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- Written by: Robert E. McKenzie, J.D.
Each year the IRS assesses over 40 million penalties against taxpayers. Of the total number of assessed penalties over 5 million of them are eventually abated by the Service. Generally the IRS only abates penalties when the taxpayer contests the penalty. Since most taxpayers don’t contest IRS penalties the number of abated penalties is artificially low. Most taxpayers and their representatives are unaware that if the taxpayer establishes a reasonable cause for failure to comply with tax laws, the applicable penalties may be abated. Therefore sophisticated taxpayers and their representatives have a much greater chance of reducing tax penalties than the approximately 12% abatement rate for all penalties. It is in a taxpayer’s best interest to contest IRS penalties if she has a reasonable cause for her noncompliance.
[This article is course content for the Tax Season 2016 CPE quiz, worth 3 CPE credits! Reach the quiz and additional content HERE.]
Chapter 20 of the Internal Revenue Manual provides guidance to IRS employees on the standards for reasonable cause. Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations. Reasonable causes is defined by the Internal Revenue Manual in the following manner:
“Any reason that establishes a taxpayer exercised ordinary business care and prudence but nevertheless failed to comply with the tax law may be considered for penalty relief.” The most important part of that definition is the term ordinary business care and prudence. Ordinary business care and prudence is defined as follows in the Internal Revenue Manual:
“Ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing that they exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless were unable to comply with the law.”
The Internal Revenue Manual sets forth a series of circumstances that would allow a taxpayer to establish reasonable cause and secure abatement of tax penalties. The following is a partial list of excuses that might establish reasonable cause:
• Death, Serious Illness, or Unavoidable Absence
• Fire, Casualty, Natural Disaster, or Other Disturbance
• Unable to Obtain Records
• Mistake was Made
• Erroneous Advice or Reliance
• Ignorance of the Law
• Forgetfulness
• Statutory Exceptions or Waivers
• Undue Hardship
• Written Advice From IRS
• Oral Advice From IRS
• Advice from A Tax Advisor
• Official Disaster Area
• Service Error
Practitioners may be surprised to learn that the IRS uses a computer program to review abatement request. The program is known as Reasonable Cause Assistant (RCA). Therefore it is in the best interest of the taxpayer for his representative to submit a letter specifically requesting abatement of penalties which quotes the Internal Revenue Manual with respect to reasonable cause and cites to specific reasons set forth in the manual. The greater the specificity of the reasonable cause letter, the greater the chance that the IRS may abate that penalty.
The RCA provides that taxpayers who have not been penalized by the IRS in the past may have their penalties reduced. The IRS Manual sets forth a First Time Abatement Rule. That rule generally allows IRS employees to abate penalties asserted against formerly compliant taxpayers. The manual provides as follows:
“RCA provides an option for penalty relief for the Failure To File, Fade To Pay, and/or Failure To Deposit Penalties if the taxpayer has not previously been required to file a return or if no prior penalties (except the Estimated Tax Penalty, on the same taxpayer…in the prior 3 years.”
Robert E. McKenzie of the law firm of Arnstein & Lehr LLP of Chicago, Illinois, concentrates his practice in representation before the Internal Revenue Service and state tax agencies. He previously served as a member of the IRS Advisory Council (IRSAC) which is a group appointed by the IRS Commissioner from 2009 to 2011.
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- Written by: Joshua Fluegel
Not-for-profit organizations have a very particular set of accounting and tax needs making a CPA an invaluable resource. The market for not-for-profit organizations is worth exploring for CPAs. The National Center for Charitable Statistics reports there are over 1.5 million registered not-for-profit organizations in the U.S. The benefits of this market could be even better realized when effective not-for-profit (NFP) software is implemented.
Not-for-profit software has come a long way and continues to fill unexpected gaps in CPAs’ practices. NFP software vendors are looking forward to anticipate issues that may need to be remedied in the coming years.
