Carefree Tax Service Inc.

Happy 2018!

Following is an update of a few of the new 2017/2018 tax law changes. In addition, our website is www.carefreetax1040.com. There are about 90 financial calculators, along with a number of financial and tax links including IRS and WI/IL Dept of Revenue websites. This site is packed with lots of information that will be helpful for both tax information and planning. If you are a returning client and would like a personalized client organizer for tax planning, request one via email at wendy@carefreetax1040.com. An organizer is also on the website under the info center tab. Call 608-756-9930 to set up your appointment.

We hope 2017 was a year full of good memories. Looking forward to seeing you soon!

Wendy and Robin

2017/2018 TAX PLANNING & TIPS

Please Bring Data Sheet to your Appointment.

It is very important that you fill the attached data sheet out, front and back, and bring it to your appointment with required paperwork. It will help with your organization. Please also bring any updated bank information for direct deposit of refunds. We very much appreciate your cooperation!

REFUNDS delayed for some. The IRS will wait until February 15th to process any refunds due to taxpayers claiming the Earned Income Tax Credit or refundable Additional Child Tax Credit. Wisconsin may not issue refunds before March 1^st unless employer has filed all required forms including W-2’s to the state.

Identity Theft

IRS Identity Verification. If you have had a breach of identity with a 2016 filed tax return, you should be receiving an IRS letter with a PIN number that is required to file your return. Be sure to bring that to your appointment. You will receive a new number every year.

Wisconsin Identity Verification - 4 years ago WI implemented a quiz to ensure the taxpayer's information was not used by someone else to claim a tax refund. The department sent out letters, which many people threw away or ignored. This resulted in late refunds, with some having to go through the appeal process. This new program stopped over millions in fraudulent refunds. If you receive any mail from WI DOR please open it! If you have any questions or concerns, call our office.

Phishing Warning! –**NEW** –A new law has been enacted to allow 4 private debt collection services to collect taxes from older accounts. A person will receive a letter from both the IRS and the private debt collection service. Please verify this by calling the IRS if you have any questions on past due IRS balances. The debt services may call people (and I know this is confusing), but will never ask for credit card payments, or debit/ITunes card payments. The same respect and collection rules apply to these debt collectors as to the IRS. BUT, there continues to be a variety of phone, email, and snail mail scams that are targeting people across the country, demanding payment. A caller will ask you to verify personal information, then threaten to sue, put you in jail, etc. As far as the IRS goes, they only contact people by mail – not by phone – about unpaid taxes. The IRS will NOT ask for payment using a pre-paid debit card, I-Tunes card, or wire transfer and they won’t ask for a credit card number over the phone. The scammers are now creating letters that look like legitimate IRS letters. If you receive a letter and it doesn't make sense to you, bring it into the office. Also, be alert for email scams that use the IRS name and ask for personal or financial information. Never open up an email from the IRS, as there may be a virus attached. Forward all scam emails to phishing@irs.gov. If you get a scamming letter or phone call, call 800-366-4484. The scammers cannot be caught unless the calls are reported. These scammers have stolen millions of dollars from people, especially the elderly.

1099-Misc Requirement If you are a business owner or landlord, and you paid any contractor at least $600 during 2017, you need to provide the contractor with a 1099-misc. Going forward, these are due to be filed by January 31. There will be penalties of $50 per return if filed February 1-28, $100 if filed between March 1 and July 31, $260 after Aug 1, and $530 if there is intentional disregard. Please call the office asap for more information or if you need my assistance to complete these.

Reminder - Form 1098-T/Tuition credit requirement Higher education institutions required to file Form 1098-T must include the total amount of payments received, beginning with the 2017 school year. **You will also need to bring verification of payments paid to the institution in 2017 to your tax appointment. We cannot file a tax return without this information.

Mortgage Insurance Premiums are no longer deductible beginning with the 2017 tax year.

New 2017 Tax Laws

Eased Casualty Loss Rules - 10 percent limitation is removed: If you are claiming a disaster loss, the law eliminates the requirement that personal casualty loss must exceed 10% of your adjusted gross income. See 2018 Tax Law changes for additional new rules.

