SECURE 2.0 Act (P.L. 117-328) and subsequent guidance. Former procedures under Rev. Proc. 2021-30 are modified and superseded. The revised procedures are effective October 22, 2026.

The bulk of the changes in the revised procedures reflect the SECURE 2.0 Act’s expansion of EPCRS’s Self Correction Program component to permit self-correction of eligible inadvertent failures, including plan loan failures. Other changes made by SECURE 2.0 and incorporated into the revised EPCRS include safe harbor corrections under Code Sec. 414(cc) and the recovery of retirement plan overpayments under Code Sec. 414(aa).

Other changes made in the revised revenue procedure include:

• References to the availability of a separate compliance resolution system for IRA failures.
• Updates reflecting changes to the determination letter and opinion letter programs.
• Revisions to correction methods for SEPs and SIMPLE IRA plans.
• Revisions to procedures for locating lost participants.
• Revisions to the correction principle for failure to obtain spousal consent.
• Changes to the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP), such as revised procedures for a group submission under VCP.

Rev. Proc. 2026-34

The IRS has issued final regulations under Code Sec. 6311 implementing changes made by the Taxpayer First Act. The regulations permit the IRS to pay fees under contracts for processing tax payments by credit or debit card, provided the fees are fully recouped from taxpayers making those payments. The regulations remove restrictions on the IRS’s payment of fees under such contracts and on the imposition of reimbursement fees on persons paying taxes by credit or debit card.

The IRS has issued final regulations under Code Sec. 6311 implementing changes made by the Taxpayer First Act. The regulations permit the IRS to pay fees under contracts for processing tax payments by credit or debit card, provided the fees are fully recouped from taxpayers making those payments. The regulations remove restrictions on the IRS’s payment of fees under such contracts and on the imposition of reimbursement fees on persons paying taxes by credit or debit card.

Payment Processing Fees

The regulations authorize the IRS to enter into contracts for receiving tax payments by credit or debit card if the contracts are cost beneficial to the government. Under certain contracts, the IRS may pay fees, charges, or other monetary consideration to payment processors. If the IRS pays fees under these contracts, it must recoup the full amount from taxpayers making payments by credit or debit card. The reimbursement fees are payable at the time of, and in addition to, the tax payment and are limited to the amounts paid by the IRS under the contracts. The IRS must seek to minimize the fees paid under these arrangements.

Under other contracts, the IRS may elect not to pay fees to payment processors. Such arrangements do not prohibit card issuers, financial institutions, or other persons participating in the transactions from imposing their own fees or charges. The IRS may not receive any portion of those fees.

Error Resolution Procedures

Payments of taxes by credit or debit card, including reimbursement fees paid under the regulations, are subject to applicable error-resolution procedures under the Truth in Lending Act, the Electronic Fund Transfer Act, or similar state or local laws. These procedures apply to errors relating to the credit or debit card account but do not apply to disputes, errors, or adjustments concerning the underlying tax liability. Reimbursement fees paid under the regulations are not taxes imposed by the Internal Revenue Code and are not eligible for refund or credit under Code Sec. 6402.

Applicability

The final regulations amend existing regulations under Code Sec. 6311 to implement changes made by the Taxpayer First Act. The rules apply to tax payments and reimbursement fees made on or after the date of publication in the Federal Register.

T.D. 10060

The IRS has issued proposed and temporary regulations providing guidance on the new federal scholarship tax credit under Code Sec. 25F. Beginning after 2026, an individual may claim a nonrefundable federal income tax credit for contributions to certified scholarship granting organizations (SGOs) issuing scholarships to students in K-12 schools. The regulations clarify how the credit is calculated, including the treatment of state tax credits, credit carryforwards, and substantiation requirements. They also establish immediate administrative rules for SGOs and states that opt into the program and identify SGOs.

The IRS has issued proposed and temporary regulations providing guidance on the new federal scholarship tax credit under Code Sec. 25F. Beginning after 2026, an individual may claim a nonrefundable federal income tax credit for contributions to certified scholarship granting organizations (SGOs) issuing scholarships to students in K-12 schools. The regulations clarify how the credit is calculated, including the treatment of state tax credits, credit carryforwards, and substantiation requirements. They also establish immediate administrative rules for SGOs and states that opt into the program and identify SGOs.

Credit Eligibility and Calculation

An individual may claim a credit for qualified cash contributions made directly to eligible SGOs. The annual credit is generally limited to $1,700 per taxpayer or $3,400 for married individuals filing jointly. Contributions made through pass-through entities, including partnerships and S corporations, are not eligible for the credit. The taxpayer must reduce the federal tax credit by the amount of any state tax credit attributable to the same contribution before applying the federal limitation. Unused credit amounts may be carried forward for up to five years.

A taxpayer claiming the credit may not claim a charitable contribution deduction for the same contribution and must satisfy specified substantiation and reporting requirements. This includes use of a unique donor identification number on new Form 8525. The taxpayer donor must designate contributions as eligible for the credit at the time they are made. Once made, the designation is irrevocable.

A taxpayer may contribute to an eligible SGO regardless of their state of residence, allowing them to support qualifying SGOs across participating states.

Scholarship Granting Organizations

To qualify as an SGO, an organization must be recognized as a tax-exempt public charity, maintain separate accounts for qualified contributions and scholarship funds, and devote at least 90 percent of required expenditures to scholarships. SGOs must verify student eligibility, ensure scholarship funds are used solely for qualified elementary and secondary education expenses, and adopt procedures to prevent scholarships from benefiting disqualified persons. The regulations also require SGOs to register with the IRS, furnish acknowledgments to contributors, file annual reports, and maintain records demonstrating compliance with federal requirements.

State Participation

A state may elect to participate the federal scholarship tax program either through an advanced election or through the submission of a state SGO list. A state seeking to participate must annually certify eligible SGOs and provide the IRS with information demonstrating that the organizations satisfy federal requirements. The IRS will maintain and publish a nationwide list of eligible SGOs upon which taxpayers may generally rely when making contributions and claiming credits.

Applicability

Taxpayers, SGOs, and states may rely on the proposed regulations for qualified contributions beginning on or after January 1, 2027. The temporary regulations apply on or after September 1, 2026, and expire on October 1, 2029.

T.D. 10057

Proposed Regulations, NPRM REG-117199-25

IR 2026-117

The Treasury Department and IRS have issued proposed regulations under Code Sec. 1062 governing the election to pay tax attributable to gain from qualified sales or exchanges of qualified farmland property in four annual installments. The proposed regulations define qualified farmland property and qualified farmers, provide rules for making the election, and address pass-through entities and acceleration events.

The Treasury Department and IRS have issued proposed regulations under Code Sec. 1062 governing the election to pay tax attributable to gain from qualified sales or exchanges of qualified farmland property in four annual installments. The proposed regulations define qualified farmland property and qualified farmers, provide rules for making the election, and address pass-through entities and acceleration events.