“Despite limited media attention on the very real problem of embezzlement-related fraud within the business community, the industry is gaining appreciation for the risk,” said Chuck Gossett, CEO of Cougar Mountain Software. “Based on their board fiduciary responsibilities, our not-for-profit prospects and customers are sharing a greater appreciation for higher levels of security and accountability. If inappropriate adjustments can be made in the financials without the oversight capabilities of a true audit trail, what excuse - in light of damage control - is worthy to the board and the donors? As the not-for-profit industry tolerates less and less risk, the software industry must continue to adopt stricter standards and controls. This will guide the industry into the future.”
Not only is it likely that software will be securing CPAs’ future with not-for-profit clients, but the software’s presence could become lighter and more accessible for CPAs.
“Certainly we expect to see more online and hosted integrations, but in the near term, it will be interesting to see how the FASB reporting changes coalesce,” said Pete Koblinski, marketing manager at CYMA Systems.
However, only time and the CPAs who vocalize their needs to software vendors will decide the true future of not-for-profit software.
Not-For-Profit Software
| Vendor | Product | Website | Phone | |
| Cougar Mountain Software | Denali Fund | https://nonprofit-accounting-software.cougarmtn.com/ | 800-388-3038 | |
| CYMA Systems | CYMA Not-For-Profit Edition | http://www.cyma.com/business-accounting-software/nfp.asp | 800-292-2962 |
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- Written by: Paul Dunham
As the end of 2015 draws closer, it is once again time to meet with clients and discuss year-end tax strategies. At the top of every year-end planning list is the status of the “extenders” – those some 50+ provisions that expired effective January 1, 2015. Speculation would provide that many of these provisions will likely be reinstated at the last minute as did indeed happen last year. The purpose of this article is to not address the status of the “extenders,” but rather discuss other year-end tax strategies that are generally effective without regard to the status of the extenders. A list of such strategies follows.
• Income tax rates for individuals are currently static and the highest marginal tax rate remains at 39.6%. Given the current environment that income tax rates will likely be the same for 2016, tried and true strategies of deferring income and/or accelerating deductions are still applicable.
• The maximum long-term capital gain rate remains at 20%. Consideration should be given to harvesting capital losses before year end to offset capital gains already realized during the year. When harvesting the losses before year end, be mindful of the “wash loss” rules.
• Consideration should be given (if applicable) to using the installment sales rules for the disposition of real property and certain business interests. The spreading of the principal payments (and corresponding gains) over time, may allow the use of a lower tax bracket for the capital gains as they are recognized over time. Further, there may be other future opportunities to make use of “future” capital losses against such gains that are recognized in the future. Lastly, by spreading out the principal payments (and related gains) over time, it may allow an individual to fall below the income thresholds for the 3.8% net investment income tax.
• Consideration should be given to using the “like-kind exchange” provisions under Section 1031 and/or the “involuntary conversion” deferral provisions under Section 1033. Both provisions effectively defer realized gains to be recognized at a later/future recognition event.
• Consideration should be given to maximizing HSA, IRA, 401(k), Solo 401(k), SEP, and other “retirement type” plan contributions. Some types of retirement plans do not require action before year end, and can be created and funded in 2016 and still be effective for the 2015 tax year. However, there are certain types of plans that do require action (i.e., the creation of the plan) before year end to be effective for the 2015 tax year.
• Consider making an election to treat certain long-term capital gains and qualified dividends at ordinary income rates to maximize the investment interest expense deduction.
• Consider using long-term capital gain property to make charitable contributions. The benefit of this strategy would be to get a fair market value deduction for the charitable contribution without having to recognize the inherent gain in the property. A word of caution to double check holding periods and charitable contribution AGI limitation percentages before advising of such plan.
• Consider the use of a donor advised fund whereby a charitable contribution can be taken in 2015, but the actual payments to charity are made over time at the direction of the donor.
• Be mindful of the itemized deduction phase out limits when advising on any types of itemized deductions. At times, it will make sense to “bunch” deductions in one tax year versus taking them over two years.