Special Rule for EITC and the Child Tax Credit - Allows taxpayers to use lower income to qualify for credits: Taxpayers can use income from 2016 instead of 2017, if it is lower, to qualify for the Earned Income Tax Credit and the Child Tax Credit.

Mortgage Debt cancelled from the short sale, foreclosure, or mortgage modification for Qualified Principal Residences is no longer excludable from income under the Mortgage Forgiveness Debt Relief Act. This was extended to the end of 2016. **It still may be excludable if you are found to be insolvent.

Medical Expense deduction floor for those who itemize was temporarily reduced back to 7.5% of income for all taxpayers. See 2018 Tax Law changes for additional new rules.

Standard mileage rate. Taxpayers can use the standard mileage rate (in lieu of actual expenses) in computing the deductible costs of operating automobiles owned or leased by them for business purposes. Employees with unreimbursed travel may deduct an amount computed using the standard mileage rate only as a miscellaneous itemized deduction, subject to 2% floor of adjusted gross income. The following rates are applicable for the 2017 tax year:

Business $.535

Medical and Moving .17

Charitable .14

New for Wisconsin

Homestead credit Claimants who are under age 62 and NOT disabled must have earned income to claim homestead credit.

IRA as charitable contribution will now be excluded from WI income, as well as their federal income for tax years beginning in 2018.

2018/2019 Tax Law Changes

2018 Retirement Plan Limitations The contribution limit for most employee plans increased from $18,000 to $18,500. The catch-up contribution limit for employees aged 50 and over remains unchanged at $6,000.

IRA Contributions The limit on annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over remains at $1,000.

Mandate to buy health insurance is eliminated beginning in 2019. There will no longer be a penalty for not having it. The penalty still applies for 2018.

Lower individual tax rates There are still 7 tax brackets, but they are lower. 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Standard deduction nearly doubles. Single will be $12,000 and married will be $24,000. The net effect of that is the percentage of filers who choose to itemize would drop sharply, since the only reason to do so is if your deductions exceed your standard deduction.

Elimination of personal exemption. For 2017, that amount is $4050 for each taxpayer and dependent on a tax return.

The State and Local tax deduction will cap at $10,000. This includes state withholding/sales tax and property taxes.

Business income that passes through to an individual from a pass-through entity and income attributable to a sole proprietorship will be taxed at individual tax rates less a deduction of up to 20% to lower the final tax bill. The deduction is subject to limits and restrictions. The threshold amount is the amount above which both the limitation on specified service businesses and the wage limit apply. This threshold amount is taxable income of $157,500 for individual taxpayers and $315,000 for married taxpayers filing jointly. Phase-ins apply: that means that the benefit decreases as income increases. If your taxable income is below the threshold amount, the deductible amount for each of your businesses is simply 20% of your qualified business income (QBI) with respect to each business. Basically, if your income is $50,000 and your QBI is $40,000, then your deduction is $8,000, or 20% of your QBI. If you are above the threshold amount, you are subject to limitations and exceptions which are determined by your occupation and other criteria…may be complicated based on your individual situation. Possibly some rental income will be included. More on this throughout 2018, as we are expecting more guidance from the IRS as to specifics.

Child Tax Credit doubles to $2000 for children under 17. The income limit also increased for a single parent from $75,000 to $200,000, and a married couple from $110,000 to $400,000 before phasing out. The refundable amount has also increased from $1000 to $1400, if applicable.

New temporary credit of $500 for non-child dependents, such as an elderly parent or child over 17 years old.

Mortgage interest deduction for home equity loans is eliminated. Currently, that’s allowed for up to $100,000 of debt.

No changes to student loan interest, teacher classroom supplies deductions, and child and dependent care credit. Also, no changes to capital gains rate of 0% for single income of less than $38,700 and married couple income of less than $77,400. Top rate is still 20%.

Medical expense deduction reverts back to 7.5% of AGI for everyone in 2018 but bounces back to 10% in 2019.

Almost everyone is exempt from the estate tax. Single gets exemption of $11 million and married couple gets a $22 million exemption.

Casualty losses deduction eliminated except for those in a presidentially declared disaster area.