Qualified Farmland Property

Qualified farmland property generally is U.S. real property that was used by the taxpayer as a farm for farming purposes, or leased to a qualified farmer for farming purposes, during substantially all of the 10 years preceding the sale or exchange. The property also must be subject to a covenant prohibiting nonfarm use for 10 years following the sale or exchange. A copy of the covenant must be attached to the taxpayer's return for the taxable year of the sale or exchange.

The proposed regulations provide that certain periods of nonuse will be disregarded in applying the 10-year farming use requirement. These include periods during which property is removed from production under a government program, pursuant to recognized farming practices, or because of unforeseen events outside the taxpayer's control, provided the property continues to be maintained for farming purposes.

Election and Installment Payments

Taxpayers would make the election by filing Form 1062, Deferral of Tax on Gain from the Sale or Exchange of Qualified Farmland Property to Qualified Farmers, and Schedule A (Form 1062). Once made, the election generally may be revoked only by paying the remaining unpaid applicable net tax liability. Each installment payment equals 25 percent of the taxpayer's applicable net tax liability. The first installment generally must be paid by the return due date, determined without regard to the extensions, for the taxable year of the sale or exchange.

Pass-Through Entities and Acceleration Events

Under the proposed regulations, partners, S corporation shareholders, beneficiaries, and other owners generally may make the election with respect to applicable net tax liability arising from a qualified sale or exchange by a pass-through entity. Pass-through entities must furnish Schedule A information and the covenant to owners and beneficiaries and report each owner's allocable share of gain.

The proposed regulations also provide rules accelerating unpaid installment payments following certain events. Acceleration events include failure to timely pay an installment, the death of an individual taxpayer, and certain liquidations, dispositions of substantially all assets, and other specified events involving corporations, trusts, and estates. The proposed regulations also provide procedures under which an eligible transferee may assume the remaining installment obligations in certain transactions.

The proposed regulations would apply to qualified sales and exchanges occurring in taxable years ending after publication of final regulations in the Federal Register. Taxpayers may rely on the proposed regulations for qualified sales and exchanges occurring in taxable years beginning after July 4, 2025, provided they apply the rules consistently and in their entirety. Treasury and the IRS requested comments on the proposed regulations and requests for a public hearing within 60 days after publication in the Federal Register.

Proposed Regulations, NPRM REG-117095-25

IR 2026-115

As the excitement of understanding what artificial intelligence can do for the tax profession starts to subside, the conversation is beginning to shift to risk management and risk assessment. To that end, the American Institute of CPAs has launched a new initiative – the Council on AI Risk in Tax (CART) – to help tax professionals manage risk.

As the excitement of understanding what artificial intelligence can do for the tax profession starts to subside, the conversation is beginning to shift to risk management and risk assessment. To that end, the American Institute of CPAs has launched a new initiative – the Council on AI Risk in Tax (CART) – to help tax professionals manage risk.

CART was born out of a risk assessment framework recently developed by former IRS Commissioner Daniel Werfel that was published by AICPA after asking representatives of state tax authorities what he could do for them following his departure from the IRS.

“They said, ‘you know Danny, we are seeing so many interesting, exciting demos of AI products that really have paradigm-shifting productivity … but we don’t know what the risks are. We don’t know what questions we should ask ourselves to make sure that, as a tax authority, we are ready to deploy these powerful AI tools responsibly,” Werfel, senior fellow at Johns Hopkins University School of Government & Policy, said in an interview, adding that they also inquired about questions they should be asking vendors about safety features and other risks they should be looking out for.

“I did some immediate research and learned that there wasn’t an AI risk framework or risk register specific to tax,” he added, leading him develop version one of the recently published risk framework.”

From there, he approached AICPA as the place to publish the framework and through those conversations, created CART as a place for tax professionals and state tax administrators to collaborate on AI risk and further refine the framework.

“With AI, it’s obviously new,” Melanie Lauridsen, AICPA vice president of tax policy and advocacy, added. It’s ever evolving. There’s a huge interest. There’s a lot of unknowns, and there’s nothing really out there right now beyond what I have seen what Danny put forward to help guide people in this area.”

The Framework

The published framework states that it is more than a simple list of “relevant risks. The formulation and activation of the list means the organization has learned to:

• Define how risks show up in practice;

• Assign controls;

• Establish indicators; and

• Make course corrections as the environment evolves.

In this way the register is part of a broader risk governance framework to help organizations chart a sensible path forward from strategy to implementation.”

The publication includes distinct frameworks for both tax authorities and tax preparers. For tax authorities, the publication highlights 20 risk areas across four categories:

• Information integrity – The wrong information reaching taxpayers at scale.
• Fairness and legitimacy – Disparate or unfair treatment across groups.
• Security and data – Compromised systems, corrupted data, or the exploitation of sensitive taxpayer information at AI systems aggregate, surface, or make newly accessible to band actors.
• Institutional capacity – Loss of the knowledge and capacity by the institution needed to govern AI responsibility over time.

For tax preparers, there are 15 risk areas across 5 categories:

• Technical – Incorrect or unreliable AI outputs that establish the conditions for downstream errors.
• Practice – Failures of professional judgement, documentation, or oversight.
• Legal and regulatory – Increased exposure to legal liability (e.g., malpractice claims, regulatory sanctions).
• Business – Erosion of client trust and firm relationships.
• Workforce and Strategic – Loss of the expertise and institutional knowledge needed to practice responsibly.

The framework “establishes a notional risk register for tax authorities and presents that side-by-side with a distinct register for tax preparers,” the framework document states. “It also identifies important areas of overlap across the two.”

A Living Framework

Werfel noted that this is not intended to be a one-and-done framework, but rather a living document that he anticipates will be updated on a regular basis.

“I wanted to give myself six months of feedback and iteration,” he said. “I told CART at our kickoA meeting [that] once we issue version two after six months, then I think it’s an annual [update] from there. But in this form, version one to version two, I wanted to put a little bit more accelerated because that’s the highest risk point for it missing something big in the risk register itself.”

Lauridsen add that convening CART regularly and discussing risks and best practices associated with those risks and updating the framework “is the right approach” as opposed to trying to build a firm set of standards for risk assessment and risk management of AI.

“We don’t know what it’ll be in a month, two months, much less six months or a year,” Lauridsen said, noting the fast evolution AI is currently experiencing. “I think it would be a disservice to come forward with a standard right now.”

She continued: “Right now, it’s more best practices. Everybody’s trying to get their minds and arms around it and how to implement it.”

Werfel added that the feedback will be very important when the framework goes through future iterations, as the CART members will be able to report back when the framework works and more importantly, when it “missed the bullseye” by the cross section of accounting, law firms, government associations and AI vendors.

“My hope is that if it’s oA bullseye, we’ll hear about it and update it,” Werfel said.

He did not rule out seeing the framework converted into an industry standard somewhere down the line, but for now, the focus is to just keep this a framework that users can use as a best practices guide to assessing risks of AI tools that states and practitioners are considering for implementation.

In the near term, Werfel said that an idea was floated to CART to make a voluntary pledge to follow the framework that CART produces. It would be completely voluntary, but a pledge to follow it would be “hopefully helpful to rally attention to AI risk.”

