Thursday, December 20, 2012

AMT Letter from the IRS



November 13, 2012

The Honorable Sander M. Levin Ranking Member
Committee on Ways and Means
U.S. House of Representatives Washington, DC 20515

Dear Mr. Levin:

In response to recent requests, I am writing to update you on how the IRS is preparing for the 2013 tax filing season in light of the uncertainty related to several tax provisions that expired at the end of 2011 -principally the income thresholds for the Alternative Minimum Tax (AMT)- but also a number of temporary tax benefits generally known as "extenders."

Each year, the IRS conducts in-depth planning during the summer to ensure that we are prepared for all aspects of the upcoming filing season- from training our customer service employees, to modifying forms and publications, to programming our technology systems to reflect changes in the tax law. This year has been particularly challenging due to several unresolved tax issues. When Congress takes action well after this planning process is underway, there is potential for substantial disruption to the filing season ahead.

As Congress returns this week, Iwanted to provide you with a detailed description of
the effects on IRS operational planning if the current uncertainty regarding the AMT and extenders continues.

Alternative Minimum Tax (AMT)

The AMT applies to individual taxpayers with incomes above specific thresholds set by law. For many years, Congress has been enacting "patches" to index these income thresholds for inflation in order to prevent millions of taxpayers from being subject to the AMT. The last such patch expired on December 31, 2011.

More specifically, for tax year 2011, the AMT exemption amount (as indexed for inflation) was $48,450 for individuals and $74,450 for married taxpayers filing jointly.
Because of these thresholds, only about 4 million taxpayers paid AMT for tax year 2011.
Under current law, however, the thresholds revert to much lower levels for 2012-
$33,750 for individuals and $45,000 for married taxpayers filing jointly. At these levels, approximately 33 million taxpayers would pay AMT for tax year 2012 (with returns filed


in the spring of 2013). T 1is is about 28 million more taxpayers who would pay the AMT than if the exemption amounts were increased as in the past.

In addition, the AMT patch has historically been accompanied by a special tax credit ordering rule that applies to all taxpayers claiming certain tax credits- whether they owe AMT or not. The ordering rules change the order in which a number of popular tax credits are applied against tax liability, and how they may be used to offset both regular and alternative minimum tax.

Taken together, the changes to the AMT exemption amount and the special tax credit ordering rules could affect more than 60 million taxpayers- nearly half of all individual income tax filers. In addition, the changes to the tax credit ordering rules that result from a lapse in the AMT patch are highly complex and cut deeply into the core tax processing logic of IRS's critical filing season technology systems.

In prior years- most recently 2007 and 2010- Congress allowed the AMT patch to lapse for more than 11 months, but then retroactively reinstated it. In both 2007 and 2010, the IRS consulted with Congress and was provided with bipartisan, bicameral assurances that Congress was working expeditiously to enact a patch. The IRS, in turn, made a risk-based decision to leave its systems programmed assuming that Congress would continue its historical practice and again enact extensions of both the increased AMT exemption amount and the special tax credit ordering rules.

Consistent with past practice, I have instructed IRS staff again this year to leave our core systems "as-is" with respect to the AMT, and hold off on the substantial design and engineering work that would be required in order to revert the core tax systems back to 1998 law (which will otherwise apply for 2012 in the absence of any action by Congress). Therefore, if Congress enacts an AMT patch, including both increased exemption am aunts and the special tax credit ordering rules, before the end of the 2012 calendar year, the IRS would likely be able to open the 2013 tax filing season with minimal delays for most taxpayers.

However, if there is no AMT patch enacted by the end of the year, the IRS would be forced to operate the 2013 tax filing season based on the expiration of the AMT patch. There would be serious repercussions for taxpayers.

Without an AMT patch, about 28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012). In addition, in order to allow time for the IRS to make the programming changes necessary to conform our processing systems to reflect expiration of the AMT patch and the credit ordering rules, the IRS would, at minimum, need to instruct more than 60 million taxpayers that they may not file their tax returns or receive a refund until the IRS completes the necessary systems changes. Because of the magnitude and complexity of the changes, it is entirely possible that these taxpayers would not be able to file until late March 2013, if not even later. Tens of millions of these taxpayers would unexpectedly have to pay additional


income tax for 2012, leaving them with a balance due return or a much smaller refund than expected. For millions of other taxpayers, refunds would be delayed.

