MAKE SURE YOU LET IRS KNOW IF YOU HAVE MOVED DURING THIS PANDEMIC…WHY ??

The  IRS released  a reminder last week that it is increasingly important to notife them as to your most current address.Here is how….

Topic No. 157: Change Your Address – How to Notify the IRS

Background. The Code requires IRS to send various documents, including refund checks and deficiency notices, to a taxpayer’s “last known address.” (Rev Proc 2010-16, 2020-19 IRB 664)

A taxpayer’s last known address is the address on the taxpayer’s most recently filed and properly processed return unless the taxpayer has given the IRS clear and concise notice of a different address. (Reg §301.6212-2(a))

When a notice or document is sent to a taxpayer’s last known address, the notice or document is legally effective, even if the taxpayer never receives it. (Rev Proc 2010-16)

Notifying IRS of a changed address. To help taxpayers who need to notify the IRS of a change in their address, the IRS

has provided the following change of address instructions on its website:

A taxpayer who changes address before filing their current tax return only needs to enter their new address on that return before filing it. When the IRS processes that return, it will update the taxpayer’s address in its records.

Example. Taxpayer changes address in February 2020 before filing his 2019 Form 1040. Taxpayer only needs to enter his new address on his 2019 Form 1040 before filing it to notify the IRS of his February 2020 change of address.

A taxpayer who changes address after filing their return should notify the post office servicing their old address that their address has changed. In addition, taxpayers changing address after filing their return should directly notify the IRS of their new address by completing and mailing:

  1. Form 8822, Change of Address (For Individual, Gift, Estate, or Generation-Skipping Transfer Tax Returns), or https://www.irs.gov/pub/irs-pdf/f8822.pdf
  2. Form 8822-B, Change of Address or Responsible Party – Business (for employment, excise, income and other business returns, and tax-exempt organization returns). https://www.irs.gov/pub/irs-pdf/f8822b.pdf

Taxpayers may also write a letter to notify the IRS that their address has changed. When writing a change of address letter to the IRS, taxpayers should include the following:

  • Full name.
  • Old and new addresses.
  • Social security number (SSN), individual taxpayer identification number (ITIN) and/or employer identification number (EIN); and
  • Their signature.

Taxpayers who file a joint return with their spouse should include, in their change of address letter, the above information (i.e., full name, old and new addresses, etc.) for both spouses and have both spouses sign the letter.

Taxpayers who previously filed a joint return and now have separate residences, should each separately notify the IRS of their new, separate address.

A taxpayer’s IRS change of address letter should be mailed to the IRS address listed in the instructions to the tax forms the taxpayer filed. For example, individual taxpayers filing Form 1040 would send their change of address letters to the IRS Service Center where they would file their Form 1040 return if they filed their Form 1040 on paper.

A taxpayer’s Form 8822 should be sent to the address provided in the instructions to Form 8822. A taxpayer’s Form 8822-B should be sent to the address provided in the instructions Form 8822-B.

The website notes that the IRS issues confirmation notices (Notices 148A and 148B), for both the old and new address, to taxpayers changing the address for an employment tax return (i.e., Form 94X series).

The website also notes that it normally takes 4 to 6 weeks to process a change of address request.

References. For notifying IRS of change of address for last-known-address purposes, see FTC 2d/FIN ¶T-2862.

Tax Filing Deadline Update….The IRS has extended the deadlines for Employment and Benefit Plans because of the CO-19…(Notice 2020-35)

Be aware that the IRS has issued this week some major changes in tax filing deadline for several tax filings. The new filing dates range from June 30 through August 31, 2020.

Take note of these changes and interest and penalties may accrue if you miss a key filing deadline. Stay tuned for more changes in the coming weeks. Stay safe !

Tax Filing Deadline Update….The IRS has extended the deadlines for Employment and Benefit Plans because of the CO-19 Notice 2020-35

https://www.irs.gov/pub/irs-drop/n-20-35.pdf

Be aware that the Internal Revenue Service this week in Notice 2020-35, 2020-25 IRB has postponed deadlines for specified time-sensitive actions with respect to certain employment taxes, employee benefit plans, exempt organizations, Individual Retirement Accounts (IRAs), Health Savings Accounts (HSAs) and Coverdell education savings accounts due to the ongoing COVID-19 pandemic.

Background. Code Sec. 7508A gives the IRS the authority to postpone the time for performing certain acts under the internal revenue laws for a taxpayer determined by the IRS to be affected by a “federally declared disaster.”

Under Code Sec. 7508A(a), a period of up to one year may be disregarded in determining whether the performance of certain acts is timely under the internal revenue laws.

