IRS Issues Guidance on Health Care Reporting Requirements for 2017

by Joshua A. Diveley

The IRS issued guidance October 17, 2017, indicating Forms 1040 for the 2017 tax year will not be accepted if the taxpayer does not report on the health coverage reporting requirements of the Affordable Care Act (ACA). For prior tax years, returns that did not report required ACA information were delayed for processing, but it did not prevent the return from ultimately being processed and any applicable refund from being issued.

In general, the ACA requires taxpayers to obtain minimum essential health insurance coverage for themselves and any dependents. If sufficient coverage is not obtained, the ACA imposes a penalty. Form 1040 directs taxpayers to report the existence or non-existence of essential coverage or whether an exemption from coverage applies.

The IRS guidance is available at: https://www.irs.gov/tax-professionals/aca-information-center-for-tax-professionals.

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IRS Notice Provides Penalty Relief to Certain Partnership Return Filing Taxpayers

by Monte L. Schatz

The IRS has issued Notice 2017-47 that provides penalty relief to partnerships that filed certain untimely returns or untimely requests for extension of time who filed those returns for the first taxable year that began after December 31, 2015.

Section 2006 of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Surface Transportation Act), Public Law 114–41, 129 Stat. 443 (2015), amended section 6072 of the Internal Revenue Code (the Code) and changed the date by which a partnership must file its annual return. The due date for filing the annual return of a partnership changed from the fifteenth day of the fourth month following the close of the taxable year (April 15 for calendar-year -2- taxpayers) to the fifteenth day of the third month following the close of the taxable year (March 15 for calendar-year taxpayers). The new due date applies to the returns of partnerships for taxable years beginning after December 31, 2015.

Many partnerships failed to timely file their various partnership returns (1065, 1065-B, 8804, 8805 or 7004 Extension requests for any of the other various partnership returns).  The assumption of these taxpayers was that the normal deadlines for their 2016 Partnership returns applied (namely April 18, 2017 for the actual returns and September 15, 2017 for those that filed the Form 7004 extension for any of these returns).    Normally in these circumstances the taxpayer is subject to late filing penalties; however, the new filing deadlines shortening the return filing period by one month resulted in many taxpayers filing late returns and the IRS has provided relief for those late filed returns.

The IRS in Notice 2017-47 has announced relief will be granted automatically for penalties for failure to timely file Forms 1065, 1065-B, 8804, 8805, and any other returns, such as Form 5471, for which the due date is tied to the due date of Form 1065 or Form 1065-B. Partnerships that qualify for relief and have already been assessed penalties can expect to receive a letter within the next several months notifying them that the penalties have been abated.  For reconsideration of a penalty covered by this notice that has not been abated by February 28, 2018, contact the number listed in the letter that notified you of the penalty or call (800) 829-1040 and state that you are entitled to relief under Notice 2017-47.

SOURCE: IRS Guidewire Issue Number N-2017-47

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IRS Adopts Simplified Form for Small Nonprofits

By James Pieper

The Internal Revenue Service (IRS) has adopted a new, shorter online form for small charitable organizations seeking nonprofit status.

The Form 1023-EZ reduces the existing 26-page form to three pages for qualifying groups.  Organizations with gross receipts of $50,000 or less and assets of $250,000 or less will be able to use the streamlined process.

In a media release, IRS Commissioner John Koskinen stated: “This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well. The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.”

The new form can only be completed online and will help the IRS clear its backlog of more than 60,000 pending nonprofit applications.

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IRS Denies Tax-Favored Status to Certain “Self-Funding” Health Plans

By James Pieper

The Internal Revenue Service (“IRS”) has issued a memorandum (“Memorandum”) indicating that it will deny tax-favored status to payments received under certain health plans marketed by their promoters as “self-funding.”

The Memorandum indicates that payments made under such plans will be considered “income” on the part of the employee (and thus not excluded from “gross income” for purposes of the income tax), and will be considered “wages” for purposes of the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes paid by the employer.

The Memorandum cites plans being offered by promoters as “fixed indemnity health plans” with associated “wellness plans.”  The benefit promoted is that the plans are “self-funding” because the purported tax benefits will offset the expense, and employees can gain apparently tax-favored payments as a result of the plan while reducing the FICA purportedly owed by the employer.

The key to the plans is that the employee receives a monthly payment, not as income, but as a “health benefit” in return for a simple but voluntary act such as calling a toll-free number to obtain health advice or participating in biometric screening.  So long as the employee undertakes one act per month, then the benefit is paid.  Promoters of such plans contend that the employee receives comparable take-home pay and the employer receives tax benefits, all on a self-funded basis.

The IRS, however, concludes in the Memorandum that the plans do not constitute “insurance” because the “health benefit” is almost certain to be paid, and, on an actuarial basis, the amount of “benefits” is almost certain to exceed the amount paid as “premium.”

Accordingly, the IRS concluded that payments related to the so-called “self-funding” plans will be considered “income” and “wages” – and, therefore, the apparent “self-funding” mechanism obtained via tax-favored treatment is illusory.

Any employers considering any sort of “self-funding” plan should consider the Memorandum as strong evidence that such a plan is not likely to produce the tax benefits promised.