Finally, because the AMT patch already expired at the end of 2011, there is no ability to consider partial year extensions of the AMT (since by the end of 2012 it would have already lapsed for an entire year).

Tax "Extenders"

A number of other tax provisions affecting individuals also expired at the end of 2011. These include tax deductions for educators' out-of-pocket classroom expenses, tuition and related fees for higher education, and state and local sales taxes. The last provision is of particular importance to taxpayers in states with no income tax.

These tax law changes are generally not as complex and do not present anything near the operational risk associated with the AMT patch. Two years ago, Congress enacted legislation extending these provisions retroactively in mid-December 2010. As a result, the IRS made the necessary changes to its forms and systems, and delayed the opening of the 2011 filing season by four weeks for approximately 9 million affected taxpayers.

If the IRS were presented with a similar scenario of late enactment of tax extenders legislation this year, I would anticipate a similar outcome. There would be some inconvenience and delayed refunds for a substantial number of taxpayers, but the overall risk to the tax filing season would be manageable.

I hope this information is helpful, and I would be happy to discuss any of these issues in more detail. I am also writing to Chairman Camp, Chairman Baucus, and Ranking Member Hatch. If you have questions, please contact me or have your staff contact Catherine Barre, Director, Legislative Affairs, at (202) 622-3720.

Steven T. Miller
Acting  Commissioner

Thursday, November 29, 2012

Figuring Required Minimum Distributions

If you are approaching retirement age, you should begin to consider when to take distributions from your qualified plans and IRAs. In addition to the IRS’s restrictions on when you can start taking money from your retirement accounts, there are additional requirements concerning distributions you must take. The Internal Revenue Code requires you to withdraw a certain amount each year so that it can tax a certain minimum amount each year.

Why am I required to take distributions?

The distribution requirements were established to prevent you from accumulating funds tax free indefinitely. In the case of a qualified plan in which you participate, you are required to begin taking at least minimum distributions starting April 1 of the year following the year in which you reach age 70 1/2 or retire, whichever is later. In the case of your IRAs, you must begin distributions starting April 1 of the year following the year in which you turn 70 1/2, regardless of whether you have retired.

How much must I take out?

If you have enough other assets for your support, you probably want to minimize distributions from your retirement plans so that your plan assets can continue to accumulate tax-deferred as long as possible. The detailed workings of the required minimum distribution (RMD) rules are contained in IRS regulations issued in 2002 and 2004, and fine tuned later by further guidance. These regulations go far beyond the Internal Revenue Code provisions in providing the details that are needed to determine an RMD. Thus, as a practical matter, the regulations must be consulted when calculating an RMD. While voluminous, they required a calculation that is much more favorable to taxpayers than had previously been the case. (If you have a Roth IRA, the news is even better. Since contributions to a Roth IRA are the result of after-tax dollars, no tax is generally due on distribution after retirement age, and there is no requirement that you distribute your account balance according to any particular schedule.)

The minimum amount that must be distributed from your retirement accounts depends on your life expectancy, or the joint life expectancy of you and your spouse if your spouse is more than 10 years your junior. If the required amounts aren't distributed, a 50-percent excise tax is imposed on the amount that should have been distributed but wasn't.

In order to determine the amount of the minimum distribution you must receive for a year, you must locate your current age on one uniform table each year to obtain the updated number of years over which your benefits are expected to be paid. That number will then be divided into your account balance as of the end of the previous year to give you the amount that must be distributed to you for the current year. The table you will use is the same table that will be used by all retirement plan participants to calculate their required distributions. (In the only exception to this uniformity, a participant whose spouse is more than 10 years younger may use the old joint and last survivor table to stretch out and reduce annual payments even more.)

At the same time you are arranging your post-retirement finances, you can also incorporate some estate planning. Along with simplification in calculating your benefits, the recent rule changes will also bring greater flexibility and opportunity in the designation of your beneficiaries. You may now change beneficiaries as often as you like before your death, and it will not affect the amount of your annual contributions (unless, of course, you are moving into or out of a beneficiary relationship with a spouse more than 10 years younger). And if your heirs are faced with changed conditions following your death, there is an opportunity for them to rearrange your pre-death beneficiary choices so they can accommodate the new conditions.