Alimony becomes tax free in 2019 for those who receive it and will not be a deduction for those who pay it, beginning with divorce or separation agreements executed after December 31, 2018.

Like-kind exchanges are only eligible for real estate transactions.

The AMT threshold has been significantly increased.

2% miscellaneous deductions are eliminated. This includes employee business expenses, employee home office use, tax prep fees, job hunting expenses, and investment fees.

Elimination of job-related move expense deduction except for members of the military.

Kiddie tax - Previously, the kid’s investment income was taxed at the parents’ tax rate. Now the income will be taxed at the same rate as trusts and estates, a much higher rate.

529 Plans – The parents can use up to $10,000 to cover the costs of private or religious schools for grades K-12.

Tax Planning

For 2017 and earlier, if you converted assets in a traditional IRA to a Roth IRA earlier in the year and later changed your mind, you could recharacterize the funds back into the IRA. Now that is not an option for 2018 going forward. Conversions are now irreversible.
Realize losses on stock while substantially preserving your investment position. For example, you can sell the original securities and then buy back the same securities at least 31 days later.
You can give up to $15,000 to as many people as you wish in 2018 free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. If you are married, you and your spouse can elect to “gift split” and use your exemptions together to give up to $30,000 per beneficiary.

PRIVACY POLICY

We do not disclose any non-public personal information about our clients or former clients to anyone, except as instructed to do so by such clients, or required by law. We restrict access to non-public personal information and we maintain physical, electronic, and procedural safeguards to guard your personal non-public information.

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The Senate Finance Committee (SFC) advanced President Donald Trump’s nomination of Charles Rettig for IRS Commissioner. The SFC approved the nomination on July 19 by a 14-to-13 party line vote.

Qualified Nominee

Several SFC Democrats and Republicans praised Rettig’s qualifications to serve as the next IRS Commissioner. SFC ranking member Ron Wyden, D-Ore., said that he is a "qualified nominee."

However, Democrats voted against his nomination in protest of new IRS guidance ( Rev. Proc. 2018-38, discussed later in this Issue) that limits donor reporting for certain tax-exempt organizations.

"The Trump administration has taken a qualified nominee and dumped him right into the middle of a dark money political firestorm of their own creation," Wyden said. Wyden announced the day before the vote that he would not support Rettig’s nomination unless Rettig committed to reversing the IRS’s new rules on certain Schedule B donor disclosures.

However, SFC Chairman Orrin G. Hatch, R-Utah, noted during the markup that the IRS reporting rules are unrelated to Rettig’s nomination. "I know that some of my colleagues have expressed dissatisfaction with new IRS reporting rules released recently and want to oppose the important appointment of an IRS commissioner because of these new rules, over which he had no control,"Hatch said. Hatch, praising Rettig’s qualifications, expressed confidence that Rettig, if confirmed, would "lead the IRS with integrity."

Next Steps

Rettig’s nomination now heads to the full Senate. If confirmed, Rettig will oversee the implementation of tax reform enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

Rettig previously told the committee that restoring taxpayer trust in the IRS would be a top goal as IRS Commissioner. "If I am privileged to serve as Commissioner, my overriding goal will be to strengthen and rebuild trust between the IRS, the American people, and their representatives in Congress," Rettig said. "That trust is critical to all that the IRS does."

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President Donald Trump and House GOP tax writers discussed "Tax Cuts 2.0" in a July 17 meeting at the White House. The next round of tax cuts will focus primarily on the individual side of the tax code, both Trump and House Ways and Means Chair Kevin Brady, R-Tex., reiterated to reporters at the White House before the meeting.

Individual Tax Cuts

The discussion between Trump and several top House GOP tax writers was set to focus, in particular, on how to further strengthen the economy post-tax reform, Brady said. "We think the best place to start is with America’s middle class families and our small businesses," he added. Brady has said that making permanent the individual tax cuts that are set to expire in 2026 under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) is a top priority for Republicans.

Corporate Tax Rate

Trump is also calling for lowering the corporate tax rate to 20 percent. The corporate tax rate was lowered last December from 35 percent to 21 percent by the TCJA.