Code Sec. 7508A(b) provides that, in the case of a pension or other employee benefit plan, or any sponsor, administrator, participant, beneficiary, or other person with respect to such a plan, affected by a federally declared disaster, the IRS may specify a period of up to one year that may be disregarded in determining the date by which any action is required or permitted to be completed.

If the IRS exercises that authority, no plan will be treated as failing to be operated in accordance with its terms solely because the plan disregards any period pursuant to this relief.

On March 13, 2020, the President declared a federal disaster (Emergency Declaration) due to the emerging COVID-19 pandemic. Following the Emergency Declaration, the IRS published guidance utilizing the authority provided under Code Sec. 7508A to postpone certain deadlines in the case of a federally declared disaster.

Tax deadlines extended. The IRS has now postponed deadlines for certain specified time-sensitive actions with respect to certain employment taxes, employee benefit plans, exempt organizations, IRAs, HSAs, and Coverdell education savings accounts on account of the ongoing COVID-19 pandemic.

Deadlines extended to June 30, 2020. With respect to the remedial amendment period and plan amendment rules for section 403(b) plans, actions that were otherwise required to be performed on or before March 31, 2020, with respect to form defects or plan amendments are postponed to June 30, 2020.

Deadlines extended to July 15, 2020. The following tax deadlines have been extended to July 15, 2020:

  • Employers correcting employment tax reporting errors using the interest-free adjustment process.
  • Employers correcting employment tax underpayments or overpayments.
  • Exempt organizations filing Form 990-N, e-Postcard.
  • Exempt organizations commencing a declaratory judgment suit.
  • Single employer defined benefit plans applying for a funding waiver.
  • Multi-employer defined benefit plans:
    1. Certifying funded status and giving notice to interested parties of that certification.
    2. Adopting, and notifying the bargaining parties of the schedules under, a funding improvement or rehabilitation plan; and
    3. Providing the annual update of a funding improvement plan and its contribution schedules, or rehabilitation plan and its contribution schedules, and filing those updates with their annual return.
  • Cooperative and small employer charity (CSEC) plans
    1. Making contributions required to be made for the plan year.
    2. Making required quarterly installments.
    3. Adopting a funding restoration plan; and
    4. Certifying funded status.
  • Employee benefit plans filing Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and paying the associated excise tax.

In addition, the period beginning on March 30, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest or penalty for failure to file the Form 5330 or to pay the excise tax postponed by the notice. Interest and penalties with respect to such postponed filing and payment obligations will begin to accrue on July 16, 2020.

Deadlines extended to July 31, 2020. Defined benefit plans have until July 31, 2020:

  1. To adopt a pre-approved defined benefit plan that was approved based on the 2012 Cumulative List.
  2. To submit a determination letter application under the second six-year remedial amendment cycle; and
  3. To take actions that are otherwise required to be performed regarding disqualifying provisions in a plan during the remedial amendment period that would otherwise have ended on April 30, 2020.

Deadlines extended to August 31, 2020. The due date for filing and furnishing Form 5498, IRA Contribution Information, form 5498-ESA, Coverdell ESA Contribution Information, and the Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, is postponed to August 31, 2020.

In addition, the period beginning on the original due date of those forms and ending on August 31, 2020, will be disregarded in the calculation of any penalty for failure to file those forms. Penalties with respect to such a postponed filing will begin to accrue on September 1, 2020.

Waiver of electronic filing requirement. The IRS has also provided a temporary waiver of the requirement that Certified Professional Employer Organizations (CPEOs) file certain employment tax returns, and their accompanying schedules, on magnetic media (including electronic filing). This temporary waiver is extended to all CPEOs; individual requests for waiver do not need to be submitted.

This waiver applies only to Forms 941, Employer’s Quarterly Federal Tax Return, filed for the second, third, and fourth quarter of 2020 and only to Forms 943, Employer’s Annual Federal Tax Return for Agricultural Employees, filed for calendar year 2020, and their accompanying schedules. Accordingly, CPEOs are permitted, but not required, to file a paper Form 941, and its accompanying schedules, in lieu of electronic submission for the second, third, and fourth quarters of calendar year 2020. In addition, CPEOs are permitted, but not required, to file a paper Form 943, and its accompanying schedules, in lieu of electronic submission for calendar year 2020.

References. For extension of tax-related deadlines for taxpayers affected by disasters, see FTC 2d/FIN ¶S-8502; United States Tax Reporter ¶75,08A4.

Accountant-turned-attorney couldn’t deduct law school costs

Here we go again…Watch out when a person qualifies for a new trade or business under the education expense deduction rules!