By Gregory Twachtman, Washington News Editor

Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.

Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.

Why Truncate?

The Protecting Americans from Tax Hikes (PATH) Act of 2015 ( P.L. 114-113) amended Code Sec. 6051(a)(2) by replacing the requirement that employers include employees’ SSNs on copies of Forms W-2 furnished to employees with a requirement to use an "identifying number for the employee."Because the SSN was no longer required to appear on Forms W-2 furnished to employees, the IRS published proposed regulations in 2017 to allow employers to truncate employees’ SSNs on those Forms W-2 ( REG-105004-16). The amendments were intended to aid employers’ efforts to protect employees from identity theft.

The final regulations adopt the proposed regulations without substantive changes to the content of the rules.

SSN Truncation on Forms W-2

The final regulations permit employers to truncate employees’ SSNs on copies of:

• Forms W-2 furnished to employees to report wages paid, employment taxes withheld, etc.;
• Forms W-2 furnished to employees to report wages paid in the form of group-term life insurance;
• Forms W-2 furnished to payees to report third-party sick pay; and
• Forms W-2c furnished to correct errors on Forms W-2.

The regulations do not apply to any other forms. Also, truncation is not mandatory; the regulations permit truncation but do not require it.

Under the general truncation rules, a TTIN cannot be used on a statement or document if a statute, regulation, other guidance published in the Internal Revenue Bulletin, form, or instructions:

• specifically requires use of an SSN, IRS individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or IRS employer identification number (EIN); and
• does not specifically permit truncation.

For instance, an employer cannot truncate an employee’s SSN on copies of Forms W-2 filed with the Social Security Administration.

The IRS intends to incorporate the revised regulations into forms and instructions.

Effective Date; Applicability Date

The final regulations are effective on July 3, 2019, but when they apply varies. Reg. §31.6051-1, Reg. §31.6051-3, and Reg. §1.6052-2, as amended, apply for statements required to be filed and furnished under Code Sec. 6051 and Code Sec. 6052 after December 31, 2020. Reg. §31.6051-2, as amended, applies on July 3, 2019. Reg. §301.6109-4, as amended, applies to returns, statements, and other documents required to be filed or furnished after December 31, 2020.

The IRS has issued final regulations that require taxpayers to reduce the amount any charitable contribution deduction by the amount of any state and local tax (SALT) credit they receive or expect to receive in return. The rules are aimed at preventing taxpayers from getting around the SALT deduction limits. A safe harbor has also been provided to certain individuals to treat any disallowed charitable contribution deduction under this rule as a deductible payment of taxes under Code Sec. 164. The final regulations and the safe harbor apply to charitable contribution payments made after August 27, 2018.

The IRS has issued final regulations that require taxpayers to reduce the amount any charitable contribution deduction by the amount of any state and local tax (SALT) credit they receive or expect to receive in return. The rules are aimed at preventing taxpayers from getting around the SALT deduction limits. A safe harbor has also been provided to certain individuals to treat any disallowed charitable contribution deduction under this rule as a deductible payment of taxes under Code Sec. 164. The final regulations and the safe harbor apply to charitable contribution payments made after August 27, 2018.

SALT Limit

An individual’s itemized deduction of SALT taxes is limited to $10,000 ($5,000 if married filing separately) for tax years beginning after 2017. Some states and local governments have adopted laws that allowed individuals to receive a state tax credit for contributions to certain charitable funds. These laws are aimed at getting around the SALT deduction limit by creating a charitable deduction for federal income tax purposes. Regardless of state and local law, however, federal law controls when determining charitable deductions for federal income tax purposes.

Return Benefit

The final regulations generally adopt the rule in proposal regulations ( NPRM REG-112176-18) that the receipt of a SALT credit for a charitable contribution is the receipt of a return benefit (quid pro quo benefit). If a taxpayer makes a payment or transfers property to Code Sec. 170(c) entity, he or she must reduce any charitable contribution deduction for federal income tax purposes if he or she receives or expects to receive a SALT credit in return. A taxpayer is generally is not required to reduce the charitable deduction on account of its receipt of state or local tax deductions. However, the taxpayer must reduce its charitable deduction if it receives or expects to receive state or local tax deductions in excess of the taxpayer’s payment or the fair market value of property transferred.

De Minimis Exception

The final regulations retain the de minimis exception that a taxpayer’s charitable deduction is not reduced if the SALT credits received as a return benefit do not exceed 15 percent of the taxpayer’s charitable payment. The 15-percent exception applies only if the sum of the taxpayer SALT credit received or excepted to receive does not exceed 15 percent of the taxpayer’s payment or of the fair market value of the property transferred.

Safe Harbor

The IRS has also issued Notice 2019-12 providing a safe harbor for certain individuals if any portion of a charitable contribution deduction disallowed due to the receipt of a SALT credit. Under the safe harbor, any disallowed portion of the charitable deduction may be treated as the payment of SALT taxes for the purposes of deducting taxes under Code Sec. 164.

Eligible taxpayers can use the safe harbor to determine their SALT deduction on their tax-year 2018 return. Those who have already filed may be able to claim a greater SALT deduction by filing an amended return if they have not already claimed the $10,000 maximum amount ($5,000 if married filing separately).

Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.

Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, created the new Section 199A QBI deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, under current law the QBI deduction will sunset after 2025. In addition to the QBI deduction’s impermanence, its complexity and ambiguous statutory language have created many questions for taxpayers and practitioners.

The IRS first released much-anticipated proposed regulations for the new QBI deduction, REG-107892-18, on August 8, 2018. The proposed regulations were published in the Federal Register on August 16, 2018. The IRS released the final regulations and notice of additional proposed rulemaking on January 18, 2019, followed by a revised version of the final regulations on February 1, 2019. Additionally, Rev. Proc. 2019-11 was issued concurrently to provide further guidance on the definition of wages. Also, a proposed revenue procedure, Notice 2019-7, was issued concurrently to provide a safe harbor under which certain rental real estate enterprises may be treated as a trade or business for purposes of Section 199A.

Wolters Kluwer recently interviewed Tom West, a principal in the passthroughs group of the Washington National Tax practice of KPMG LLP, about the Section 199A QBI deduction regulations. Notably, West formerly served as tax legislative counsel at the U.S. Department of the Treasury’s Office of Tax Policy. This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP.

Wolters Kluwer: What is your general overview of the revised, final regulations for the Section 199A Qualified Business Income (QBI) or "pass-through" deduction?

Tom West: I think it is admirable that Treasury and IRS were able to publish these final regulations so quickly and address so many of the comments and questions that the proposed regulations generated. I think they realized how important this particular package was to so many taxpayers for the 2018 filing season and, while questions obviously remain, having these rules out in time to inform decisions for this year’s tax returns is helpful. In particular, the liberalized aggregation rules and the additional examples regarding certain specified service trades or businesses (SSTBs) are the most consequential in my mind.

Wolters Kluwer: What should taxpayers and practitioners keep in mind in consideration of relying on either the proposed or final regulations for the 2018 tax year?

