IRS to Audit More High-Income Taxpayers, Mnuchin Tells Lawmakers

The IRS is planning to audit more high-income taxpayers, Treasury Secretary Steven Mnuchin told House lawmakers. The plan comes on the heels of recent reports that the IRS has conducted more audits of lower-income taxpayers largely because of the increased complexity and resources needed for high-income examinations.

“I have specifically directed the IRS Commissioner to come up with a plan to increase the amount of funding so that we can audit more high-income earners,” Mnuchin told lawmakers during a March 3 House Ways and Means Committee hearing on the president’s fiscal year (FY) 2021 Budget. “That is specifically in our plan,” he added.

IRS Budget
Mnuchin also told lawmakers that the president’s request for an increase in IRS funding would help accomplish the modernization and improvement of the agency. “Of particular interest to this Committee, we are requesting $12 billion for the Internal Revenue Service (IRS). This includes funding to implement the Taxpayer First Act and the third year of the Integrated Business Systems Modernization Plan,” Mnuchin said. “We continue to bring the IRS into the 21st century by updating systems and utilizing data analytics and other technological advancements to enhance the effectiveness of audit enforcement activities.”

The Trump administration’s FY 2021 budget request proposes $12 billion in base funding for the IRS, which would provide an increase from currently enacted levels of $11.5 billion. The budget would also provide $300 million to continue the IRS’s modernization efforts.

“I am pleased to see a slight increase in IRS funding in the president’s budget, but the request still falls far lower than the amount the agency received a decade ago,” Chairman Richard Neal, D-Mass., said during the hearing.

Infrastructure
Additionally, Mnuchin and lawmakers discussed commonality in moving forward on a bipartisan infrastructure plan. Recently, both Trump and House Democrats have separately outlined their infrastructure priorities.

“Before the administration begins to entertain any proposals for temporary tax cuts, the most important way that we can proceed… if we were to develop a stimulus package, the soundest way to do that is clearly to proceed with a major infrastructure initiative,” Neal said. Neal’s comments appeared to be in response to a tweet by President Trump in which he recommended a temporary payroll tax cut as a means for economic stimulus.

“If there is a need to stimulate the economy… I am sure that infrastructure is a priority for the president,” Mnuchin told lawmakers.

IRS Highlights Tax Tips and Benefits for Service Members

The IRS highlighted tax tips and benefits for military members, veterans and their families to assist in meeting federal income tax filing obligations. This includes active duty or reserve members of the following branches:

  • United States Army (including Army Reserve and Army National Guard).
  • United States Navy (including Navy Reserve).
  • United States Air Force (including Air Force Reserve and Air National Guard).
  • United States Marine Corps (including Marine Corps Reserve).
  • United States Coast Guard (including Coast Guard Reserve).

Moreover, recently retired or separated members may also be eligible for benefits. Service members can use (1) IRS Free File which allows for complimentary filing of taxes; (2) the Military OneSource program, which provides a range of free resources including for family members; (3) the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs, which offer volunteers who assist in tax return preparation; and (4) the Earned Income Tax Credit for various tax credits.

The IRS also released IRS Publication 3, Armed Forces’ Tax Guide, which covers special tax situations for active duty members. The publication also comprises of guidance that allows armed forces reservists to deduct their reservist-related travel expenses, regardless of whether they itemize their deductions and moving expense deductions that are available to active-duty members of the military in connection with a change of station.

Population Figures Provided for Calculating Low-Income Housing Tax Credits

State and local housing credit agencies that allocate low-income housing tax credits and states and other issuers of tax-exempt private activity bonds have been provided with a listing of the proper population figures to be used when calculating the 2020:

  • calendar-year population-based component of the state housing credit ceiling under Code Sec. 42(h)(3)(C)(ii);
  • calendar-year private activity bond volume cap under Code Sec. 146; and
  • exempt facility bond volume limit under Code Sec. 142(k)(5).