Brady told reporters earlier in the week of July 16 that discussions between House GOP tax writers and the White House were continuing on the possible proposal. While Brady did not openly commit to the notion of further lowering the corporate tax rate, he did tell reporters that he thinks the president is right that global competitors will likely respond in kind to last year’s tax reform.

Tax Cuts 2.0 Timeline

The House is expected to vote on the Tax Cuts 2.0 package in September, Brady told reporters at the White House on July 17. Additionally, Brady stated that he anticipates the "Senate setting a timetable, as well."

Brady’s estimated timeline for votes on the tax cuts package is in line with his statements in June that House GOP members will receive a legislative outline of the proposal this month. Further, a draft of the tax package is expected to be released publicly in August.

Senate

At this time, the Tax Cuts 2.0 package is not expected on Capitol Hill to fare well in the Senate. The package would need at least nine Democratic votes to clear the chamber.

"The GOP tax scam was a huge tax break for big corporations," Sen. Tammy Baldwin, D-Wis., said in a July 17 tweet. "We should reward work, not just wealth," she added. While Democrats remain outspoken against the TCJA for primarily benefiting corporations, Republicans are hopeful for Democratic support, just prior to midterm elections, on a measure that focuses on individual tax cuts.

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House Republicans and the Trump Administration are working together to craft a tax cut "2.0"outline, the House’s top tax writer has said. House Ways and Means Committee Chairman Kevin Brady, R-Tex., told reporters during the week that House tax writers and the White House are currently working to finalize the "framework."

Tax Cuts 2.0

Additionally, Brady reiterated to reporters that he plans to hold listening sessions with other House Republicans to gather ideas for the tax package. The legislative outline is expected to be circulated among House lawmakers this month and released generally in August. A House floor vote on the package is anticipated this fall.

Individual Tax Cuts

The tax reform "phase two" package will focus on making permanent the individual tax cuts enacted temporarily through 2025 under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Extending the individual tax cuts will be the " centerpiece" of the next package, Brady has said.

Impact. "Making the TCJA’s expiring individual tax code changes permanent would result in a larger economy in the long run," the Tax Foundation said in a report released on July 10. According to the report, a "small, positive" economic impact is expected during 2019 through 2028. "In the long run, making all individual tax provisions permanent will lead to 2.2 percent higher long-run GDP, 0.9 percent higher wages, and 1.5 million more full-time equivalent jobs," the report said.

However, the economic boost would not arrive without being accompanied by an increased federal deficit, according to the report. "Making these provisions permanent will also increase the deficit, reducing federal revenues by $638 billion ($575 billion on a dynamic basis) over the 10-year budget window and in the long run, reduce federal revenue on an annual basis by $165 billion ($112 billion on a dynamic basis)."

Corporate Tax Cuts

Additionally, Republicans are "thinking about bringing the 21 percent [corporate tax rate] down to 20," President Trump said in a recent interview. The corporate tax rate was permanently lowered from 35 to 21 percent under the TCJA.

Senate

At this time, the prospect of the House’s tax cut 2.0 package clearing the Senate remains unlikely. Currently, the phase two measure would need at least nine Democratic votes to clear the chamber. Democrats have remained critical of the TCJA and are not expected on Capitol Hill to support legislative efforts to extend the new law’s provisions.

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The Senate Finance Committee’s (SFC) leading Democrat has released a report critiquing Republicans’ 2017 overhaul of the tax code. The report, focusing primarily on international tax reform, was released by SFC ranking member Ron Wyden, D-Ore., on July 18.

Criticism of GOP Tax Reform

The Democratic SFC report, "Trump’s Tax Law and International Tax: More Complexity, Loopholes and Incentives to Ship Jobs Overseas," criticizes a number of provisions enacted in last year’s tax reform. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) was signed into law by President Donald Trump last December.

"Donald Trump and Congressional Republicans continue to peddle the false promises outlined in this tax scam report," Wyden said in a July 18 press release. "Their new international tax regime instead rewards companies for investing overseas while hardworking Americans watch their wages fall."

The report focuses on five areas of international tax reform. According to the report, the new tax law makes the tax code more complicated and incentivizes corporations to move jobs overseas.