Tom West: I have to imagine that when choosing between the two, for most taxpayers the final regulations will ultimately provide the better result. The ability to aggregate at the entity level, which was only provided in the final regulations, may be a key consideration for those taxpayers with more complicated or tiered structures. That said, I do think taxpayers need to be careful in their aggregation modeling because you are going to be stuck with your aggregation once you’ve filed. It may be that some taxpayers wait on getting locked into a particular aggregation and continue to study the new rules—and even wait on additional guidance that may be coming. However, it may be important to note that the final regulations provide that if an individual fails to aggregate, the individual may not aggregate trades or businesses on an amended return—other than for the 2018 tax year.

Wolters Kluwer: How is the removal of the proposed 80 percent rule regarding specified service trades or businesses (SSTBs) from the final regulations likely to impact certain taxpayers?

Tom West: First of all, I think the removal of this rule is a demonstration of two important dynamics. One, the critical importance of the engagement of taxpayers in the comment process, and, two, the government’s willingness to listen and adapt in their rule-making. I don’t know if there are particular industries or taxpayers who will be impacted, but I do know that the change is a very logical and appropriate one, and logic doesn’t always prevail in these processes, so I’m happy to give the regulators credit when it does.

Wolters Kluwer: Which industries may have been helped or hindered by the final regulations with respect to SSTB rules?

Tom West: I’m not sure specific industries were helped, but the biggest positive in terms of the SSTB final rules is the carryover from the proposed regulations of the treatment of the skill or reputation provision. Had Treasury and the IRS gone in a different direction, there was a risk of that provision swallowing the rest of the 199A regime—not to mention how much more subjective the already sometimes difficult SSTB determinations would have become.

Wolters Kluwer: Are there any lingering, unanswered questions among taxpayers or practitioners that particularly stand out when determining what constitutes SSTB income?

Tom West: I think many taxpayers who have both SSTB and non-SSTB activities were hoping for more clarity, either in rules or examples, on how to acceptably segregate business lines or on when (or if) certain activities are inextricably tied together. There are also still lingering questions regarding when a trade or business is an SSTB—particularly in the field of health.

Wolters Kluwer: Were there any surprises in the final regulations?

Tom West: I don’t know if I’m surprised, knowing the concerns that led them to the decisions they made, but the fact that Treasury and IRS held the line on some of the SSTB-related rules is notable. I’m thinking specifically of the so-called "cliff" effect of the de minimis rule and the fact that owners of certain kinds of SSTB businesses, e.g., sports teams, are not allowed to benefit from the Section 199A deduction.

Taxpayers that plan to operate a business have a variety of choices. A single individual can operate as a C corporation, an S corporation, a limited liability company (LLC), or a sole proprietorship. Two or more individuals can form a partnership, a corporation (C or S), or an LLC.

Taxpayers that plan to operate a business have a variety of choices. A single individual can operate as a C corporation, an S corporation, a limited liability company (LLC), or a sole proprietorship. Two or more individuals can form a partnership, a corporation (C or S), or an LLC.

Nontax considerations

State law and nontax considerations are an important consideration in choosing the form of the business and may play a decisive role. A general partner of a partnership has unlimited liability for the debts of the business. This can be modified by using a limited partnership (LP), which must have at least one general partner and at least one limited partner. The general partner still have unlimited liability, but a limited partner's liability is limited to its contribution to the partnership. A corporation has limited liability; shareholders generally are not responsible for the liabilities of the corporation beyond their contributions to the entity.

Federal tax considerations

At the same time, it is crucial to consider federal tax requirements and consequences when choosing the form of business entity. A primary federal tax consideration is avoiding a double layer of tax on business income. This can be accomplished by operating as a passthrough entity, such as a partnership or S corporation. Income is not taxed at the entity level. It passes through to partners and shareholders and is taxed at their rates.

In contrast, C corporations are taxable entities. Furthermore, when a C corporation pays a dividend to its shareholders, this generally is taxable to the shareholder. It must be noted that income of a passthrough entity is allocable and taxable to its owners, whether or not the income is actually distributed to the partner or shareholder. Dividends are not taxed unless there is an actual distribution.

While a partnership is organized under state law, an S corporation is a creature of the federal tax system. The S corporation is a regular corporation for state law purposes.

Advantages of partnerships

Unlike an S corporation shareholder, anyone or any entity can be a partner. S corporations are limited to 100 shareholders; only certain individuals, estates and trusts are eligible to be shareholders. C corporations and nonresident aliens cannot be shareholders of an S corporation.

S corporations are limited to a single class of stock; income and losses must be allocated on the same basis to each shareholder. Having only one class of stock may affect the corporation's ability to raise capital. A partnership can have different classes of partners and has more flexibility for allocating income and losses to different types of partners.

Partnership liabilities can increase a partner's basis in the partnership, offsetting distributions of cash and reducing their taxation. The increased basis allowed partners to use losses generated by the partnership. Liabilities of an S corporation do not create stock basis; separate bases in stock and debt must be calculated. This lack of basis may limit the use of losses generated by the S corporation.

Contributions of appreciated property by a partner to the partnership generally are not taxable, even if the partner is not part of a group controlling the partnership. Contributions by a shareholder to a corporation are tax-free only if the shareholders are part of a group controlling 80 percent of the corporation after the contribution. However, a partnership must follow special allocation rules for handling built-in gain on contributed property, whereas S corporations do not have special allocation rules in this circumstance.

Conclusion

In general, a partnership offers more flexibility than an S corporation in the treatment of taxes. However, S corporation shareholders do have limited legal liability, while general partners are not insulated from the partnership's debts and liabilities.

The Tax Code contains many taxpayer rights and protections. However, because the Tax Code is so large and complex, many taxpayers, who do not have the advice of a tax professional, are unaware of their rights. To clarify these protections, the IRS recently announced a Taxpayer Bill of Rights, describing 10 rights taxpayers have when dealing with the agency.

The Tax Code contains many taxpayer rights and protections. However, because the Tax Code is so large and complex, many taxpayers, who do not have the advice of a tax professional, are unaware of their rights. To clarify these protections, the IRS recently announced a Taxpayer Bill of Rights, describing 10 rights taxpayers have when dealing with the agency.

Taxpayer education

The idea for a Taxpayer Bill of Rights has been percolating for several years. One of the leading proponents has been National Taxpayer Advocate Nina Olson. In January 2014, Olson told Congress that a Taxpayer Bill of Rights was long overdue. Even though the rights already existed, many taxpayers did not know about them. More taxpayer education was needed, Olson emphasized. Olson proposed that either Congress pass legislation or the IRS take administrative action to set out a Taxpayer Bill of Rights.

Olson proposed that a Taxpayer Bill of Rights be based on the U.S. Bill of Rights. Olson also recommended that the IRS describe taxpayer rights in non-technical language. Olson's proposal won support from IRS Commissioner John Koskinen earlier this year.

Taxpayer Bill of Rights

In June, IRS Commissioner John Koskinen and Olson together unveiled a 10-point Taxpayer Bill of Rights.