These figures are derived from the estimates of the resident populations of the 50 states, the District of Columbia and Puerto Rico, which were released by the Bureau of the Census on December 30, 2019. The figures for the insular areas of American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands are the midyear population figures in the U.S. Census Bureau’s International Database.

Additional Tax on Early Distribution from Retirement Plan is Constitutional

An individual who received a distribution from her qualified retirement plan when she was not yet 59-1/2 years old, was not disabled, and was not eligible for any of the exceptions under Code Sec. 72(t)(2), was responsible for the 10-percent additional penalty tax imposed by Code Sec. 72(t)(1). The court rejected the taxpayer’s claim that the additional tax violated the equal protection component of the Due Process Clause of the Fifth Amendment to the U.S. Constitution.

The court held that Code Sec. 72(t) was valid as applied to the taxpayer, because the age and disability classifications bore a reasonable relationship to a legitimate government purpose. The court reasoned that if taxpayers faced no disincentive for withdrawing amounts from qualified retirement plans long before their retirement years and without suffering any disability, the withdrawn amounts might be diverted to nonretirement uses, which would frustrate Congress’ objective of encouraging taxpayers to save for periods of their lives when they might not be able, or wish, to work. However, allowing a disabled person to receive distributions from such a plan without paying the additional tax was fully consistent with Congress’ objective.

IRS Increases User Fee for Offers in Compromise

The IRS has released final regulations that increase the user fee for processing an offer in compromise from $186 to $205, effective for offers in compromise submitted on or after April 27, 2020.

The final regulations also continue to provide exceptions for offers based on doubt as to liability and offers from low-income taxpayers from the user fee, and expand the definition of low-income taxpayer, reflecting recent legislation.

IRS Encourages Taxpayers to Save for Retirement

Highlighting the tax provisions of the newly enacted Further Consolidated Appropriations Act, 2020 (the Act), the IRS has encouraged taxpayers to save for retirement. The Act includes a number of tax changes such as the retroactive renewal of some tax benefits that expired at the end of 2017. Eligible taxpayers can claim these benefits when they file their 2019 income tax returns. Further, the taxpayers may also qualify to claim some tax benefits for 2018 by filing an amended return. Publication 17, Your Federal Income Tax, features an in-depth look at on tax changes for 2019 including recent legislative changes and covers the general rules for filing a federal income tax return.

Contributing to a Traditional IRA
The Act has eliminated the long-standing 70-and-a-half age limit for making contributions to traditional (Individual Retirement Arrangements) IRAs. Further, there is no age limit for contributions to a Roth IRA.

Required Minimum Distributions
Taxpayers with traditional IRAs, as well as 401(k) plans and other workplace retirement plans, may be able to wait until they turn age 72 before taking required minimum distributions (RMDs) from their IRAs and plans. For those who turned age 70-and-a-half prior to January 1, 2020, their RMDs must begin by April 1 of the year after they turned age 70-and-a-half. Moreover, for those who were age 70-and-a-half or younger on January 1, 2020, their first RMD is not due until April 1 of the year after they turn age 72.

Birth or Adoption of a Child
An IRA owner or a participant in a workplace defined contribution plan can withdraw up to $5,000 for the birth or adoption of a child without incurring the usual 10-percent additional tax on early distributions. The distribution must be made within one year after the child is born or the adoption is finalized and cannot be from a defined benefit plan.

New Rules for Beneficiaries
Fewer beneficiaries of IRAs and workplace retirement plans would qualify to receive distributions over their lifetime. The old distribution rules continue to apply where the IRA owner or plan participant died before 2020, except a special rule applies to distributions after the death of a beneficiary who dies after 2019.

529 Plan
More expenses now qualify for tax-free and penalty-free withdrawals from a qualified tuition program, also known as a 529 plan. Amounts can be withdrawn to pay principal or interest on a designated beneficiary’s or their sibling’s student loan. In addition, a 529 plan can now be used to pay qualifying expenses for a designated beneficiary to participate in an apprenticeship program that is registered and certified by the U.S. Department of Labor. Since, these changes are retroactive to 2019, any distributions during 2019 that meet these guidelines also qualify for tax-free and penalty-free treatment.