If you would like to make sure your spouse's financial needs will be taken care of after your death, but you would also like to let your assets continue to accumulate on a tax-deferred basis and eventually provide an inheritance for your children or grandchildren, you should name your spouse the primary beneficiary and your younger heirs the secondary beneficiaries. If your spouse doesn't need your retirement plan assets for his or her support after your death, he or she has until the last day of the year that follows the year of your death to disclaim any interest in your account assets. This allows that amount to pass directly to your younger beneficiaries, over their longer life expectancy, as if your spouse had never been named a beneficiary at all.

After your death, your remaining plan assets will be paid to your beneficiary over his or her lifetime (unless you or your plan provide for a shorter distribution period). If you die before naming a beneficiary, but after the date the IRS says you must begin distributions from your plan, your remaining plan assets will be paid out over a period equal to your life expectancy immediately before your death unless your plan calls for a shorter period. If you die before that date without having named a beneficiary, your plan assets must be paid out within five years of your death.

Working within the distribution rules, you must make decisions about your post-retirement finances and planning your estate. If you want to know more about the rules and how they will work best in your situation, please don't hesitate to call our offices.

Wednesday, November 28, 2012

Job-Hunting Expenses

The Tax Code allows you to deduct expenses that you may incur for searching for a job in your field. Some of these expenses may be obvious; others are not. The deduction may be especially valuable in today's tight job market. This letter describes those expenses.

The costs of typing and printing your resume are valid deductions. Postage and long distance telephone calls can be deducted. The cost of travel to a job interview can be deducted. Here, it is important to remember that the auto mileage expense changes every year. For 2012, it is 55.50 cents-per-mile. Air or rail fare also can be deducted. If you utilize the services of an employment agency, that cost can be deducted, as can the costs of job counseling and referral services. Remember to keep records of all these costs because although some may be minor, together they may add up to a significant amount. It does not matter if your job search is successful or not.

However, the above deductions cannot be taken if you are searching for a job in a new field. For example, a professional photographer who seeks to change his or her career path and pursue a new job in the health care industry cannot deduct any of his or her job-hunt expenses.

Just what constitutes a "new field" is not necessarily intuitive; the IRS has held that different types of jobs in the same employment sector are jobs in different fields and job search expenses were not deductible. Exceptions to this rule do apply, however. The IRS allows retired servicemen and women to search for jobs in new fields and still claim these job-search deductions. And temporary jobs you take while searching for permanent employment in your field will not affect the deductibility of your job search expenses.

Persons, such as college students, entering the job market for the first time cannot deduct their job-search expenses. If, however, a college student has worked in his or her chosen field while attending college, post-college job search expenses may be deductible. If a jobseeker has been out of the workforce for a long period of time, the costs of searching for a job are not deductible. This rule may particularly affect parents who take time off work to raise their children.

Job-search expenses are itemized deductions. You can deduct job search expenses as long as the amount of all of your miscellaneous itemized tax deductions is more than two percent of your adjusted gross income (AGI). If you take the standard deduction, you cannot claim them.

Medical Expense for Weight Loss Programs

Medical Expense Deduction for Weight-loss Programs

Many people are unaware that the cost of weight-loss programs may qualify as a deductible medical expense when used to treat obesity or hypertension. The deduction is especially valuable for people with flexible spending accounts (FSAs). If your weight-loss program qualifies as a "deductible medical expense," you can pay for it with the pre-tax dollars you allocate to the medical expense portion of your FSA each year.

For many years, the IRS allowed people to deduct the cost of weight loss programs only if the patient had to lose weight as part of his or her treatment for another disease. Obesity, in and of itself, was not considered by the IRS to be a disease. The rationale was that many people lose weight merely for cosmetic, and not health, reasons. That's true, but not for everyone.

Some time ago, the IRS signaled it was changing course when it determined that people could deduct the costs of smoking-cessation programs. In addition, the costs of treating alcoholism and drug addiction were deductible. In both cases, the patient had to be directed by his or her physician to stop smoking or get help for alcoholism or drug addiction. Now, the cost of treating obesity is added to the list.