The provisions in the Taxpayer Bill of Rights are:

1. The Right to Be Informed
2. The Right to Quality Service
3. The Right to Pay No More than the Correct Amount of Tax
4. The Right to Challenge the IRS's Position and Be Heard
5. The Right to Appeal an IRS Decision in an Independent Forum
6. The Right to Finality
7. The Right to Privacy
8. The Right to Confidentiality
9. The Right to Retain Representation
10. The Right to a Fair and Just Tax System

"The Taxpayer Bill of Rights contains fundamental information to help taxpayers," Koskinen said. "These are core concepts about which taxpayers should be aware. Respecting taxpayer rights continues to be a top priority for IRS employees, and the new Taxpayer Bill of Rights summarizes these important protections in a clearer, more understandable format than ever before."

As the IRS Commissioner noted, the Taxpayer Bill of Rights does not create new rights. Rather, the Taxpayer Bill of Rights is intended to serve an educational purpose to help taxpayers understand better their existing rights.

IRS Publication 1

The Taxpayer Bill of Rights is highlighted prominently in IRS Publication 1, Your Rights as a Taxpayer. The IRS reported that updated Publication 1 will be sent to taxpayers when they receive notices on issues ranging from audits to collections. Updated Publication 1 initially will be available in English and Spanish, and later in Chinese, Korean, Russian and Vietnamese.

Additionally, the IRS created a special page on its website to highlight the Taxpayer Bill of Rights. The Taxpayer Bill of Rights will be displayed in all IRS offices.

If you have any questions about the IRS Taxpayer Bill of Rights, please contact our office.

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Since 2009, the IRS has operated an Offshore Voluntary Disclosure Program (OVDP) for U.S. taxpayers who have failed to disclose foreign assets or report foreign income from those assets to the IRS or Treasury. The program provides reduced penalties and other benefits, thus giving taxpayers an opportunity to address their past noncompliance and "become right" with the government.

Since 2009, the IRS has operated an Offshore Voluntary Disclosure Program (OVDP) for U.S. taxpayers who have failed to disclose foreign assets or report foreign income from those assets to the IRS or Treasury. The program provides reduced penalties and other benefits, thus giving taxpayers an opportunity to address their past noncompliance and "become right" with the government.

The IRS reports that 45,000 taxpayers have made voluntary disclosures since 2009 and have paid $6.5 billion in back taxes, interest, and penalties. In 2014, the IRS made important changes to the OVDP, with the expectation that the revised program will lead to a significant increase in the number of U.S. taxpayers who participate in the OVDP and report their undisclosed foreign assets.

Reporting obligations

U.S. taxpayers, including U.S. citizens living abroad, must report and pay taxes on their worldwide income, including income from foreign assets. Taxpayers must report foreign accounts on Form 1040, Schedule B; if their value exceeds certain thresholds, they must report on Form 8938, Statement of Foreign Financial Accounts. Taxpayers with accounts worth more than $10,000 must report the accounts on the Report of Foreign Bank and Financial Accounts (FBAR), which is filed with Treasury (not the IRS).

The IRS provided temporary OVDPs in 2009 and 2011. In 2012, it opened another OVDP that it continues to offer. Under the 2012 program, taxpayers must enter into a closing agreement with the IRS, provide updated returns for the prior eight years, and pay a penalty as high as 27.5 percent. In return, the IRS agrees not to pursue criminal penalties against taxpayers who may have willfully failed to report their foreign assets and/or income. In 2012, the IRS also unveiled a "streamlined procedures" program, with lighter penalties for U.S. taxpayers residing abroad who were nonwillful evaders.

2014 revisions

The revised streamlined procedures program has been expanded to taxpayers living in the United States. Participants are no longer required to have an unpaid tax balance of $1,500 or less per year. Participants self-certify that their noncompliance was not willful; the IRS will review their circumstances. Taxpayers must pay taxes on any unreported income from the past three years and must file required FBAR reports for the previous six years. Participants living abroad pay no penalty, while U.S. residents pay a miscellaneous offshore penalty of five percent.

The OVDP program for potentially willful evaders has been tightened. Taxpayers must provide increased information and must pay the 27.5 percent penalty at the time of application. In light of the expanded streamlined program, the IRS eliminated reduced penalties (five and 12.5 percent) that had been offered to nonwillful OVDP participants. To increase the pressure on nonfilers, the IRS increased the penalty from 27.5 percent to 50 percent for taxpayers who used a foreign financial institution or a facilitator that the IRS or Justice Department publicly acknowledges to be under investigation.

Taxpayers are advised to consult with their tax adviser about these programs and choose carefully. A taxpayer cannot participate in both the streamlined and the OVDP programs; it is an either/or proposition. If a taxpayer is confident that his or her noncompliance was not willful, the streamlined program is a reasonable choice. However, this program provides no protection from criminal prosecution, further audits, or proposed tax increases, if the IRS decides that the taxpayer acted willfully.

Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.

Business travel

You are considered “traveling away from home” for tax purposes if your duties require you to be away from the general area of your home for a period substantially longer than an ordinary day's work, and you need sleep or rest to meet the demands of work while away. Taxpayers who travel on business may deduct travel expenses if they are not otherwise lavish or extravagant. Business travel expenses include the costs of getting to and from the business destination and any business-related expenses at that destination.

Deductible travel expenses while away from home include, but are not limited to, the costs of:

• Travel by airplane, train, bus, or car to/from the business destination.
• Fares for taxis or other types of transportation between the airport or train station and lodging, the lodging location and the work location, and from one customer to another, or from one place of business to another.
• Meals and lodging.
• Tips for services related to any of these expenses.
• Dry cleaning and laundry.
• Business calls while on the business trip.
• Other similar ordinary and necessary expenses related to business travel.

Business mixed with personal travel

Travel that is primarily for personal reasons, such as a vacation, is a nondeductible personal expense. However, taxpayers often mix personal travel with business travel. In many cases, business travelers may able to engage in some non-business activities and not lose all of the tax benefits associated with business travel.

The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business.

Let’s look at an example. Amanda, a self-employed architect, resides in Seattle. Amanda travels on business to Denver. Her business trip lasts six days. Before departing for home, Amanda travels to Colorado Springs to visit her son, Jeffrey. Amanda’s total expenses are $1,800 for the nine days that she was away from home. If Amanda had not stopped in Colorado Springs, her trip would have been gone only six days and the total cost would have been $1,200. According to past IRS precedent, Amanda can deduct $1,200 for the trip, including the cost of round-trip transportation to and from Denver.

Weekend stayovers

Business travel often concludes on a Friday but it may be more economical to stay over Saturday night and take advantage of a lower travel fare. Generally, the costs of the weekend stayover are deductible as long as they are reasonable. Staying over a Saturday night is one way to add some personal time to a business trip.

Foreign travel

The rules for foreign travel are particularly complex.  The amount of deductible travel expenses for foreign travel is linked to how much of the trip was business related.  Generally, an individual can deduct all of his or her travel expenses of getting to and from the business destination if the trip is entirely for business.