Tax Cuts 2.0

Meanwhile, Republicans on the other side of the Capitol continue to tout the positive economic effects of tax reform as they prepare to unveil their next tax cuts package. "Tax Cuts 2.0" will focus on making permanent tax cuts for individuals and passthrough entities, which were enacted temporarily through 2025 under the TCJA.

"It wasn’t that long ago that our economy was sluggish, paychecks were going nowhere, jobs were going overseas -- all that has changed," House Ways and Means Committee Chair Kevin Brady, R-Tex., said in a July 18 televised interview in which he praised the TCJA. According to Brady, Congress and the White House are starting Tax Cuts 2.0 "right now."

"The President is all in," Brady said. Brady, along with several other House tax writers, met with Trump on the next round of tax reform in a July 17 meeting at the White House.

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Homeowners will be hurt financially by last year’s tax reform, according to a new House Democratic staff report. The report alleges that real estate developers will primarily benefit from the new tax law at the expense of homeowners.

The Democratic staff report was released by House Oversight and Government Reform Committee ranking member Elijah E. Cummings, D-Md., on July 5. The report highlights the effects of specific provisions of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) on homeowners across the United States.

Home Equity Interest Deduction

Prior to the TCJA, homeowners could deduct interest on home equity loans up to $100,000, as noted in the report. However, the TCJA, enacted last December, retroactively prohibits homeowners from deducting interest on loans of any amount if used for any purpose other than home improvement. According to Cummings’ staff, many homeowners use home equity loans for a variety of reasons, such as medical emergencies or college education.

Real Estate Tax Breaks

The staff report highlights several TCJA provisions that could benefit real estate developers. Among these tax breaks includes the 20-percent deduction for passthrough business income for certain qualifying real estate companies. Additionally, the report notes that under the TCJA, real estate developers are exempt from the new 30-percent limitation on interest deducted by large businesses. Further, the report notes that TCJA exempts real estate from the repeal of favorable tax treatment of like-kind exchanges of business assets and provides a 20-percent deduction for dividends from qualified real estate investment trusts.

"For the first time, this new report shows how big the payoffs were to wealthy real estate developers – more than $66 billion over the next ten years, according to the Joint Committee on Taxation," Cummings said in a statement. "They [Republicans] chose to take away a longstanding tax deduction that American families have relied on for decades while at the same time creating $66 billion in new tax breaks for real estate developers," he added.

In response to an inquiry about the report, a House Ways and Means Committee majority spokesperson told Wolters Kluwer on July 6 that the Democratic staff report is a "partisan exercise." "Multiple reports from nonpartisan organizations show strong housing numbers for this year...tax reform allows families to keep more of their hard-earned money to spend on what is important to them. This all is good news for homeowners and those seeking to buy a home," the spokesperson told Wolters Kluwer.

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The IRS has issued final regulations that target tax-motivated inversion transactions and certain post-inversion tax avoidance transactions. The final regulations retain the thresholds and substantiation requirements of the 2016 final, temporary and proposed regulations (the 2016 regulations), but make limited changes to the 2016 regulations to improve clarity and reduce unnecessary complexity and burdens on taxpayers. These changes also ensure that the final regulations do not impact cross-border transactions that are economically beneficial and not tax-motivated.

Background

Generally, in an inversion transaction, a U.S.-based multinational expatriates by changing its tax residence from the United States to another country in an effort to avoid or reduce U.S. taxes.

Comment. Subject to certain limitations, the transaction allows the inverted company to reduce future taxes on U.S.-source earnings, such as by deducting interest paid on loans from the new foreign parent. In addition to U.S. tax base erosion, inversions may have other effects on the U.S. economy, such as reduced employment when the headquarters are moved overseas.

Code Sec. 7874 limits inversions that are tax-motivated, by generally targeting transactions in which the following occur:

a foreign corporation acquires substantially all of the properties of a domestic corporation (domestic entity acquisition);
immediately after the transaction, the former shareholders of the domestic corporation make up a significant portion of the shareholders of the acquiring foreign corporation; and
after the domestic entity acquisition, the expanded affiliated group (EAG) that includes the foreign acquiring corporation does not have substantial business activities in the foreign country in which, or under the law of which, the foreign acquiring corporation is created or organized when compared to the total business activities of the EAG.