The IRS provided some examples. Both scenarios involve participation in weight-loss programs. Both taxpayers paid fees for admission into the programs and to attend periodic meetings. They also bought diet plans and booklets. One of the two received a diagnosis of obesity. The other person was diagnosed as suffering from hypertension partially caused by being overweight. Both participated in their programs as treatment for these medical conditions.

The IRS ruled that these two people can take deductions for the costs that are related to their weight-loss programs. However, the cost of buying reduced-calorie diet foods cannot be deducted since they are substitutes for normal living expenses.

If you plan on taking a medical deduction, the relevant costs can be deducted as an itemized medical expense deduction only if they are paid out-of-pocket and if they are neither compensated nor reimbursed (including through a flexible spending plan). Also, the amount of such costs that you can deduct have to be in excess of 7.5 percent of your adjusted gross income (10 percent for 2013 and beyond, unless the taxpayer or spouse is age 65). Also note that because of the Health Care Act, withdrawals from a medical flexible spending account starting in 2013 is limited to $2,500 for the entire year.

Keep in mind that there are still some unanswered questions. When does overweight end and obesity begin? How much overweight is needed to affect hypertension and to what level must hypertension reach in order to justify deductible weight-loss treatment? Does weight-loss include an exercise program, even though the IRS mentioned nothing in its ruling about exercise as a weight-loss treatment? Does a deductible exercise program include a heath club membership or an expensive home treadmill? Taxpayers have yet to test these questions on the IRS.

If you or a family member has considered entering a weight-loss program, please feel free to check with this office on whether your costs might be defrayed through a tax break. Creating a file in which you keep doctor's notes, bills and progress logs could also be important.

Finally, if you or a family member has undergone the expense of a weight-loss program within the past three years, you might want this office to check whether you ought to file an amended return to claim a tax refund.

Wednesday, October 31, 2012

2012 Year-End Tax Planning for Businesses - National Society of Accountants

2012 Year-End Tax Planning for Businesses

Recently, end of year tax planning for businesses has been complicated by uncertainty over the future availability of many tax incentives. The 2012 year end is no different. In 2010, Congress extended many business incentives for one or two years. These incentives are about to expire. In addition, many of the “Bush-era” tax cuts are scheduled to sunset at the end of 2012. It is unclear if Congress will provide further extensions as they debate across-the-board spending cuts scheduled to take effect in 2013. In addition, businesses must prepare to comply with healthcare reform. This combination of events provides tax planning considerations unique to 2012 that requires a multi-year strategy taking into account a variety of scenarios and outcomes.

For instance, in recent years, Congress has used bonus depreciation to encourage economic growth. Currently, a special 50-percent first year bonus depreciation allowance is provided for qualified property. This allowance is scheduled to expire after 2012 (2013 in the case of certain longer production period property and certain transportation property). The equipment eligible for bonus depreciation must be placed in service and not merely purchased before the end of the year to be eligible for 2012. Placed-in-service generally requires installation and ready-for use in the business.

Bonus depreciation also relates to vehicle depreciation dollar limits. For 2012, the first-year depreciation allowed for vehicles subject to luxury-vehicle limits is increased by $8,000. Unless the bonus depreciation is extended, 2012 will be the final year in which substantial first-year write-offs for the purchase of a business vehicle may be available.

In addition to bonus depreciation, taxpayers may also take advantage of the generous dollar limitation and investment limitations for Code Sec. 179 expensing. For 2012, the dollar limitation is $139,000 with a $560,000 investment ceiling on the purchase of all otherwise qualifying property. These limitations drop to $25,000 and $200,000, respectively in 2013.

Purchased property may qualify for both Code Sec. 179 expensing and bonus depreciation. Code Sec. 179 expensing should be taken first, followed by bonus depreciation and then regular first-year depreciation. For example, a 2012 purchase of $400,000 in assets that qualify as five-year property would be entitled to a $139,000 Code Sec. 179 deduction, a $130,500 bonus depreciation and a $26,100 regular depreciation deduction assuming a half-year convention.

Repair Regulations

For tax years beginning on or after January 1, 2012, the rules for capitalizing improvements to tangible property are provided as part of a group of regulations known as the “repair regulations.” The regulations are broad and far-reaching - they apply to every business taxpayer that uses tangible property, whether owned or leased. Neither the form of entity that operates the business, nor the entity's foreign or domestic status, plays a role in determining their relevance. Manufacturers, wholesalers, distributors, and retailers – are all affected.