In certain cases, foreign travel is considered entirely for business even if the taxpayer did not spend his or her entire time on business activities. For example, a foreign business trip is considered entirely for business if the taxpayer was outside the U.S. for more than one week and he or she spent less than 25 percent of the total time outside the U.S. on non-business activities. Other exceptions exist for business travel outside the U.S. for less than one week and in cases where the employee did not have substantial control in planning the trip.

Foreign conventions are especially difficult, but no impossible, to write off depending upon the circumstances. The taxpayer may deduct expenses incurred in attending foreign convention seminar or similar meeting only if it is directly related to active conduct of trade or business and if it is as reasonable to be held outside North American area as within North American area.

Tax home

To determine if an individual is traveling away from home on business, the first step is to determine the location of the taxpayer’s tax home. A taxpayer’s tax home is generally his or her regular place of business, regardless of where he or she maintains his or her family home. An individual may not have a regular or main place of business. In these cases, the individual’s tax home would generally be the place where he or she regularly lives.  The duration of an assignment is also a factor. If an assignment or job away from the individual’s main place of work is temporary, his or her tax home does not change. Generally, a temporary assignment is one that lasts less than one year.

The distinction between tax home and family home is important, among other reasons, to determine if certain deductions are allowed. Here’s an example.

Alec’s family home is in Tucson, where he works for ABC Co. 14 weeks a year.  Alec spends the remaining 38 weeks of the year working for ABC Co. in San Diego. Alec has maintained this work schedule for the past three years. While in San Diego, Alec resides in a hotel and takes most of his meals at restaurants.  San Diego would be treated as Alec’s tax home because he spends most of his time there. Consequently, Alec would not be able to deduct the costs of lodging and meals in San Diego.

Accountable and nonaccountable plans

Many employees are reimbursed by their employer for business travel expenses. Depending on the type of plan the employer has, the reimbursement for business travel may or may not be taxable. There are two types of plans: accountable plans and nonaccountable plans.

An accountable plan is not taxable to the employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and federal employment taxes. Accountable plans have a number of requirements:

• There must be a business connection to the expenditure. The expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his or her individual income tax return.

• There must be adequate accounting by the recipient within a reasonable period of time. Employees must verify the date, time, place, amount and the business purpose of the expenses.

• Excess reimbursements or advances must be returned within a reasonable period of time.

Amounts paid under a nonaccountable plan are taxable to employees and are subject to all employment taxes and withholding.  A plan may be labeled an accountable plan but if it fails to qualify, the IRS treats it as a nonaccountable plan. If you have any questions about accountable plans, please contact our office.

As mentioned, the tax rules for business travel are complex. Please contact our office if you have any questions.

Exempt organizations

Charitable organizations often are organized as tax-exempt entities. To be tax-exempt under Code Sec. 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes in Code Sec. 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization; that is, it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Churches that meet the requirements of Code Sec. 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.

Tax-exempt organizations must file annual reports with the IRS. If an organization fails to file the required reports for three consecutive years, its tax-exempt status is automatically revoked. Recently, the tax-exempt status of more than 200,000 organizations was automatically revoked. Most of these organizations are very small ones and the IRS believes that they likely did not know about the requirement to file or risk loss of tax-exempt status.  The IRS has put special procedures in place to help these small organizations regain their tax-exempt status.

Contributions

Contributions to qualified charities are tax-deductible. They key word here is qualified. The organization must be recognized by the IRS as a legitimate charity.

The IRS maintains a list of organizations eligible to receive tax-deductible charitable contributions. The list is known as Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986.  Similar information is available on an IRS Business Master File (BMF) extract.

In certain cases, the IRS will allow deductions for contributions to organizations that have lost their exempt status but are listed in or covered by Publication 78 or the BMF extract.  Additionally, private foundations and sponsoring organizations of donor-advised funds generally may rely on an organization's foundation status (or supporting organization type) set forth in Publication 78 or the BMF extract for grant-making purposes.

Generally, the donor must be unaware of the change in status of the organization. If the donor had knowledge of the organization’s revocation of exempt status, knew that revocation was imminent or was responsible for the loss of status, the IRS will disallow any purported deduction.

Churches

As mentioned earlier, churches are not required to apply for tax-exempt status. This means that taxpayers may claim a charitable deduction for donations to a church that meets the Code Sec. 501(c)(3) requirements even though the church has neither sought nor received IRS recognition that it is tax-exempt.

Foreign charities

Contributions to foreign charities may be deductible under an income tax treaty. For example, taxpayers may be able to deduct contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada.  Before donating to a foreign charity, please contact our office and we can determine if the contribution meets the IRS requirements for deductibility.

The rules governing charities, tax-exempt organizations and contributions are complex. Please contact our office if you have any questions.

As gasoline prices have climbed in 2011, many taxpayers who use a vehicle for business purposes are looking for the IRS to make a mid-year adjustment to the standard mileage rate. In the meantime, taxpayers should review the benefits of using the actual expense method to calculate their deduction. The actual expense method, while requiring careful recordkeeping, may help offset the cost of high gas prices if the IRS does not make a mid-year change to the standard mileage rate. Even if it does, you might still find yourself better off using the actual expense method, especially if your vehicle also qualifies for bonus depreciation.

Two methods

Taxpayers can calculate the amount of a deductible vehicle expense using one of two methods:

• Standard mileage rate
• Actual expense method

Under the standard mileage rate, taxpayers calculate the amount of the allowable deduction by multiplying all business miles driven during the year by the standard mileage rate. One of the chief attractions of the standard mileage rate is its ease of use. Taxpayers do not have to substantiate expense amounts; however, they must substantiate business purpose and other items. There are also limitations on use of the business standard mileage rate.

The standard mileage rate for 2011 for business use of a car (van, pickup or panel truck) is 51 cents-per-mile. The IRS calculates the standard mileage rate on an annual study of the fixed and variable costs of operating an automobile. The IRS set the standard mileage rate for 2011 in late 2010 when gasoline prices were lower than today. It is a flat amount, whether or not your vehicle is fuel efficient, operates on premium grade fuel, is brand new or ten years old, or is subject to high repair bills.

During past spikes in gasoline prices, the IRS has made a mid-year change to the standard mileage rate for business use of a vehicle. In 2008, the IRS increased the business standard mileage rate from 50.5 cents-per-mile to 58.5 cents-per-mile for last six months of 2008 because of high gasoline prices. The IRS made a similar mid-year adjustment in 2005 when it increased the business standard mileage rate after Hurricane Katrina.

At this time, it is unclear if the IRS will make a similar mid-year adjustment in 2011. IRS officials generally have declined to make any predictions. If the IRS does make a mid-year change, it will likely do so in late June, so the higher rate can apply to the last six months of 2011.

