IRS Provides Penalty Relief to Farmers and Fishermen

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On January 18, 2013, the IRS announced that it will issue guidance in the near future to provide relief from the estimated tax penalty for farmers and fishermen unable to file and pay their 2012 taxes by the March 1 deadline due to the delayed start for filing tax returns.

The delay stems from this month’s enactment of the American Taxpayer Relief Act (ATRA). The ATRA affected several tax forms that are often filed by farmers and fishermen, including the Form 4562, Depreciation and Amortization (Including Information on Listed Property). These forms will require extensive programming and testing of IRS systems, which will delay the IRS’s ability to accept and process these forms. The IRS is providing this relief because delays in the agency’s ability to accept and process these forms may affect the ability of many farmers and fishermen to file and pay their taxes by the March 1 deadline. The relief applies to all farmers and fishermen, not only those who must file late released forms.

Normally, farmers and fishermen who choose not to make quarterly estimated tax payments are not subject to a penalty if they file their returns and pay the full amount of tax due by March 1. Under the guidance to be issued, farmers or fishermen who miss the March 1 deadline will not be subject to the penalty if they file and pay by April 15, 2013. A taxpayer qualifies as a farmer or fisherman for tax-year 2012 if at least two-thirds of the taxpayer’s total gross income was from farming or fishing in either 2011 or 2012.

Farmers and fishermen requesting this penalty waiver must attach Form 2210-F to their tax return. The form can be submitted electronically or on paper. The taxpayer’s name and identifying number should be entered at the top of the form, the waiver box (Part I, Box A) should be checked, and the rest of the form should be left blank.

FBAR Criminal Enforcement: Liechtenstein and Israel

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The voluntary disclosure programs provided the IRS with an enormous amount of information regarding countries, banks and individuals involved in US taxpayers’ non-compliance with U.S. tax laws. With so much information, it was reasonable to expect that the IRS would not be satisfied with solely prosecuting Swiss banks. Year 2012 confirmed these expectations; building up on FATCA and the information provided in voluntary disclosures, the IRS made aggressive moves far beyond Switzerland, initiating negotiations about and, in many cases, concluding bilateral FATCA treaties with over 50 different countries. Among these enforcement efforts, two countries stand out as most likely candidates for future prosecutions – Liechtenstein and Israel.

Banks in Liechtenstein and Israel Are Targets in U.S. Probes

In May of 2012, the IRS issued a request to Liechtensteinische Landesbank AG (LLB) to disclose information regarding accounts of at least $500,000 owned by U.S. taxpayers. The request covers all years 2004 through present time. The bank already sent out the letters to its U.S. clients describing their intention to comply with the request. It should be noted that Liechtenstein has been under tremendous pressure not only from the United States, but also France and Germany to wind down its secrecy laws.

At the same time, the IRS became very concerned about the money flow between Switzerland and Israel. It appeared that some taxpayers decided to exit Switzerland in light of the USB and Wegelin case and moved all of their accounts to Israel. The IRS caught up with this trend and decided to pursue these taxpayers in Israel.

The focus is on three Israeli banks – Bank Leumi Le-Israel, Bank Hapoalim and Mizrahi-Tefahot Bank. It appears that these banks are cooperating even ahead of the 2013 deadline and U.S. taxpayers with undisclosed accounts in these banks are well-advised to assume that their accounts will be disclosed to the IRS sooner rather than later (especially given the close relationship between Israel and the United States).

Voluntary Disclosure for Non-Compliant U.S. Taxpayers in Liechtenstein and Israel

It appears that U.S. taxpayers with undisclosed accounts in Liechtenstein and Israel are in a race against time and they are losing to the IRS. Therefore, at this point, it is absolutely essential for these taxpayers to consider their voluntary disclosure options as soon as possible. Otherwise, they run a tremendous risk of being discovered by the IRS and subject to severe criminal and civil penalties.

2012 OVDP voluntary disclosure, Reasonable Cause (Modified) voluntary disclosure and FAQ #17 and #18 (absence of additional U.S. tax liability) disclosure are options that may be open to such taxpayers. All of these options must be thoroughly analyzed by an international tax attorney who is familiar with these issues.

