The April 18th tax deadline is fast approaching, but if you haven't filed yet, there's no need to get stressed out, We are providing 5 sound tax tips for you.
- IRS to Start Audit Process By Mail, Not Phone.
As recently as June 21, 2016, the IRS website noted that “Should your account be selected for audit, you will be notified in two ways: by mail or by telephone. In the case of a telephone contact the IRS will still send a letter confirming the audit. E-mail notification is not used by the IRS.”
However, by way of a May 20, 2016 memorandum from the IRS Deputy Commissioner for Services and Enforcement, effective immediately all initial (emphasis from the memorandum) contact with taxpayers to commence an examination must be made by mail, instead of the telephone. This change is in response to the continuing threat of phone scams, phishing and identity theft. Note that IRS employees can call the taxpayer as needed after sending the letter (allowing 14 calendar days from mailing the letter). Note also that the IRS is evaluating other contacts with taxpayers outside of the examination area to address risks with respect to phone scams and other threats
Practice Tip: Scam artists are very good and generally deal in volume. It is surprisingly easy to be taken in by a scam. Some scam artists send fake letters and notices that look very much like official IRS documents.
Practice Tip: While being alert to fraud, remember that some IRS notices come with real deadlines that, if missed, can significantly affect a client’s rights.
- Taxation of Wrongful-Incarceration Recovery-Protecting Americans from Tax Hikes (PATH) Act
With the advent of wrongful conviction law clinics, more advanced DNA and other testing, and for other reasons, wrongfully-incarcerated persons are being released from prisons. Sometimes the wrongfully-incarcerated are awarded civil damages, restitution or other monetary award in connection with their incarceration. Many of the wrongfully-incarcerated are elders by the time they are released from incarceration.
The PATH Act, enacted in December 2015, included an exemption from income for damages received by wrongfully-incarcerated persons due to the wrongful incarceration. The PATH Act has a provision allowing a special one year window to file a claim for a tax refund due to the recovery now being retroactively treated as nontaxable. This means that clients have until December 19, 2016 to make the refund claim for tax periods that would otherwise be too old to request a refund. In most cases, claims for tax years 2012 and prior years would be barred but for this special rule.
- Final Medical Expenses - Can You Back Date?
Usually “back dating” is unethical, if not illegal. However, a decedent’s final medical expenses can be an exception. Final medical expenses can, of course, be deducted on the Federal Estate Tax Return (Form 706). However, with the relatively high federal estate tax exemption ($5,450,000 in 2016), it is becoming increasingly less likely that an estate tax return will be filed.
IRC §213(c) allows medical expenses paid within one year of the decedent’s death to be deducted, subject to the normal limitations, on the decedent’s final income tax return. (This option requires forgoing taking the deduction on the estate tax return.)
Practice Tip: Given the high estate tax rate relative to the marginal income tax rate, if there is an estate tax, the medical expense deduction will almost always be more valuable if taken on the estate tax return rather than on the final income tax return. The client would then forgo the deduction on the final income tax return.
Trap: If the medical deduction is taken on the final income tax return and the deducted amount is ater reimbursed by insurance, the reimbursed amount received is income in respect of a decedent (IRD). This IRD will need to be reported on the income tax return for the estate (Form 1041).
- Disclosure of Confidential Estate Tax Return Information.
The IRS Office of Chief Counsel issued advice (CCA 201621014) addressing who can request confidential estate tax return information. In addition to the Personal Representative/Trustee, the heirs at law, “next of kin”, will beneficiaries and donees of property can request confidential estate tax return information. The requester needs to show that they have a material interest (usually financial) when requesting the information.
Practice Tip: In situations where the estate refuses to provide a copy of the estate tax return to a client/beneficiary, it is possible that some of the information can be obtained from the IRS. It is possible that even the threat of making the information request to the IRS will cause the Personal Representative/Trustee to release information.
- Reminder About State Taxation on Retirement Plan Distributions.
Federal law prohibits states from taxing retirement plan distributions of non-residents (Title 4 USC, Chapter 4, Section 114, enacted 1996). This includes 401(K), defined benefit and profit sharing plans, IRAs, SEPs, 403(a) and (b) plans, etc. Certain nonqualified deferred compensation plans are also exempt in some cases.
Practice Tip: This law applies to “legal residents”. The “normal” planning to clarify the state of residency is especially critical when attempting to use this law.