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Federal Judge Orders IRS to Refund Tax Preparers for PTIN Fees

In 2014, tax return preparers brought a federal class action lawsuit challenging the legality of fees charged by the IRS for PTINs (Preparer Tax Identification Number). Regulations promulgated in 2010 and 2011 imposed requirements on tax return preparers including obtaining a specific PTIN and paying a fee associated with obtaining such PTIN. Currently, the application and renewal fee for a PTIN is $50.00.

The preparers in the class action argued that the fees are unlawful since tax preparers receive no special benefits from the PTIN and secondly the fee is unreasonable in comparison to the costs the IRS incurs to issue the PTIN.

On June 1, 2017, Judge Royce C. Lamberth of the United States District Court for the District of Columbia held that the IRS may continue to require PTINs but granted summary judgment in favor of the tax preparers stating, in part, that the IRS may not charge fees for issuing PTINs. Following a review of applicable case law, the Court found that PTINs are not a “service or thing of value” provided by the IRS. The IRS will be enjoined from charging fees in the future and is required to refund fees charged for the PTINs to all members of the class.

The order granting summary judgment is not yet a final judgment. Such final judgment will indicate the amount owed to each member of the class and may be subject to appeal by the IRS.

For more information, including court documents and the opinion rendered by Judge Lamberth see http://ptinclassaction.com/

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IRS’s Large Business & International Division to Implement Campaigns

The Internal Revenue Service (“IRS”) Large Business and International (“LB&I”) division recently announced the roll-out of thirteen campaigns as part of the IRS’s examination process.  A campaign is an issue-based compliance process that centers on focused examinations.  These campaigns cover a range of topics, including positions on related party transactions and S Corporation losses claimed in excess of basis.  Campaigns are a new approach to enforcement by the IRS that the IRS hopes will identify the most serious tax administration risks, create specific plans to move toward compliance, and effectively deploy IRS resources.  A taxpayer can be the subject of multiple campaigns during an examination.

The IRS will issue “soft letters” to some taxpayers, in which the IRS identifies the campaign issue and indicates the taxpayer’s return appears to include this position.  The letter will articulate the IRS’s legal position and ask whether the taxpayer agrees to change its position by amending the return.  Soft letters will not be released publicly.

The IRS recently informed taxpayers that the receipt of a soft letter does not mean the IRS has opened an examination.  Further, taxpayers are not required to respond to the letters.  However, failure to respond could lead to an examination.

Taxpayers should be aware that this new approach means businesses and high-net-worth individuals dealing with any of the identified issues may face increased IRS audit risk.  These taxpayers should work with their legal advisors to avoid or prepare for IRS challenges.

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IRS Issues Tax and Reporting Relief for Proposed Fiduciary Standard Consistent with Department of Labor Regulations

By Monte Schatz

There have been a significant series of regulatory announcements and rulings related to the fiduciary duty and its application to employee benefit plans.  The final fiduciary duty rule became effective on June 7, 2016, and has an applicability date of April 10, 2017. The President by Memorandum to the Secretary of Labor directed the Labor Department to examine the impact of the fiduciary duty rule.  On March 2nd the DOL published 82 FR 12319 seeking public comments about questions raised in the Presidential Memorandum.  The March 2nd notice also provided that a 60-day delay in implementation would be effective on the date of publication of a final rule

The Principal Transactions Exemptions and the accompanying Best Interest Contract provisions, included as part of the fiduciary duty rule, also have an applicability date of April 10, 2017, with a phased implementation period ending on January 1, 2018. The BIC Exemption effectively states that the fiduciary advisor must sign a “Best Interests Contract” (BIC) with the client, stipulating that the advisor will provide advice that is in the Best Interests of the client.   The Principal Transactions Exemption allows compensation for certain transactions by certain broker-dealers, insurance agents, and others that will act as investment advice fiduciaries that would otherwise violate prohibited transaction rules that trigger excise taxes and civil liability.

Most investment industry groups’ concerns regarding any non-compliance during a “gap period” of the financial fiduciary rule focused on Department of Labor and its potential civil liability enforcement provisions as outlined under ERISA.  Additional concerns were raised concerning Internal Revenue Service enforcement provisions found in Internal Revenue Code §4975 prohibited transaction rules that provides for the imposition of excise taxes for violations of that rule.

As a result of delays of the Fiduciary Standard rules, the Department of Labor published Field Assistance Bulletin (FAB) 2017-01.  FAB 2017-01 provides that, to the extent circumstances surrounding its decision on the proposed delay of the April 10 applicability date give rise to the need for other temporary relief, including retroactive prohibited transaction relief, the DOL will consider taking such additional steps as necessary with respect to the arrangements and transactions covered by the DOL temporary enforcement policy and any subsequent related DOL enforcement guidance.

In Announcement 2017–4 the IRS stated, Because the Code and ERISA contemplate consistency in the enforcement of the prohibited transaction rules by the IRS and the DOL, the Treasury Department and the IRS have determined that it is appropriate to adopt a temporary excise tax non-applicability policy that conforms with the DOL’s temporary enforcement policy described in FAB 2017-01. Accordingly, the IRS will not apply § 4975 and related reporting obligations with respect to any transaction or agreement to which the DOL’s temporary enforcement policy, or other subsequent related enforcement guidance, would apply.

SOURCES:

http://www.asppa.org/News/Article/ArticleID/8480

https://www.irs.gov/pub/irs-drop/a-17-04.pdf

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