Tax Benefits Extended Through 2020
Tax benefits such as the tuition and fees deduction, the deduction for mortgage insurance premiums for eligible homeowners, the exclusion for debt cancelled on a principal residence and the nonbusiness energy credit for homeowners who install energy-efficient windows, doors, insulation and furnaces that expired at the end of 2017 have now been extended through 2020. As a result, eligible taxpayers can claim them on the 2019 return they are filing this tax season. In addition, eligible taxpayers can claim them on an amended return (Form 1040X) for 2018.

IRS to Increase Visits to High-Income Nonfilers

The IRS has announced that it will step up efforts to visit high-income taxpayers who in prior years have failed to timely file one or more of their tax returns. With the recent and ongoing hiring of additional enforcement personnel, IRS revenue officers across the country will increase face-to-face visits with high-income taxpayers who have not filed tax returns in 2018 or previous years.

For the new visits taking place, high-income non-filers taxpayers are those who generally received income over $100,000 during a tax year and did not file a tax return with the IRS. These taxpayers have typically received numerous letters from the IRS over an extended period of time, so they generally realize they have a tax issue. During the visits, IRS revenue officers will share information and work with the taxpayer to hopefully resolve the tax issue.

Compliance Strategies
The IRS is also increasing the use of data analytics, research and new compliance strategies, including personal visits, to reach taxpayers and tax return preparers who have not filed federal tax returns. To promote voluntary compliance with tax laws, the IRS is using new ways to leverage existing processes and systems, including:

  • increasing the identification and case creation for individual and business nonfilers;
  • the Automated Substitute for Return program (ASFR), affecting individuals who have not filed tax returns but whose available income information shared with the IRS indicates a significant income tax liability;
  • the automated Code Sec. 6020(b) process, which promotes employment tax filing compliance; and
  • the Delinquent Return Refund Hold program (DRRH), which systemically holds an individual taxpayer’s income tax refund when their account has at least one unfilled tax return within the five years surrounding that return.

The IRS is also working with key partners to better educate taxpayers and tax professionals on filing requirements.

Proposed Regs Reflect Changes to Entertainment and Meal Deductions

Proposed regulations reflect the significant changes that the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) made to the Code Sec. 274 deduction for travel and entertainment expenses. For most expenses paid or incurred after 2017, TCJA:

  • repealed the “directly related to a trade or business” and the business-discussion exceptions to the general disallowance of entertainment expense deductions;
  • eliminated the general business expense deduction for 50 percent of entertainment (but not meal) expenses; and
  • repealed the special substantiation rules for deductible entertainment (but not travel) expenses.

Taxpayers may rely on the proposed regulations until they are finalized. Taxpayers may also continue to rely on similar guidance that was provided in Notice 2018-76, I.R.B. 2018-42, 599.

Entertainment Expenses
Among other things, new Proposed Reg. §1.274-11:

  • restates the statutory rules of Code Sec. 274(a), including the entertainment deduction disallowance rule for dues or fees to any social, athletic, or sporting club or organization;
  • substantially incorporates the existing definition of “entertainment” from Reg. §1.274-2(b)(1); and
  • confirms that the nine exceptions in Code Sec. 274(e) continue to apply to deductible entertainment expenditures.

However, the proposed regulations also confirm that “entertainment” does not include food or beverages unless they are provided at or during an entertainment activity, and their costs are included in the entertainment costs.

Food and Beverage Expenses
As under Notice 2018-76, Proposed Reg. §1.274-12 allows taxpayers to deduct 50 percent of business meal expenses if:

  • the expense is an ordinary and necessary business expense;
  • the expense is not lavish or extravagant;
  • the taxpayer or an employee is present when the food or beverage is furnished;
  • the food or beverage is provided to a current or potential business customer, client, consultant, or similar business contact; and
  • food and beverages that are provided during or at an entertainment activity are purchased separately from the entertainment, or their cost is separately stated.

