IRS Lawyers

IRS Announces 2014 Retirement Plan Limitations

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On October 31, 2013, the Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2014. Some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment. However, other pension plan limitations will increase for 2014.

Below is the description of the changes (or lack thereof) for some of the most common plans.

401(k), 403(b) and most 457 plans

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $17,500.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500.

IRA Annual Contribution Limitations

The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000, up from $59,000 and $69,000 in 2013. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $181,000 and $191,000, up from $178,000 and $188,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRA Contribution Limitations

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Retirement Savings Contribution Credit

The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $35,500 to $36,000; the limitation under Section 25B(b)(1)(B) is increased from $38,500 to $39,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $59,000 to $60,000.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $26,625 to $27,000; the limitation under Section 25B(b)(1)(B) is increased from $28,875 to $29,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $44,250 to $45,000.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $17,750 to $18,000; the limitation under Section 25B(b)(1)(B) is increased from $19,250 to $19,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $29,500 to $30,000.

Qualified Retirement and Pension Plans

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.

Effective January 1, 2014, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $205,000 to $210,000. For a participant who separated from service before January 1, 2014, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2013, by 1.0155.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2014 from $51,000 to $52,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2014 are as follows:

The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $17,500.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $255,000 to $260,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $165,000 to $170,000.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $1,035,000 to $1,050,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $205,000 to $210,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $115,000.

The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.

The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $380,000 to $385,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.

The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $12,000.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $17,500.

The compensation amount under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $100,000 to $105,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $205,000 to $210,000.

 Various Income Limitations

The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2014 are as follows:

The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,500.

The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $95,000 to $96,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $59,000 to $60,000. The applicable dollar amount under Section 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $178,000 to $181,000.

The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $178,000 to $181,000. The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $112,000 to $114,000. The applicable dollar amount under Section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.

The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under Section 430(c)(2)(D) has been made is increased from $1,066,000 to $1,084,000.

Search Warrants and IRS Summons Powers in Tax Crimes Cases

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In a previous article, we explained the basics of criminal tax investigations. In this article, we will examine further two investigatory methods available to the IRS.

Search Warrants

IRS Special Agents may request for a search warrant in certain cases. In order for a search warrant to be granted, IRS Counsel generally must first approve of the warrant request. The agent must also demonstrate to a federal judge or magistrate that evidence of a tax crime will be found on the premises of the taxpayer during the search, and the warrant must describe with specificity the place that will be searched, and any documents or items that will be seized. An agent must also show that probable cause exists that a taxpayer has committed a tax crime for the search warrant to be valid under the Fourth Amendment to the US Constitution.

Search Warrants are generally limited to significant criminal tax cases, such as cases involving large sums of taxes owed, and substantial fraud.

Summons Powers

IRS agents also have broad summons powers, available in both criminal and civil cases, under Internal Revenue Code Section 7602. IRS agents, however, may not conduct unnecessary investigations (IRC Section 7605). When important documents in a tax crime case are held by third parties, IRS agents may also summon third parties in order to obtain testimony about such documents, but taxpayers are usually supposed to receive notice of the summons (IRC Section 7609).

Contact Sherayzen Law Office for Help With IRS Investigations

If you are facing a criminal investigation by the IRS, contact Sherayzen Law Office for legal help. Attorney Eugene Sherayzen will review the facts of the case, outline an aggressive ethical defense strategy, and rigorously represent your interests during the IRS investigation.

IRS Announces Procedures Adjusted for APA and Certain Competent Authority Requests

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The Internal Revenue Service, Deputy Commissioner (International), Large Business and International Division (“LB&I”), announced certain organizational and administrative changes and transitional procedures in connection with the creation of the Advance Pricing and Mutual Agreement (“APMA”) program.

Prior to February 26, 2012, the Advance Pricing Agreement (“APA”) program was part of the Office of the Associate Chief Counsel (International), and the functions of the U.S. Competent Authority were generally exercised by the office of the Director, Competent Authority & International Coordination within the LB&I Division of the IRS. Effective February 26, 2012, the APA program and those Competent Authority functions (including mutual agreement procedures) related to transfer pricing and other allocation issues, as well as determinations of permanent establishment status, are realigned and consolidated into APMA, a single program within LB&I.

The Director of APMA reports to the Director, Transfer Pricing Operations. Other Competent Authority functions are the responsibility of a new LB&I Treaty Assistance and Interpretation team in the office of the Assistant Deputy Commissioner (International), LB&I.

Pursuant to this realignment, the administration of requests for Competent Authority assistance is shared by two separate units within LB&I. Requests for APAs or regarding other transfer pricing, permanent establishment and allocation issues are addressed by APMA. Competent Authority requests regarding non-allocation issues are addressed by the LB&I Treaty Assistance and Interpretation team.