• For the 3.8% net investment income tax, consider shifting investments to tax-exempt, deferred annuities or insurance products. Also, consider grouping passive activities that comprise an appropriate economic unit to qualify them as nonpassive.
• From an estate and gift tax planning perspective, remember to use the $14,000 annual gift tax exclusion amount. Once a year has passed the $14,000 exclusion is not cumulative and is lost. Remember that certain educational and medical costs do not count towards the $14,000 annual gift tax exclusion amount.
• For estate tax purposes, consider using the life time exclusion amount of $5,430,000 if not already used. In using such exclusion amount, consider transferring property that would qualify for minority and/or marketability discounts. There are indications that such discounts are currently under attack and may not be available too much longer.
While waiting for legislative action regarding the extenders, there are still many tax planning ideas/strategies that should be discussed with clients before year end. Hopefully, the items noted above will help generate some ideas and thoughts for your clients.
Paul Dunham is a Managing Director in the Tax Group of CBIZ MHM in Tampa Bay. He has served both public and privately held companies on a wide range of tax issues, including implications of corporate acquisitions and divestitures, S corporation and partnership operations, income tax accounting methods, estate planning, real estate investment and related taxation.
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- Written by: Peter J. Scalise
Whether you’re a publicly held movie studio conglomerate producing and distributing substantial numbers of films annually commanding significant shares of box office revenues worldwide or an independent filmmaker, movie production tax incentives should certainly be considered and incorporated into the tax planning process to properly tax effect the cost of filmmaking.
Synopsis of Movie Production Tax Incentives
Movie Production Tax Incentives (MPIs) are tax benefits offered on a state-by-state basis throughout the United States to entice, as applicable, in-state qualified phases of filmmaking production such as the Qualified Pre-Production Phase, the Qualified Production Phase, and the Qualified Post-Production Phase. It should be duly noted that it is fairly common practice in the movie studio industry to shoot the aforementioned phases of qualified production throughout several locations (e.g., Qualified Production Phase in the City of Los Angeles in California, USA and the Qualified Post-Production Phase in the City of Vancouver in British Columbia, Canada) and consequently it is critical to be cognizant of incentives available, as applicable, not only state by state within the United States but also country by country worldwide.
While the applicable Qualifying Production Activities (QPAs) vary significantly from state-to-state, many common QPAs include, but are not limited to, feature films, episodic television series, relocated television series, television pilots, television movie, and mini-series. In contrast, as a caveat, many states generally consider the subsequent productions to be non-qualified production activities and consequently not eligible for MPIs such as documentaries, news programs, interview/talk programs, instructional videos, sports events, daytime soap operas; reality programs, commercials, and music videos. Additionally, while the applicable Qualifying Production Expenditures (QPEs) also vary significantly from state-to-state, many common QPEs include, but are not limited to, salaries, facilities, props, travel, wardrobe, and set construction. It is always critical to establish clear nexus between QPAs and corresponding QPEs.
The structure, type, and size of the incentives vary significantly from state to state. Many MPIs may include tax credits, tax rebates and/or exemptions (e.g., sales and use tax exemptions on movie production equipment, sales and use tax exemptions on lodging, etc.) while other state incentive packages may include cash grants, fee-free locations among many other diverse and advantageous incentives. The state-by-state legislative histories and policies driving MPIs are clearly aimed at increasing economic growth at the state and local levels through filmmaking and television production throughout the United States, while curtailing the departure of movie production to other countries.
Approximately forty states currently offer MPIs with most being either transferable (e.g., transferable credits allow production companies that generate tax credits greater than their tax liability to sell those credits to other taxpayers, who then use them to reduce or eliminate their own tax liability) or refundable (e.g., refundable credits are such that the state will pay the production company the balance in excess of the qualified expenses).