With respect to the fourth requirement listed above, the proposed regulations adopt the definition of “business associate” in Reg. §1.274-2(b)(2)(iii), but expands it to include employees. Thus, these requirements would apply to employer-provided meals to employees as well as non-employees.

The proposed regulations also flesh out the fifth requirement listed above, and clarify that the separate charges for entertainment-related food and beverages must reflect their actual cost. Without a separate charge, none of the entertainment cost may be allocated to deductible food and beverage expenses.

In addition, the proposed regulations apply the general rules for deductible meal expenses to meal deductions for business travel.

Exceptions and Special Rules
The proposed regulations define “food or beverage expenses” to include delivery fees, tips, and sales tax. However, food or beverage expenses for employer-provided meals at an eating facility do not include expenses for the operation of the facility, such as salaries of employees preparing and serving meals, and other overhead costs.

The proposed regulations apply the TCJA changes to the exceptions and special rules for deductible food and beverages in Code Sec. 274(e), (k) and (n), including:

  • reimbursed food or beverage expenses;
  • recreational expenses for employees;
  • items available to the public;
  • goods or services sold to customers.

Finally, the proposed regulations also provide examples on several specific scenarios to illustrate the rules, including:

  • food or beverages provided to food service workers who consume the food or beverages while working in a restaurant or catering business;
  • snacks available to employees in a pantry, break room, or copy room;
  • refreshments provided by a real estate agent at an open house;
  • food or beverages provided by a seasonal camp to camp counselors;
  • food or beverages provided to employees at a company cafeteria; and
  • food or beverages provided at company holiday parties and picnics.

Comments Requested
The IRS requests comments on all aspects of the proposed regulations, especially the definition of entertainment, including how to distinguish entertainment from advertising and travel; the use of the objective test in defining entertainment activities; changes from Notice 2018-76 to the rules for business meals; the application of the Code Sec. 274(e) exceptions to entertainment, food and beverage expenditures; and whether additional issues or examples should be provided.

A public hearing on the proposed regulations is scheduled for 10 a.m. on April 7, 2020. The IRS must receive written or electronic comments by April 13, 2020. Comments may mailed to the IRS, or submitted electronically via the Federal Rulemaking Portal at www.regulations.gov (indicate IRS and REG-100814-19).

Reporting Relief for 2020 IRA Required Minimum Distributions

The IRS has provided guidance to financial institutions on reporting required minimum distributions (RMDs) for 2020. The concern is that financial institutions might mistakenly treat IRA owners who turn age 70-1/2 in 2020 as being obligated to make RMDs for 2020. The IRS’s plan is to not treat this kind of mistake as incorrect reporting, provided that the institution notifies the IRA owner no later than April 15, 2020, that no RMD is required for 2020.

Required Beginning Date Moved to Age 72
The “Setting Every Community Up for Retirement Enhancement Act of 2019” (SECURE Act) was enacted on December 20, 2019, as Division O of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94). Among other changes, it moved the required beginning date for RMDs. The new required beginning date for an IRA owner is April 1 of the calendar year following the calendar year in which the individual attains age 72, not age 70-1/2 as under prior law.

The change is effective for distributions required to be made after December 31, 2019, with respect to individuals who will attain age 70-1/2 after that date. As a result, IRA owners who reach age 70-1/2 in 2020 will not have a required beginning date of April 1, 2021, and so they will have no RMD for 2020.

2020 IRA RMD Reporting
If an IRA owner has an RMD due for 2020, the financial institution that is the trustee, custodian, or issuer maintaining the IRA must file a 2019 Form 5498 (IRA Contribution Information) by June 1, 2020, and indicate by a check in Box 11 that an RMD is required for 2020. The financial institution may also choose to provide further information in Box 12a (RMD Date) and Box 12b (RMD Amount). Additionally, if an IRA owner has an RMD due for 2020, the financial institution must furnish an RMD statement to the IRA owner by January 31, 2020, that informs the IRA owner of the date by which the RMD must be distributed, and either provides the RMD amount or offers to calculate that amount upon request.