Contact Sherayzen Law Office for Help With Voluntary Disclosure of Foreign Accounts and Foreign Income

If you have any undisclosed foreign accounts and/or foreign income, contact Sherayzen Law Office. Our experienced international tax firm will thoroughly review your case, advise you on the available voluntary disclosure options, prepare your voluntary disclosure documentation (including tax returns and offshore information returns such as Forms 5471, 8865, 926, 3520, FBARs and others), guide you throughout the voluntary disclosure process and vigorously represent your interests during your negotiations with the IRS.

Tax-Free Transfers to Charity Renewed For Certain IRA Owners

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On January 16, 2013, the IRS confirmed that certain owners of individual retirement arrangements (IRAs) have a limited time to make tax-free transfers to eligible charities and have them count for tax-year 2012.

Pursuant to the American Taxpayer Relief Act of 2012, Congress extended for 2012 and 2013 the tax provision authorizing qualified charitable distributions (QCDs). Under this provision, an otherwise taxable distribution from an IRS, owned by a person who has at least 70.5 years or older, can exclude from gross income up to $100,000 of QCDs paid directly to an eligible charitable organization. The eligible IRA owners have until Thursday, January 31, 2013, to make a direct transfer, or alternatively, if they received IRA distributions during December 2012, to contribute, in cash, part or all of the amounts received to an eligible charity.

The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable and no deduction is available for the transfer.

It is iimportant to note that QCDs are counted in determining whether the IRA owner has met his or her IRA required minimum distributions for the year.

For tax year 2012 only, IRA owners can choose to report QCDs made in January 2013 as if they occurred in 2012. In addition, IRA owners who received IRA distributions during December 2012 can contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 QCDs.

QCDs are reported on Form 1040 Line 15. The full amount of the QCD is shown on Line 15a. Do not enter any of these amounts on Line 15b but write “QCD” next to that line.

Optional Safe Harbor Method for Claiming Home Office Deduction for 2013

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On January 15, 2013, the IRS today announced a simplified option for claiming home office deduction (i.e. deduction for the business use of a home). The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

Background Information

Internal Revenue Code (IRC) Section 280A generally deals with the tax treatment of home office expenses. Generally, IRC Section 280A(a) disallows any deduction for expenses related to a dwelling unit that is used as a residence by the taxpayer during the taxable year. However, Provisions 280A(c)(1) through (4) allow a deduction for expenses related to certain business or rental use of a dwelling unit, subject to the deduction limitation in § 280A(c)(5).

Section 280A(c)(1) permits a taxpayer to deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis (A) as the taxpayer’s principal place of business for any trade or business, (B) as a place to meet with the taxpayer’s patients, clients, or customers in the normal course of the taxpayer’s trade or business, or (C) in the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.

Section 280A(c)(2) permits a taxpayer to deduct expenses that are allocable to space within the dwelling unit used on a regular basis for the storage of inventory or product samples held for use in the taxpayer’s trade or business of selling products at retail or wholesale, if the dwelling unit is the sole fixed location of the trade or business.

Section 280A(c)(3) permits a taxpayer to deduct expenses that are attributable to the rental of the dwelling unit or a portion of the dwelling unit.

Section 280A(c)(4) permits a taxpayer to deduct expenses that are allocable to the portion of the dwelling unit used on a regular basis in the taxpayer’s trade or business of providing day care for children, for individuals who have attained age 65, or for individuals who are physically or mentally incapable of caring for themselves.

Optional Safe Harbor Method

After recognizing that Section 280A(c)(1) imposes a substantial compliance burden on taxpayers (and, perhaps, with the desire to cut its own enforcement costs), the IRS decided to provide for the very first time a new method of calculating home office deductions – the optional safe harbor method.

Under this safe harbor method, taxpayers determine their allowable deduction for business use of a residence by multiplying a prescribed rate (currently set at $5 per square foot) by the square footage of the portion of the taxpayer’s residence that is used for business purposes (“allowable square footage”). The allowable square footage is the portion of a home used in a “qualified business use” of the home, but not to exceed 300 square feet.

“Qualified Business Use” is a term of art. Under the Rev. Proc. 2013-13, this term means (1) business use that satisfies the requirements of § 280A(c)(1), (2) business storage use that satisfies the requirements of § 280A(c)(2), or (3) day care services use that satisfies the requirements of § 280A(c)(4) (see above).