Actual expense method

Rather than rely on a mid-year adjustment from the IRS, which might not come, it's a good idea to compare the actual vehicle costs versus the business standard mileage rate. Taxpayers who use the actual expense method must keep track of all costs related to the vehicle during the year. The cost of operating a vehicle includes these expenses:

• Gasoline
• Repair and maintenance costs
• Cleaning
• Tires
• Depreciation
• Lease payments (if the taxpayer leases the vehicle)
• Interest on a vehicle loan
• Insurance
• Personal property taxes on the vehicle

"Doing the math" this year in weighing whether to take the actual expense method not only should factor in the cost of gasoline but also what depreciation or expensing deductions you will be gaining by using the actual expense method. Enhanced bonus depreciation and enhanced "section 179" expensing for 2011 can increase your deduction for a newly-purchased vehicle in its first year tremendously if the actual expense method is elected.

Certain other costs are deductible whether you take the actual expense method or the standard mileage rate. This group includes parking charges, garage fees and tolls. Expenses incurred for the personal use of your vehicle are generally not deductible. An allocation must be made when the vehicle is used partly for personal purposes

Switching methods

Once actual depreciation in excess of straight-line has been claimed on a vehicle, the standard mileage rate cannot be used for the vehicle in any future year. Absent that prohibition (which usually is triggered if depreciation is taken), a business can switch between the standard mileage rate and actual expense methods from year to year. Businesses that switch methods now cannot make change methods effective in mid-year; you must apply one method retroactively from January 1.

Recordkeeping

The actual expense method requires taxpayers to substantiate every expense. This recordkeeping requirement can be challenging. For example, taxpayers who fill-up often at the gas pump need to keep a record of every purchase. The same is true for tune-ups and other maintenance and repair activity. One way to simplify recordkeeping is to charge all vehicle related expenses to one credit card.

Most people are familiar with tax withholding, which most commonly takes place when an employer deducts and withholds income and other taxes from an employee's wages. However, many taxpayers are unaware that the IRS also requires payors to withhold income tax from certain reportable payments, such as interest and dividends, when a payee's taxpayer identification number (TIN) is missing or incorrect. This is known as "backup withholding."

Backup Withholding in General

A payor must deduct, withhold, and pay over to the IRS a backup withholding tax on any reportable payments that are not otherwise subject to withholding if:

• the payee fails to furnish a TIN to the payor in the manner required;
• the IRS or a broker notifies the payor that the TIN provided by the payee is incorrect;
• the IRS notifies the payor that the payee failed to report or underreported the prior year's interest or dividends; or
• the payee fails to certify on Form W-9, Request for Taxpayer Identification Number and Certification, that he or she is not subject to withholding for previous underreporting of interest or dividend payments.

The backup withholding rate is equal to the fourth lowest income tax rate under the income tax rate brackets for unmarried individuals, which is currently 28 percent.

Only reportable payments are subject to backup withholding. Backup withholding is not required if the payee is a tax-exempt, governmental, or international organization. Similarly, payments of interest made to foreign persons are generally not subject to information reporting; therefore, these payees are not subject to backup withholding. Additionally, a payor is not required to backup withhold on reportable payments for which there is documentary evidence, under the rules on interest payments, that the payee is a foreign person, unless the payor has actual knowledge that the payee is a U.S. person. Furthermore, backup withholding is not required on payments for which a 30 percent amount was withheld by another payor under the rules on foreign withholding.

Reportable Payments

Reportable payments generally include the following types of payments of more than $10:

• Interest;
• Dividends;
• Patronage dividends (payments from farmers' cooperatives) paid in money;
• Payments of $600 or more made in the course of a trade or business;
• Payments for a nonemployee's services provided in the course of a trade or business;
• Gross proceeds from transactions reported by a broker or barter exchange;
• Cash payments from certain fishing boat operators to crew members that represent a share of the proceeds of the catch; and
• Royalties.

Reportable payments also include payments made after December 31, 2011, in settlement of payment card transactions.

Failure to Furnish TIN

Payees receiving reportable payments through interest, dividend, patronage dividend, or brokerage accounts must provide their TIN to the payor in writing and certify under penalties of perjury that the TIN is correct. Payees receiving other reportable payments must still provide their TIN to the payor, but they may do so orally or in writing, and they are not required to certify under penalties of perjury that the TIN is correct.

A payee who does not provide a correct taxpayer identification number (TIN) to the payer is subject to backup withholding. A person is treated as failing to provide a correct TIN if the TIN provided does not contain the proper number of digits --nine --or if the number is otherwise obviously incorrect, for example, because it contains a letter as one of its digits.

The IRS compares TINs provided by taxpayers with records of the Social Security Administration to check for discrepancies and notifies the bank or the payer of any problem accounts. The IRS has requested banks and other payers to notify their customers of these discrepancies so that correct TINs can be provided and the need for backup withholding avoided.

Information reporting continues to expand as Congress seeks to close the tax gap: the estimated $350 billion difference between what taxpayers owe and what they pay. Despite the recent rollback of expanded information reporting for business payments and rental property expense payments, the trend is for more - not less - information reporting of various transactions to the IRS.

Transactions

A large number of transactions are required to be reported to the IRS on an information return. The most common transaction is the payment of wages to employees. Every year, tens of millions of Forms W-2 are issued to employees. A copy of every Form W-2 is also provided to the IRS. Besides wages, information reporting touches many other transactions. For example, certain agricultural payments are reported on Form 1099-G, certain dividends are reported on Form 1099-DIV, certain IRA distributions are reported on Form 1099-R, certain gambling winnings are reported on Form W-2G, and so on. The IRS receives more than two billion information returns every year.

Valuable to IRS

Information reporting is valuable to the IRS because the agency can match the information reported by the employer, seller or other taxpayer with the information reported by the employee, purchaser or other taxpayer. When information does not match, this raises a red flag at the IRS. Let's look at an example:

Silvio borrowed funds to pay for college. Silvio's lender agreed to forgive a percentage of the debt if Silvio agreed to direct debit of his monthly repayments. This forgiveness of debt was reported by the lender to Silvio and the IRS. However, when Silvio filed his federal income tax return, he forgot, in good faith, to report the forgiveness of debt. The IRS was aware of the transaction because the lender filed an information return with the IRS.

Expansion

In recent years, Congress has enacted new information reporting requirements. Among the new requirements are ones for reporting the cost of employer-provided health insurance to employees, broker reporting of certain stock transactions and payment card reporting (all discussed below).

Employer-provided health insurance. The Patient Protection and Affordable Care Act requires employers to advise employees of the cost of employer-provided health insurance. This information will be provided to employees on Form W-2.

This reporting requirement is optional for all employers in 2011, the IRS has explained. There is additional relief for small employers. Employers filing fewer than 250 W-2 forms with the IRS are not required to report this information for 2011and 2012. The IRS may extend this relief beyond 2012. Our office will keep you posted of developments.

Reporting of employer-provided health insurance is for informational purposes only, the IRS has explained. It is intended to show employees the value of their health care benefits so they can be more informed consumers.

Broker reporting. Reporting is required for most stock purchased in 2011 and all stock purchased in 2012 and later years, the IRS has explained. The IRS has expanded Form 1099-B to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stock brokers and mutual fund companies will use this form to make these expanded year-end reports. The expanded form will also be used to report whether gain or loss realized on these transactions is long-term (held more than one year) or short-term (held one year or less), a key factor affecting the tax treatment of gain or loss.