Under (2) above, if the former shareholders of the domestic corporation hold 80 percent or more of the stock of the foreign corporation after the transaction, the foreign corporation is treated as a domestic corporation for U.S. tax purposes. If the former shareholders hold at least 60 percent but less than 80 percent of the stock of the foreign acquiring corporation after the transaction, then the transaction is respected but use of tax attributes is limited. Transactions where the former shareholders of the domestic corporation hold less than 60 percent of the stock of the foreign acquiring corporation are generally not limited. The percentage of stock is referred to as the ownership percentage, and the fraction used to calculate the ownership percentage is referred to as the ownership fraction.

The Tax Cuts and Jobs Act of 2017 (TCJA) ( P.L. 115-97) reduced, but did not completely eliminate, the incentives for tax-motivated inversions.

Changes Made by the Final Regulations in General

Similar to the 2016 regulations, the final regulations under Code Sec. 7874 provide rules for:

identifying domestic entity acquisitions and foreign acquiring corporations in certain multiple-step transactions;
calculating the ownership percentage and, more specifically, disregarding certain stock of the foreign acquiring corporation for purposes of computing the denominator of the ownership fraction and, in addition, taking into account certain non-ordinary course distributions (NOCDs) made by a domestic entity for purposes of computing the numerator of the ownership fraction;
determining when certain stock of a foreign acquiring corporation is treated as held by a member of the EAG; and
determining when an EAG has substantial business activities in a relevant foreign country.

However, the final regulations clarify the prior rules, provide additional exceptions to their application, and reduce complexity and unnecessary burdens on taxpayers, including by providing guidance on how to apply particular mechanical rules. Specifically, the final regulations make clarifying changes to some of the stock exclusion rules: the passive assets rule, the serial acquisition rule, and the third country rule. Clarifying changes are also made to the substantial business activities test.

In addition, the final regulations add additional exceptions to the serial acquisition rule and the third country rule to narrow their scope. To reduce complexity and ambiguity, changes are made to the passive assets rule, the NOCD rule, and the rules coordinating the application of the stock exclusion rules with the EAG rules.

The final regulations further provide rules under Code Sec. 7874 and other provisions to reduce the tax benefits of certain post-inversion tax avoidance transactions. Such rules generally prevent the post-inversion dilution of U.S. shareholders’ interests in expatriated foreign subsidiaries.

Passive Assets Rule

The final regulations apply the passive assets rule only for purposes of determining the ownership percentage by value. The passive assets rule is also modified so that stock excluded under any of the stock exclusion rules is not taken into account. In addition, property that gives rise to stock excluded under any of the stock exclusion rules is not taken into account for purposes of this rule.

Serial Acquisitions of Domestic Entities

The final regulations retain the 36-month look-back period for the serial acquisition rule, but make three technical clarifications or modifications to this rule. Specifically, the final regulations:

clarify that the determination of the foreign acquiring corporation’s stock attributable to a prior domestic entity acquisition does not take into account stock of the foreign acquiring corporation deemed to have been received under the NOCD rule or Code Sec. 7874(c)(4) in the prior domestic entity acquisition;
provide an additional exception to the definition of the term "prior domestic entity acquisition" to exclude a domestic entity acquisition that occurs within a foreign-parented group and qualifies for the internal group restructuring exception; and
define a predecessor of a foreign acquiring corporation for purposes of the serial acquisition rule.

Other Matters

The final regulations also:

provide exceptions to the third-country rule in certain cases where transactions are not driven by tax planning;
include several clarifications or modifications to the NOCD rule;
modify one of the requirements of the de minimis exception applicable to the disqualified stock rule, the passive assets rule, and the NOCD rule;
broaden the coordination of the stock exclusion rules with the EAG rules; and
for purposes of the substantial business activities test, define a "tax resident" as a body corporate liable to tax under the laws of the country as a resident.