It is critical to design and implement a sustainable methodology that will incorporate all applicable MPIs to obtain the proper tax effect of the cost of filmmaking regardless of the size and structure of the movie studio or production conglomerate. Tax incentives matter whether your client is one of the “big six majors” (e.g., Paramount Motion Pictures Group (Viacom), Warner Bros. Entertainment (Time Warner), The Walt Disney Studios (The Walt Disney Company), NBC Universal (Comcast), Columbia TriStar Motion Pictures Group (Sony), and Fox Filmed Entertainment (21st Century Fox).) or a leading independent producer/distributor commonly referred to as the "mini-majors" (e.g., Lionsgate Films, The Weinstein Company, Open Road Films, CBS Films, DreamWorks Studios, and MGM Pictures) or a smaller production and/or distribution company known as independents or “indies.” As a direct result of these advantageous MPIs, filmmakers may be able to jubilantly end their productions saying, “Lights, Camera, Action and Tax Cut!”
Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, LLC a member of The Prager Metis International Group. Peter is a BIG 4 Alumni Tax Practice Leader and has successfully represented entertainment industry clients over the past few decades for their specialty tax incentive needs including the “Big Six Majors”, the “Mini-Majors” as well as many independent production studios and film finance companies.
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- Written by: Kathleen M. Lach
The decision as to whether to file a joint federal income tax return with one's spouse is not one to be taken lightly. Yet, it is a decision that is frequently made without sufficient consideration, and the consequences can be devastating for the unsuspecting spouse.
Case No.1: John is a self-employed consultant, and in 1991 married Lisa Sudby. By August of 1993, Lisa and John separated, and in October of 1993, Lisa filed for divorce. The divorce was finalized by June of 1994. The couple filed joint federal income tax returns for 1991, 1992, and 1993. John was audited by the IRS. This resulted in adjustments to income for John's business and ultimately adjusted the couple's joint federal income tax obligation. Lisa was jointly and severally liable for the additions to tax and attendant penalties assessed as a result of the audit, with ex-husband John for years 1992 and 1993 since they filed joint returns for those years.
[This article is course content for the Tax Season 2016 CPE quiz, worth 3 CPE credits! Reach the quiz and additional content HERE.]
Case No. 2: Bob is an investment banker. His wife Patty is a stay-at-home mom. Bob’s business involves multimillion-dollar transactions, and his balance sheet reflected deposits or withdrawals in any given day that fluctuated by hundreds of thousands of dollars. Patty has no understanding of or interest in investment banking.
Bob and Patty have filed joint federal income tax returns since they were married. Patty signs the returns each year prior to filing, without review.
In 2001, Bob received notice that the IRS was opening an examination of a transaction he engaged in at the advice of a colleague at the time. Sometime in 2003, the auditor determined that the transaction at issue was a sham. Two of the promoters of the transaction faced prison time. Bob and Patty faced an increase of $1.2 million in tax to their 1998 federal income tax return, plus penalties and interest.
The Internal Revenue Code provides relief from joint and several liability under certain circumstances pursuant to IRC §6015. Section 6015(b) is frequently referred to as the “innocent spouse” provision. Section 6015(c) provides for separation of liability, and takes into consideration the allocable income of each spouse on the jointly filed return. Finally, section 6015(f) provides relief under considerations of fairness or "equity."
Section 6015(b) provides relief for all joint filers who satisfy the five requirements listed in that section. A taxpayer must satisfy all of the requirements of subparagraphs (A) through (E) to be entitled to relief under section 6015(b)(1).1 Section 6015(c) allows a spouse who filed a joint tax return to elect to limit his/her income tax liability for that year to his/her separate liability amount. However, section 6015(c) applies only to taxpayers who are no longer married, are legally separated, or have not lived together over a twelve-month period. A taxpayer may also seek relief under section 6015(f), which authorizes the Service to grant equitable relief from joint and several liability when relief is unavailable under section 6015(b) and (c).