Payment card reporting. Various payment card transactions after 2010 must be reported to the IRS. This reporting does not affect individuals using a credit or debit card to make a purchase, the IRS has explained. Reporting will be made by the payment settlement entities, such as banks. Payment settlement entities are required to report payments made to merchants for goods and services in settlement of payment card and third-party payment network transactions.

Roll back

In 2010, Congress expanded information reporting but this time there was a backlash. The PPACA required businesses and certain other taxpayers to file an information return when they make annual purchases aggregating $600 or more to a single vendor (other than a tax-exempt vendor) for payments made after December 31, 2011. The PPACA also repealed the long-standing reporting exception for payments made to corporations. The Small Business Jobs Act of 2010 required information reporting by landlords of certain rental property expense payments of $600 or more to a service provider made after December 31, 2011.

Many businesses, especially small businesses, warned that compliance would be costly. After several failed attempts, Congress passed legislation in April 2011 (H.R. 4, the Comprehensive 1099 Taxpayer Protection Act) to repeal both expanded business information reporting and rental property expense reporting.

The future

In April 2011, IRS Commissioner Douglas Shulman described his vision for tax collection in the future in a speech in Washington, D.C. Information reporting is at the center of Shulman's vision.

Shulman explained that the IRS would get all information returns from third parties before taxpayers filed their returns. Taxpayers or their professional return preparers would then access that information, online, and download it into their returns. Taxpayers would then add any self-reported and supplemental information to their returns, and file their returns with the IRS. The IRS would embed this core third-party information into its pre-screening filters, and would immediately reject any return that did not match up with its records.

Shulman acknowledged that this system would take time and resources to develop. But the trend is in favor of more, not less, information reporting.

A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.

The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.

A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).

LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.

Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Basic rules

The "basic" rules governing estimated tax payments are not always synonymous with "straightforward" rules. The following addresses some basic rules regarding estimated tax payments by corporations and individuals:

Corporations. For calendar-year corporations, estimated tax installments are due on April 15, June 15, September 15, and December 15. If any due date falls on a Saturday, Sunday or legal holiday, the payment is due on the first following business day. To avoid a penalty, each installment must equal at least 25 percent of the lesser of:

• 100 percent of the tax shown on the corporation's current year's tax return (or of the actual tax, if no return is filed); or
• 100 percent of the tax shown on the corporation's return for the preceding tax year, provided a positive tax liability was shown and the preceding tax year consisted of 12 months.

A lower installment amount may be paid if it is shown that use of an annualized income method, or for corporations with seasonal incomes, an adjusted seasonal method, would result in a lower required installment.

Individuals. For individuals (including sole proprietors, partners, self-employeds, and/or S corporation shareholders who expect to owe tax of more than $1,000), quarterly estimated tax payments are due on April 15, June 15, September 15, and January 15. Individuals who do not pay at least 90 percent of their tax through withholding generally are required to estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year. The required annual payment is generally the lesser of:

• 90 percent of the tax ultimately shown on your return for the 2015 tax year, or 90 percent of the tax due for the year if no return is filed;
• 100 percent of the tax shown on your return for the preceding (2014) tax year if that year was not for a short period of less than 12 months; or
• The annualized income installment.

For higher-income taxpayers whose adjusted gross income (AGI) shown on your 2014 tax return exceeds $150,000 (or $75,000 for a married individual filing separately in 2015), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.

Adjusting estimated tax payments

If you expect an uneven income stream for 2015, your required estimated tax payments may not necessarily be the same for each remaining period, requiring adjustment. The need for, and the extent of, adjustments to your estimated tax payments should be assessed at the end of each installment payment period.

For example, a change in your or your business's income, deductions, credits, and exemptions may make it necessary to refigure estimated tax payments for the remainder of the year. Likewise for individuals, changes in your exemptions, deductions, and credits may require a change in estimated tax payments. To avoid either a penalty from the IRS or overpaying the IRS interest-free, you may want to increase or decrease the amount of your remaining estimated tax payments.

Refiguring tax payments due

There are some general steps you can take to reconfigure your estimated tax payments. To change your estimated tax payments, refigure your total estimated tax payments due. Then, figure the payment due for each remaining payment period. However, be careful: if an estimated tax payment for a previous period is less than one-fourth of your amended estimated tax, you may be subject to a penalty when you file your return.

If you would like further information about changing your estimated tax payments, please contact our office.

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

What your return says is key

If it's not the time of filing, what really increases your audit potential? The information on your return, your income bracket and profession--not when you file--are the most significant factors that increase your chances of being audited. The higher your income the more attractive your return becomes to the IRS. And if you're self-employed and/or work in a profession that generates mostly cash income, you are also more likely to draw IRS attention.

Further, you may pique the IRS's interest and trigger an audit if:

• You claim a large amount of itemized deductions or an unusually large amount of deductions or losses in relation to your income;
• You have questionable business deductions;
• You are a higher-income taxpayer;
• You claim tax shelter investment losses;
• Information on your return doesn't match up with information on your 1099 or W-2 forms received from your employer or investment house;
• You have a history of being audited;
• You are a partner or shareholder of a corporation that is being audited;
• You are self-employed or you are a business or profession currently on the IRS's "hit list" for being targeted for audit, such as Schedule C (Form 1040) filers);
• You are primarily a cash-income earner (i.e. you work in a profession that is traditionally a cash-income business)
• You claim the earned income tax credit;
• You report rental property losses; or
• An informant has contacted the IRS asserting you haven't complied with the tax laws.

DIF score

Most audits are generated by a computer program that creates a DIF score (Discriminate Information Function) for your return. The DIF score is used by the IRS to select returns with the highest likelihood of generating additional taxes, interest and penalties for collection by the IRS. It is computed by comparing certain tax items such as income, expenses and deductions reported on your return with national DIF averages for taxpayers in similar tax brackets.

E-filed returns.  There is a perception that e-filed returns have a higher audit risk, but there is no proof to support it. All data on hand-written returns end up in a computer file at the IRS anyway; through a combination of a scanning and a hand input procedure that takes place soon after the return is received by the Service Center. Computer cross-matching of tax return data against information returns (W-2s, 1099s, etc.) takes place no matter when or how you file.

Early or late returns. Some individuals believe that since the pool of filed returns is small at the beginning of the filing season, they have a greater chance of being audited. There is no evidence that filing your tax return early increases your risk of being audited. In fact, if you expect a refund from the IRS you should file early so that you receive your refund sooner. Additionally, there is no evidence of an increased risk of audit if you file late on a valid extension. The statute of limitations on audits is generally three years, measured from the due date of the return (April 18 for individuals this year, but typically April 15) whether filed on that date or earlier, or from the date received by the IRS if filed after April 18.

Amended returns. Since all amended returns are visually inspected, there may be a higher risk of being examined. Therefore, weigh the risk carefully before filing an amended return. Amended returns are usually associated with the original return. The Service Center can decide to accept the claim or, if not, send the claim and the original return to the field for examination.