Applicability Dates

The applicability dates of the rules in the final regulations are generally the same as the applicability dates of the rules as set forth in the 2016 regulations. However, differences between the final regulations and the 2016 regulations generally apply on a prospective basis, with an option for taxpayers to apply the differences retroactively. Since taxpayers may have relied on the 2016 regulations, the modifications to the final regulations generally apply prospectively. However, domestic entity acquisitions completed before July 12, 2018, continue to be subject to those rules as set forth in the 2016 regulations, but generally with an option for taxpayers to apply the differences retroactively.

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The Fifth Circuit vacated a tax preparer’s conviction for obstructing tax administration. The conviction was no longer valid in light of C.J. Marinello, SCt., 2018-1 ustc ¶50,192.

Marinello

Under Code Sec. 7212, it is a crime to corruptly or by force or threats obstruct the due administration of the Internal Revenue Code. In Marinello, the U.S. Supreme Court determined that a conviction for this crime requires that:

a relationship ( "nexus") exists between the defendant’s conduct and a particular administrative proceeding; and
the proceeding was either pending when the defendant engaged in the conduct or reasonably foreseeable by the defendant.

A "particular administrative proceeding" includes an investigation, audit or other targeted administrative action. It does not include routine, day-to-day work carried out in the ordinary course by the IRS, such as the review of tax returns.

Obstruction Conviction

Here, a jury convicted the tax preparer on one count of obstructing the tax laws. One of the obstruction allegations was that the preparer had provided false testimony at a show cause hearing in federal court. This met the Marinello requirements, because the hearing was held to assess her compliance with an IRS tax records subpoena.

However, most of the other alleged obstruction did not satisfy Marinello, because it focused on the preparer paying her employees in cash and on failing to keep adequate records.

The court vacated the obstruction conviction, because the jury believed it could consider all of the preparer’s conduct as part of the obstruction count. The court did not know which of the allegations the jury had found to be proven by the government.

False Returns Conviction

The jury also convicted the preparer for preparing false returns. The preparer claimed the improper obstruction count tainted the false return counts. However, the court rejected this "spill-over prejudice" claim, and did not vacate the false returns conviction. The invalid obstruction count did not allow the jury to consider evidence that would not have been allowed at a trial focused on just the false return counts.

On remand from SCt. Unpublished opinion vacating and remanding, per curiam, an unpublished DC Tex. decision. Related decision at CA-5 2017-1 ustc ¶50,241.

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National Taxpayer Advocate Nina E. Olson has released her mid-year report to Congress. The report contains a review of the 2018 filing season, and identifies the priority issues the Taxpayer Advocate Service (TAS) will address during the upcoming fiscal year. It also includes the IRS’s responses to each of the 100 administrative recommendations made in the 2017 Annual Report to Congress.

The report identifies and discusses 12 priority issues the TAS plans to focus on during the upcoming fiscal year. The top five include implementation of the Tax Cuts and Jobs Act of 2017 (TCJA) ( P.L. 115-97), the effectiveness of IRS service channels in meeting taxpayer needs, the development of an integrated case management system, the impact of high false-positive rates on legitimate taxpayers and the protection of taxpayers facing financial hardship from IRS and private debt collection activities. The most significant challenge the IRS faces in the upcoming year is implementing the TCJA, which, among other things, requires programming an estimated 140 systems, writing or revising some 450 forms and publications and issuing guidance on dozens of TCJA provisions. The TAS has launched a new website that lists key tax return items under current law (2017), shows which ones have been impacted by the TCJA and illustrates how the changes will be reflected on tax year 2018 returns filed in 2019.

In her preface to the report, Ms. Olson focuses on the IRS’s customer service challenges. The report says the IRS uses narrow performance measures that suggest the agency is performing well but do not reflect the taxpayer experience. Recommendations to improve customer service include: (1) adopting robust performance measures that more accurately reflect the taxpayer experience; (2) providing taxpayers with modernized "omnichannel"services so that taxpayers can obtain assistance online, by phone or in-person; (3) accelerating the development of an integrated case management system; and (4) using "big data" to help taxpayers as well as to bolster enforcement. Further, Ms. Olson reiterated her longstanding concern that IRS funding reductions have undermined the agency’s ability to provide high-quality taxpayer service and to modernize its aging information technology infrastructure.

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2017/2018 TAX PLANNING & TIPS

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