The IRS intends to revise the existing published guidance with respect to requests for APAs and Competent Authority assistance. Before issuing such updated guidance, the IRS will seek public comment.

Pending issuance of such guidance, taxpayers should continue to follow and rely on Rev. Proc. 2006-9, 2006-1 C.B. 278, as modified by Rev. Proc. 2008-31, 2008-1 C.B. 1133 with respect to requests for APAs and Rev. Proc. 2006-54, 2006-2 C.B. 1035 with respect to requests for Competent Authority assistance, except as follows:

1. References to the APA program should be understood to refer to APMA.

2. For determinations regarding limitation on benefits, the user fee under Rev. Proc. 2006-54, §14.02 is $27,500, effective for requests received after Feb. 4, 2012. See Rev. Proc. 2012-1 (Appendix A), 2012-1 I.R.B. 1.

3. Taxpayers should send APA requests and requests for Competent Authority assistance to the following address:

Deputy Commissioner (International)
Large Business and International Division
Internal Revenue Service
1111 Constitution Avenue, N.W.
Routing: MA2-209
Washington, D.C. 20224
Attention: Katina Cooper

IRS Extends the 2011 Tax Return Filing Deadline to April 17, 2012

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On January 4, 2012, the Internal Revenue Service announced that the taxpayers will have until  April 17, 2012 (Tuesday) to file their 2011 tax returns and pay any tax due.  This is because April 15, 2012, falls on a Sunday, and Emancipation Day, a holiday observed in the District of Columbia, falls this year on Monday, April 16, 2012.  Since, according to federal law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do, all taxpayers will have two extra days this year to file their 2011 tax returns.  Note, however, that taxpayers requesting an extension will have until October 15, 2012, to file their 2011 tax returns; there is no change in the filing date here.

The IRS will begin accepting e-file and Free File returns on January 17, 2012. Additional details about e-file and Free File will be announced later this month.

Tax Lawyer Minneapolis | Common Tax Penalties and Interest: The Basics

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Penalties and interest may be impose

d by the IRS relating to various tax underpayments. Taxpayers should understand some of the basic tax penalties detailed in this article (many of which can be quite sever) in order to avoid such penalties if possible, and to perhaps mitigate any imposed penalties.

Accuracy-Related Penalties

An accuracy-related penalty of 20% of a tax underpayment may be imposed by the IRS if the underpayment is attributable to one or more of the following: (1) negligence or disregard of the rules and regulations; (2) any substantial understatement of income tax; (3) any substantial valuation overstatement; (4) any substantial overstatement of pension liabilities; and/or
(5) any substantial gift or estate tax valuation understatement.

Late-Filing Penalty

If a taxpayer files a late tax return, unless he/she can demonstrate “reasonable cause” to the IRS for not filing on time, a late filing penalty of 5% of the net tax due for each month the return is due, up to five months (25% maximum) can be imposed. In addition, there is a minimum
penalty, equal to the lesser of $135 or the net amount required to be shown on the tax return, for returns that are more than 60 days late (including extensions).

The late filing penalty does not apply if a return is filed late but no taxes are owed.

Failure to Pay Penalty

In general, if a taxpayer is late in paying taxes owed, the IRS can impose a failure to pay penalty of 0.5% (0.5 of 1%) upon the net amount of tax due and unpaid by the due date. The penalty begins on April 16th, and stops accruing when the IRS receives the payment amount. The maximum penalty that can be imposed is 25%.

Combined Penalties

Taxpayers may also be subject to combined penalties, with special rules. For example, if both late-filing and late-payment penalties are imposed on a taxpayer, a combined penalty of 5% per month will be applied for the duration in which both penalties apply at the same time (maximum penalty of 25%). The combined penalty is made up of a reduced late-filing penalty (4.5% instead of the standard 5%) added to the 0.5% late-payment penalty. After the maximum 25% penalty is met, the late-filing portion of the penalty ends, but the late-payment portion will continue at 0.5% up to a maximum of 22.5%.

Other penalties may also be imposed in addition to the combined penalty.

Civil Fraud Penalties

If the IRS can establish by clear and convincing evidence that a taxpayer has fraudulently underreported income, it can impose a penalty equal to 75% of the entire amount underreported. After such determination, the burden of proof rests upon the taxpayer to establish that fraud did not constitute the entire underreported amount. Fraud is defined to be an intentional wrongdoing by the taxpayer with the specific intent to evade a tax known or believed to be owing.

Furthermore, if the IRS determines that a taxpayer fraudulently failed to file a tax return, a penalty equal to 15% of the net tax due for every month that a return is due and not filed, up to five months (for a maximum of 75%) can be imposed.

Interest on Tax Underpayments

In addition to the various penalties, interest on tax underpayments may also be imposed. For individual taxpayers, the interest rate is equal to the short-term Federal rate plus 3%. Interest is compounded daily in most cases, and begins to accrue from the due date of the return.