Tag Archives: irs

IRS Announces S Corporation Loss Campaign

S Corporations
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The Internal Revenue Service (IRS) LB&I audit division announced a series of campaigns for issues they have identified as ripe for noncompliance. LB&I handles tax examinations for businesses with assets in excess of $10 million. The success of these campaigns typically trickles down to other audit divisions and can become standard procedure.

One campaign is targeting S corporations that report losses to its shareholders, to verify that the shareholder has sufficient basis to deduct the loss. This does not mean every such S corporation will receive an audit notice. Some may be audited while others may receive letters questioning particular items on the return, asking for an explanation or clarification.

If you are a shareholder in an S corporation, we recommend that you review your basis schedule for accuracy or work with your tax advisor to begin maintaining one. It is the shareholder’s responsibility to support any loss claimed on the tax return.

For questions about this topic or more information, please contact Aronson’s Laurence C. Rubin, CPA, at 301.231.6200.

 

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Filing Date Change for Annual Employee and Information Returns

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Some IRS filing dates have changed for the 2016 year; annual employee and information returns must be filed sooner than ever. The Consolidated Appropriations Act of 2016 calls for changes to help combat tax fraud, including the new accelerated due dates for employer copies of forms W-2 and 1099-MISC. The previous filing deadline of February 28, for forms W-2 to the Social Security Administration and 1099-MISC to the Internal Revenue Service, has changed to January 31, of the following year.

In addition to being the 2016 employer filing deadline, Tuesday, January 31, 2017, is also when these forms must be distributed to employees.

IRS-imposed penalties can be substantial. If you miss the filing deadline, it could result in late fees ranging from $50 to $260 per filed form. Furthermore, keep in mind that if you have 250 or more forms to submit, the forms must be filed electronically. An IRS penalty will be imposed on companies who violate the electronic filing rule by submitting paper forms.

If you have questions regarding the new filing deadlines or would like to discuss your particular situation, please call your Aronson tax advisor at 301.231.6200.

 

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Is Your IRS Notice Real?

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The latest incarnation of aggressive scammers impersonating IRS agents features fake IRS notices arriving by e-mail or snail mail.

According to the IRS, the fake notices labeled as “CP2000”, purport to be related to the Affordable Care Act and request information related to 2014. For further details, see the IRS announcement on this topic.

The CP2000 is a legitimate notice number that is mailed to taxpayers, which makes it even harder for you to realize it could be fraudulent. When in doubt, show the notice to your tax advisor, or call the IRS at 1.800.829.1040 to ask about the status of your account. Do not call the number shown on a notice you are uncertain about.

Any payments made to the IRS by check should be payable to United States Treasury. Such a check is far less likely for a recipient other than the IRS to cash. Better to be safe than sorry! Consider making all payments directly to the IRS online using DirectPay or setting up an EFTPS account. Online payments provide a confirmation number at the time payment is made, and enough information to your bank that in the event of a problem, the destination of the funds can be traced.

For further information or to discuss your circumstances, please contact Larry Rubin, CPA, at 301.231.6200 or lrubin@aronsonllc.com.

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Mandatory ITIN Renewal

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Important changes coming in October – If you are a taxpayer with an Individual Taxpayer Identification Number (ITIN), there is an important change that takes effect October 1, 2016. ITINs must be renewed if one of the following two criteria applies:

  • The ITIN has not been used on any tax filing for 2013, 2014, or 2015.
  • Issuance prior to 2013, with middle digits 78 or 79 (9xx-78-xxxx and 9xx-79-xxxx).

You can only renew your ITIN by submitting form W-7 to the IRS by mail or at a walk-in IRS office. The link provided here is to the most recent form, which is the only version that may be used for ITIN renewal. While the renewal process can take up to 60 days, failing to renew your ITIN prior to a tax return filing will result in refund delays and loss of various tax credits, until it’s reestablished.

Don’t wait for a renewal notice in the mail from the IRS to affected taxpayers, we recommend that those with ITINs be proactive and renew if necessary, to be prepared for this upcoming filing season.

For more information, please contact Aronson Partner, Larry Rubin, CPA, at lrubin@aronsonllc.com or 301.231.6200.

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Day Trader? What You Need to Know

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Individuals trading securities have great incentive to classify themselves as traders. By default, buying and selling publicly traded securities is an investment activity, with gains and losses being capital in nature, and related expenses being deducted as itemized deductions.

But what about the downside to investor treatment? Net losses are limited to deducting only $3,000 each year, and the itemized deductions are reduced by 2% of your adjusted gross income and killed off entirely if you are in the alternative minimum tax. Yet net gains are typically all short-term, receiving ordinary income treatment. Furthermore, wash sale rules apply. A wash sale occurs when a security is sold at a loss and the same or substantially identical security is purchased 30 days before or after that trade. The impact of the wash sale is that the loss is not deductible, but instead added to the cost-basis of the related security.

By contrast, a day trader, while still reporting trades like an investor, is able to deduct the trade-related expenses against other income as an ordinary loss. Expenses such as trade analysis software and subscriptions become usable as a deduction.

The day trader can make a mark-to-market election (also known as MTM or 475(f) election) by filing a statement with the IRS by the original due date of the tax return for the year preceding the year it is to take effect. For example, an individual would file this election by April 15, 2017, and the election would then be effective retroactive to January 1, 2017, and continue to be effective until a revocation is filed. Such a revocation follows the same timing rules as the election.

The benefits of the MTM are two-fold:

  • Net losses are unlimited. Contrary to capital gain treatment, day trades are all ordinary income or loss, and a net loss for the year is fully deductible.
  • The transactions are not subject to the wash sale rules.

A potential downside of this election is that any securities held at year-end are treated as sold at the fair market value on December 31, (for a calendar year taxpayer). Those securities now marked to market have their cost basis adjusted to the deemed sale price.

The comparison chart below outlines the various tax treatments and reporting for the various options.

 

Investor

Day Trader – no MTM

Day Trader – MTM

Gains and losses
  • Capital
  • Subject to wash sale rules
  • Capital
  • Subject to wash sale rules
  • Ordinary
  • Holdings at year end treated as sold on 12/31
Reporting
  • Reported on schedule D
  • Subject to capital loss limits
  • Reported on schedule D
  • Subject to capital loss limits
  • Reported on form 4797
  • No limitation on net loss deduction
Expenses
  • Miscellaneous itemized deduction
  • Subject to 2% phaseout and AMT
  • Schedule C
  • Deductible against other income without limitation
  • Schedule C
  • Deductible against other income without limitation

Who is an investor and who is a trader is not a simple matter of self-classification. The distinction can be tough, and the IRS even tougher, since trader status has significant advantages over investor status. Trading must be substantial, continuous, and regular; done to try to take advantage of the swings in the daily price movements; and whose aim is to profit from those short term changes.

Factors the IRS looks at in evaluating trader position are:

  • Time period between transaction opens and closes
  • Aggregate dollar amount traded and frequency of trades
  • Amount of time devoted to trading
  • Reliance on trading to provide income

“Substantial, continuous, and regular” is the area that is most often disputed. There is no bright line test, no benchmarks. Each scenario has to be evaluated, taking all factors into account, in order to reach the right conclusion.

If you consider yourself a day trader or are contemplating becoming one and wish to discuss your situation, please contact Aronson’s tax controversy lead partner Laurence C. Rubin, CPA at 301.222.8212.

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