Santos, TC Memo 2016-100TC Memo 2016-100

The Tax Court has concluded that an accountant could not deduct his law school tuition and fees as ordinary business expenses, finding that such qualified him for a new trade or business and thus were nondeductible under Reg. § 1.162-5(b). The Court also declined to consider the taxpayer’s late-raised arguments challenging the validity of that reg.

Background. Education expenses are deductible under Code Sec. 162(a) if made by a taxpayer either to maintain or improve skills required in his business or employment or to meet the express requirements of his employer, or the requirements of law or regs, if they are imposed as a condition to retaining his salary, status or employment. (Reg. § 1.162-5) The expense is deductible only if the taxpayer is established in the trade or business at the time he pays or incurs the expense. (Jungreis, (1970) 55 TC 58155 TC 581)

Deductions are not allowed if the education:

  • Is needed to meet the minimum requirements for taxpayer’s present or intended employment, trade, business, or profession (Reg. § 1.162-5(b)(2)); or
  • Is undertaken to fulfill general education aspirations or for other personal reasons; or
  • Is part of a program of study that will lead to qualifying the individual in a new trade or business. (Reg. § 1.162-5(b)(3)(i))

Two of the examples in Reg. § 1.162-5(b)(3) illustrating types of nondeductible educational expenses involve individuals who go to law school. In the first example, a self-employed non-lawyer’s law school expenditures are nondeductible because they qualify him for a new trade or business. The second example involves an employee in a nonlegal profession whose employer requires him to get a law degree, and in this example, although the employee intends to continue practicing his nonlegal profession, the expenditures are still nondeductible because the education nonetheless qualifies him to do something new. A number of courts have also held that a law degree qualifies a law student for a new trade or business (i.e., the business of being an attorney) and that, therefore, the cost of a law degree is a nondeductible educational expense under Reg. § 1.162-5(b)(3). (See, e.g., Melnik v. U.S., (CA 9 1975) 36 AFTR 2d 75-566736 AFTR 2d 75-5667)

Facts. Emmanuel Santos began working as a return preparer in ’90. He became an “enrolled agent” authorized to represent taxes before IRS in ’95 and earned a master’s degree in taxation in ’96. He began offering other services to his clients, including financial planning.

At some point, Santos enrolled in law school. He was attending law school in 2010 and, during that year, paid tuition, and fees of $20,275. He later started a law firm with his father that also provides tax and financial planning services.

Santos attached a Schedule C (Profit or Loss from Business) to his 2010 Form 1040 for the “business or profession” of tax and financial planning. On his Schedule C, Santos deducted a variety of expenses, including $20,275 for law school tuition and fees. After concessions from both parties, the remaining issue was whether Santos could deduct the law school tuition and fees.

No deduction. The Tax Court easily concluded, looking at the applicable regs and caselaw, that the law school tuition and fees paid by Santos were not deductible.

Santos also challenged the validity of Reg. § 1.162-5. The Court noted that the reg was challenged shortly after its promulgation and was upheld both by the Tax Court (Weiszmann, (1969) 52 TC 110652 TC 1106) and by the Ninth Circuit Court of Appeals (the relevant Court to which an appeal of this case would lie), which affirmed the Tax Court. (Weiszmann v. Comm., (CA 9 1971) 27 AFTR 2d 71-97027 AFTR 2d 71-970) Specifically, the Tax Court found in Weiszmann that the challenged reg was consistent with statutory law and not arbitrary.

In this case, the Tax Court found that Weiszmann was binding precedent and thus declined to reconsider the validity of the reg. The Court noted that, while the tests for evaluating a reg’s validity are different now than they were when Weiszmann was decided, and while “precedent may lose its force when the underlying law upon which the precedent was based has changed,” it didn’t see any such change warranting a departure from Weiszmann.

The Court also rejected the argument that it should hold the reg invalid under other tests. Santos cited Altera, (2015) 145 TC No. 3145 TC No. 3, in which the Tax Court struck down certain cost-sharing regs for, among other reasons, failure to address “numerous relevant and significant comments.” However, the Tax Court distinguished the regs at issue in Altera as requiring empirical analysis, whereas the education expense regs in the instant case are purely a matter of statutory interpretation. And further, the Court found that Santos failed to challenge the validity of the reg until after trial—so the trial record and court papers have no information regarding public comment on the education expense reg, leaving the Court unable to determine the adequacy of Treasury’s response.

References: For when a person qualifies for a new trade or business under the education expense deduction rules, see FTC 2d/FIN ¶ L-3715; United States Tax Reporter ¶ 1624.185; Tax Desk ¶ 302,013; TG ¶ 16197.