A handful of important changes impact relations between the IRS and taxpayers. The IRS has ended some of its programs while starting a new one; new laws have changed the rules affecting some dealings with the IRS. Here is a roundup of some of those changes.
Six-Year Statute of Limitations
While the IRS usually has three years from the due date of the return to commence an audit (Code Sec. 6501(a), the IRS has six years in which to act when a taxpayer omits 25% from gross income, provided the omission is more than $5,000 (Code Sec. 6501(e)(1)), the question of what constitutes “gross income” for this purpose may not always be clear.
[This article is course content for the Tax Season 2016 CPE quiz, worth 3 CPE credits! Reach the quiz and additional content HERE.]
In 2012, the U.S. Supreme Court held that the overstatement of basis, which results in an understatement of gain on the sale of property, is not an omission from gross income for purposes of the six-year statute of limitations (Home Concrete
& Supply, LLC, 132 S. Ct. 1836 (2012)). Now, however, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41) has effectively reversed the Court’s ruling. Under the new law, which became effective on July 31, 2015, an overstatement of basis that produces an understatement of gain constitutes an omission from gross income triggering the six-year statute of limitations.
Thus, the change applies to tax returns filed after July 31, 2015. However, it also applies to any returns filed prior to this date that are not closed by the statute of limitations or by consent of the taxpayer. It also applies to cases before the Tax Court that were docketed before July 31, 2015, if the tax year is still open.
Arbitration Program
In 2000, the IRS directed the IRS to start a pilot program offering arbitration to resolve taxpayer disputes (Code Sec. 7123(b) (2)). The IRS followed up with a number of such pilot programs and, in 2006, made the Appeals arbitration program permanent. Now the IRS announced it was terminating the program, effective September 21, 2105 (Rev. Proc. 2015-55, IRB 2015-ADD). The reason for the end to the program was simply lack of interest on the part of taxpayers. In the 14 years that the program was operational, only two cases were settled through arbitration.
Alternative dispute resolution with the IRS can still be done through mediation under certain conditions. There are different mediation programs for large corporations, small businesses and self-employed individuals, and tax-exempt organizations; see www.irs.gov/Individuals/Appeals-Mediation-Programs for details.
Get Transcript
About 23 million taxpayers used the online Get Transcript service from the IRS in the past tax return season (http://www.irs.gov/uac/Newsroom/Get-Transcript-Application-Questionsand-Answers). This service enabled taxpayers to obtain their tax account information, a tax return transcript, and certain other information online by providing personal information (e.g., Social Security number, date of birth, street address). In May, the IRS announced that its computers had been breached through its Get Transcript online service (http://www.irs.gov/uac/Newsroom/IRS-Statement-on-the-Get-Transcript-Application). The IRS first reported that about 100,000 taxpayers’ accounts were accessed illegally; the number of affected taxpayers was later expanded to about 330,000 (http://www.irs.gov/uac/Newsroom/Additional-IRS-Statement-on-the-Get-Transcript-Incident) and many believe the number is much higher. As a result of the breach, the IRS has suspended the online program (http://www.irs.gov/uac/Newsroom/IRS-Statement-on-the-Get-Transcript-Application).
Taxpayers can get a transcript by mail (http://www.irs.gov/Individuals/Get-Transcript); it takes five to 10 days to receive the transcript in this way. Alternatively taxpayers can obtain copies of their returns by filing Form 4506, Request for Copy of Return, through the mail. Obviously, transcripts by mail take more time than the online option.
Note: As a result of this breach, a class action lawsuit has been filed against the IRS by taxpayers who claim their identities were stolen (Wellborn v. IRS, DC DC, filed 8/20/15). They argue that the IRS should have known their computers were vulnerable to cyber-criminals. The complaint references reports from the Government Accountability Office (GAO) and the Treasury Inspector General for Tax Administration that warned the IRS about its lax computer security.
Other fallout from the Get Transcript hacking:
• The IRS has ruled that identity theft protection services offered to consumers, employees, and others whose personal information may have been compromised by a data breach of a business, government agency, or other organization will not be taxed because the IRS will not claim it is taxable income (Announcement 2015-22, IRB 2015-35, 288). Such services include credit reporting and monitoring services, identity theft insurance policies, identity restoration services, or other similar services. The tax-free treatment does not extend to employees who receive this fringe benefit as part of their compensation package rather than because of the company having experienced a data breach.
• The IRS has ended the automatic extension for filing Form W-2, Wage and Tax Statement (T.D. 9730, 8/15/15). According to the preamble in temporary regulations, the change is due to incidents of falsified statements filed by identity thieves using stolen taxpayer information. Until these new temporary regulations go into effect, the old rules apply, which allow for an automatic 30-day extension, with another non-automatic 30-day extension that can be granted by requesting it from the IRS. The temporary regulations making this change apply to all forms within the W-2 series other than Form W-2G, Certain Gambling Winnings. As a result of the change, the IRS will grant an extension of up to 30 days only in limited cases where the extension is warranted because of extraordinary circumstances or catastrophe (e.g., destruction of records in a fire or natural disaster). The change takes effect for returns filed in 2017 (i.e., W-2s reporting compensation earned in 2016).
Form 5500-EZ late filer program
The IRS has created a penalty relief program for late filers of Form 5500-EZ. This return covers qualified retirement plans where the only participants are owners and their spouses; there are no common law employees (other than these participants) (Rev. Proc. 2015-32, IRB 2015-24, 1063). The purpose of the program is to get these plans into compliance without having to pay the $25 per day penalty (up to $15,000 for each delinquent return), plus interest (Code Sec. 6652(e)). Instead, delinquent filers only have to pay $500 per delinquent return (up to $1,500 per plan).
To use the program, each delinquent return must be submitted separately on paper (no electronic filing). The top of the return should be marked “Delinquent Return Filed under Rev. Proc. 2015-32, Eligible for Penalty Relief.” Form 14704, Transmittal Schedule—Form 5500-EZ Delinquent Filer Penalty Relief Program, should also be completed and attached to the oldest delinquent return being submitted, along with the required fee.
The program cannot be used if the IRS has already sent a delinquency notice called CP 283, Penalty Charged on Your 5500 Return, for an overdue return. Instead of relying on this program to escape severe penalties, delinquent filers can come into compliance arguing reasonable cause for the late filing. The taxpayer attaches his or her own statement about reasonable cause to the delinquent return; the IRS may or may not accept the explanation. If it does, the penalties are waived. If it does not, the IRS will send a penalty notice (CP 283), making the late filer program option no longer available.
Plans that have assets under $250,000 usually are not required to the annual return. However, this filing exception does not apply to the final year of the plan. Small business owners who did not file a return for the final year of their plans because they thought the $250,000 exception exempted them should take advantage of the penalty relief program.
Conclusion
The rules regarding IRS-taxpayer relations are constantly changing. With changes in technology, a reduced IRS budget despite increasing responsibilities, and the need to implement new tax rules, expect to see more developments in IRS-taxpayer relations to come.
Executive Editor Sidney Kess is CPA-attorney, speaker and author of hundreds of tax books. The AICPA established the Sidney Kess Award for Excellence in Continuing Education in his honor, best-known for lecturing to over 700,000 practitioners on tax. Kess is counsel at Kostelanetz & Fink and is consulting editor to CCH.
Comments powered by CComment