IRA Owners Attaining Age 70-1/2 in 2020
The RMD statement should not be sent to IRA owners who will attain age 70-1/2 in 2020. If a financial institution does so, the IRS will not consider the statement to have been provided incorrectly if the institution notifies the IRA owner no later than April 15, 2020, that no RMD is required for 2020.

For IRA owners who will attain age 70-1/2 in 2020, the 2019 Form 5498 should not include a check in Box 11 or entries in Box 12a or 12b.

The SECURE Act did not change the required beginning date for IRA owners who attained age 70-1/2 before January 1, 2020. To reduce confusion, the IRS encourages all financial institutions to remind IRA owners who attained age 70-1/2 in 2019 and have not yet taken their 2019 RMDs that they are still required to take those distributions by April 1, 2020.

Final Regs Reflect Updated Due Dates for Income Tax and Information Returns

The IRS has issued final regulations that update the due dates and extensions of time to file certain income tax returns and information returns to reflect legislative changes. The regulations replace temporary regulations issued in 2017 with no substantive changes other than removal of regulations related to electing large partnerships.

Income Tax Returns
The final regulations provide the following with respect to income tax returns:

  • The due date for filing a C corporation income tax return (Form 1120 series) is the 15th day of the fourth month after the close of the tax year (April 15 for a calendar-year taxpayer). The due date is the 15th day of the third month after the close of the tax year (March 15 for a calendar-year taxpayer) if the corporation has a fiscal year ending on June 30 and beginning before January 1, 2026. A corporation is provided an automatic six-month extension for filing its return (seven months in the case of a C corporation with a fiscal year ending on June 30 and beginning before January 1, 2026).
  • The due date for filing an S corporation income tax return (Form 1120S, U.S. Income Tax Return for an S Corporation) is the 15th day of the third month after the close of the tax year (March 15th for a calendar-year taxpayer). An S corporation may obtain an automatic six-month extension of time to file its return by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns.
  • The due date for filing a partnership income tax return (Form 1065, U.S. Return of Partnership Income) is the 15th day of the third month following the close of the tax year (March 15 for a calendar-year taxpayer). A partnership may obtain a six-month extension to file Form 1065, as well as to file Form 8804, Annual Return for Partnership Withholding Tax (Section 1446), by filing Form 7004.
  • The due date for filing income tax return for an estate or trust (Form 1041, U.S. Income Tax Return for Estates and Trusts) is the 15th day of the fourth month after the close of the tax year (April 15 for a calendar-year taxpayer). An estate or trust (nonbankruptcy) may obtain an automatic 5 ½ month extension to file its return by filing Form 7004.

Returns for Tax-Exempt Organizations
The due date for filing the annual information return of a tax-exempt organization (Form 990 series) is the 15th day of the fifth month after the close of the tax year (May 15 for a calendar-year taxpayer). An organization may obtain an automatic six-month extension to file certain returns if the organization files an application on Form 8868. The automatic extension applies to:

  • the Form 990 series;
  • Form 1041-A, U.S. Information Return Trust Accumulation of Charitable Amounts;
  • Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code);
  • Form 5227, Split-Interest Trust Information Return;
  • Form 6069, Return of Excise Tax on Excess Contributions to Black Lung Benefit Trust Under Section 4953 and Computation of Section 192 Deduction; and
  • Form 8870, Information Return for Transfers Associated With Certain Personal Benefit Contracts.

Information Returns
The due date for filing the Form W-2 series (other than Form W-2G, Certain Gambling Winnings), the related Form W-3, Transmittal of Wage and Tax Statements, and Form 1099-MISC, Miscellaneous Income, if nonemployee compensation is being reported, is January 31 after the calendar year for which the information is being reported. The January 31 due date applies regardless of whether the return is filed on paper or electronically.

The due date for filing Form 1096, Annual Summary and Transmittal of U.S. Information Returns, or other forms in the Form 1099 series (other than for nonemployee compensation) is February 28 after the calendar year for which the information is being reported (March 31 if filing electronically).