The safe harbor method provided by this revenue procedure does not apply to an employee with a home office if the employee receives advances, allowances, or reimbursements for expenses related to the qualified business use of the employee’s home under a reimbursement or other expense allowance arrangement (as defined in § 1.62-2) with his or her employer.

Note that the current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

Advantages and Disadvantages of the New Optional Safe Harbor Method

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

The new option does not affect business expenses unrelated to the home (such as advertising, supplies and wages paid to employees). Such expenses are still fully deductible.

The down side of the new option is that the homeowners cannot depreciate the portion of their home used in a trade or business. However, they can still claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

A taxpayer using the safe harbor method for a taxable year cannot deduct any depreciation (including any additional first-year depreciation) or § 179 expense for the portion of the home that is used in a qualified business use of the home for that taxable year. The depreciation deduction allowable for that portion of the home for that taxable year is deemed to be zero.

Switching the Methods

The election of whether to use safe harbor method is made on a annual basis. Therefore, in one year, a taxpayer may use the safe harbor method, while the next year he can choose to calculate and substantiate actual expenses for purposes of § 280A. A change from using the safe harbor method in one year to actual expenses in a succeeding taxable year, or vice-versa, is not a change in method of accounting and does not require the IRS consent.

It is important to remember that an election for any taxable year, once made, is irrevocable

More complications arise if the taxpayer depreciates his home subsequent (or even prior to) electing to use the safe harbor method.

Safe Harbor Method Available in 2013

The new simplified option is available starting the tax year 2013.

Itemized Deductions Limitation in 2013

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The American Taxpayer Relief Act of 2012 added a limitation for itemized deductions claimed on 2013 returns of individuals with incomes of $250,000 or more ($300,000 for married couples filing jointly).

In reality this is not a new law; this is basically a re-birth of the famous “Pease limitation” that was the part of the Omnibus Budget Reconciliation Act of 1990. This limitation was later phased out during the era of Bush tax cuts and completely eliminated for the year 2010. Subsequently, additional legislation extended the elimination of the Pease limitation from 2010 through 2012. Now, as part of the New Year’s compromise, the American Taxpayer Relief Act of 2012 reinstated the provision with an upgrade; the provision is codified as 26 USC §68.

In order to understand how the provision works, it is important to emphasize that the idea is to limit the impact of certain itemized deductions, but not to completely eliminate the tax advantages of such deductions.

Types of Itemized Deductions Affected by the Limitation

Armed with this understanding, let’s look at the details of the Pease limitation. First, the provision mostly applies to the following types of itemized deductions: charitable contributions, mortgage interest, state/local/property taxes and miscellaneous itemized deductions. However, the statute expressly excludes medical expense deductions, the investment interest deduction, casualty, theft, or gambling loss deductions (see 26 USC §68(c)).

Limitation and Thresholds

For the tax year 2013, 26 USC §68 starts to limit the itemized deductions once the AGI exceeds $250,000 for individuals and $300,000 for joint filers (these are the items indexed for inflation). The limitation will consist of the less of (a) 3% of the adjusted gross income above the threshold amount, or (b) 80% of the amount of the itemized deductions otherwise allowable for the taxable year.

For example, in a hypothetical where a an individual earns $300,000 in 2013 and his itemized deductions consist of mortgage interest and property tax deductions of $50,000, the individual’s itemized deductions will be reduced by $ 1,500.

Based on the information in our hypothetical (and disregarding any other facts and factors), here are the calculations:

(a) $300,000 AGI – $250,000 (threshold for 2013) = $50,000; 3% x $50,000 = $1,500;
(b) 80% x $50,000 of itemized deductions = $40,000.

Since $1,500 is less than $40,000, this is the amount that should be used to reduce the taxpayer’s itemized deductions.

Contact Sherayzen Law Office for Tax Planning Help Regarding Pease Limitation

If you are potentially facing the limitation of your itemized deductions, it is possible that you are overlooking tax alternatives that may mitigate the impact of Pease Limitation. If you wish to explore such alternatives as part of your overall tax plan, contact the experienced tax firm of Sherayzen Law Office.