Except for the knowledge requirement of section 6015(c)(3)(C) (the provision disallowing election of separate liability to a spouse with actual knowledge of the item giving rise to the deficiency), the taxpayer bears the burden of proving that he/she has met all the prerequisites for innocent spouse relief.2
1. IRC §6015(b)
IRC §6015(b) lists the conditions that must be satisfied in order for relief to be considered. If each condition is met, the requesting spouse is relieved of the tax liability for that year to the extent the liability is attributable to the understatement.3
The code section also provides for apportionment of relief. If the requesting spouse establishes that he or she did not know about a portion of the understatement, relief may be granted to the extent that the liability is attributable to that portion of the understatement.4 Relief under this code section is available only in audit situations, where as a result of an IRS examination of a return, it determined that there was an "understatement" of tax for the tax year under examination.
2. IRC §6015(c)
IRC § 6015(c) provides relief for taxpayers who are no longer married or who are legally separated or not living together. If relief is available under this section, the individual's liability for any deficiency assessed for the return at issue will not exceed the portion of the deficiency allocable to the individual.5 The requesting spouse has the burden of proof in establishing the portion of any deficiency allocable to him or her.6
Under section 6015(c), the standard to be met is actual knowledge. The determination does not involve the facts as they apply to “constructive” knowledge, or an individual’s “reason to know” in connection with the deficiency.7
3. IRC §6015(f)
Finally, Congress enacted a "last resort" provision to enable relief in situations where section 6015(b) or (c) do not apply. IRC §6015(f) provides for “equitable relief.” Under section 6015(f), relief may be granted if:
(a) Taking into account all the facts and circumstances, it would be inequitable to hold the individual liable for any unpaid tax or any deficiency.
(b) Relief is not available to such individual under subsection (b) or (c).8
Relief under 6015(f) often turns on an analysis of knowledge and hardship, along with significant benefit, factors also considered in the above analysis of section 6015(b).
Where does this leave Lisa and Patty? The initial analysis must focus on the sections of 6015 under which they may qualify for relief. All applicable code sections should be elected on Form 8857. A request is initiated by completing IRS form number 8857, Request for Innocent Spouse Relief, and it was filed with the designated IRS Service Center. If relief is requested under section 6015(a) or (b) it is automatically considered under 6015(f). If relief is requested under 6015(f), it is not automatically considered under either of the other provisions if they are applicable.
Lisa is divorced from John. They have been divorced for more than twelve months. The liability is a result of an understatement of tax. She is eligible to file for relief under IRC §6015(c), as well as 6015(b) and alternatively under 6015(f). The specific facts of Lisa’s case will determine whether she will be granted relief.
Patty is still married to Bob. The liability is due to an understatement of tax. She is eligible to file for relief under IRC § 6015(b), and alternatively under 6015(f). The most significant hurdle for Patty to overcome is that she had no knowledge or reason to know of the understatement of the tax.
This provision is an important consideration for practitioners, particularly practitioners who represent married individuals, to assure that their rights are protected, and that all potential avenues for relief in liability cases are considered.
Kathleen Lach is a Partner in the Tax and Litigation Departments of Arnstein & Lehr LLP. She represents clients before a variety of different tax authorities, including the Internal Revenue Service, the Illinois Department of Revenue, and the Illinois Department of Employment Security.
1. Kling v. Commissioner, T.C. Memo 2001-78 (March 30, 2001).
2. Cheshire v. Commissioner, 2002 WL 200612 (5th Cir.) See also, Reser v. Commissioner, 112 F.3d 1258, 1262-63 (5th Cir.1997).
3. 26 U.S.C. 6015(b)(1)
4. 26 U.S.C. 6015(b)(2)
5. 26 U.S.C. 6015(c)(1)
6. 26 U.S.C. 6015(c)(2)
7. 26 U.S.C. 6015(c)(3)(C); See also, Cheshire v. Commissioner, 115 T.C. 183 (2000), affirmed, 2002 WL 200612 (5th Cir.)
8. 26 U.S.C. 6015(f)