In general, these regulations attempt to provide standards for distinguishing repairs from capitalized improvements based on principals developed over the years in court cases and IRS rulings. A change by a taxpayer to conform to the repair regulations is an accounting method change, and a corresponding adjustment is generally required. This adjustment serves to put the taxpayer on the same accounting method for all amounts incurred both prior to and after the effective date of the regulations. Therefore, taxpayers adopting an accounting method change under the capitalization regulations must examine repairs and capitalized expenses for prior years in order to calculate the adjustment.

Taxpayers with an "applicable financial statement," such as a certified audited financial statement, may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met. The aggregate cost which may be expensed annually under a taxpayer's expensing policy is subject to a ceiling equal to the greater of .1 percent of gross receipts or 2 percent of total depreciation and amortization reported on the financial statement.

“Bush-era” tax Cuts

The “Bush-era” tax cuts is the collective term for the tax measures enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). EGTRRA and JGTRRA made over 30 major changes to the Tax Code which are scheduled to sunset at the end of 2012. The following are highlights of the major changes for business and investment in 2013 resulting from the sunset –

·        Reduced maximum capital gains rate expires

·        Lower capital gain tax rates for qualified five-year gain will be revived

·        Exclusion of gain on sale of small business stock treated as AMT preference item will increase

·        Taxation of qualified dividends at capital gain rates will no longer apply

·        Credit for employer-provided child care facilities and services expire

·        Accumulated earnings tax rate increases to 39.6 percent

·        Personal holding company tax rate increases to 39.6 percent

·        Repeal of collapsible corporation rules expires

Health Care

On June 28, 2012, the U.S. Supreme Court upheld the constitutionality of the Patient Protection and Affordable care Act (PPAC). As part of its primary purpose to facilitate health care reform, the PPAC includes key tax provisions that affect businesses. Many business and employers waited to fully implement these provisions until the Supreme Court determined the fate of the health care reform law. Now, however, businesses must comply with the rules under PPAC.

Although it was optional in 2011, Form W-2 reporting is mandatory for 2012 and thereafter. Employers must disclose the aggregate cost of applicable employer-sponsored coverage provided to employees annually on the employee’s Form W-2. Regardless of whether the employee or the employer pays for the coverage, the aggregate cost of the coverage reported is determined under rules similar to those used in determining applicable premiums for purposes of the COBRA continuation coverage requirements of group health plans.


Many taxpayers are wondering how they may be able to prepare for 2013 and beyond, and what to do before then. The short answer is to quickly become familiar with the expiring tax incentives and what may replace them after 2012, and to plan accordingly. We can help you align traditional year-end techniques with strategies for dealing with uncertainties created by Congress’s delay in addressing sunsetting tax rates and the extension of other major tax benefits. Please call our office for an appointment.

Carson Long Halloween 2012

Thursday, October 4, 2012

Attending the political candidate forum

I am eagerly awaiting the candidates forum at the Union Baptist Church in Dover, Delaware. I am eager to hear how the assembled candidates are going to bring back economic prosperity to the State and country. I certainly was pleased with the efforts of Mitt Romney last night and I hope we elect a Leader to get this country back on track.

Wednesday, September 26, 2012

eFileCabinet Online Demo

We have partnered with EFile Cabinet Online and we can offer this service to any client for only $15 a month, that is a 50% cost reduction if you were to contract with them directly. It's a great service for not only a business, but also for any individual wishing to organize their files and eliminate paper files. Contact us today if you are interested in more information. Once you start using this service, you will not want to ever be without it.

MUST WATCH THIS ASAP! United States Budget Dilemma.wmv

Wednesday, August 1, 2012

2012 Second Quarter Federal Tax Developments

During the second quarter of 2012, there were many important federal tax developments. This letter highlights some of the more important developments for you. As always, please give our office a call or email if you have any questions.

Health care legislation

In a 5-4 decision, the U.S. Supreme Court upheld the Patient Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act (HCERA) on June 28, 2012 (National Federation of Independent Business et al. v. Sebelius). Chief Justice John Roberts, writing for the majority, held that the law’s individual mandate is a valid exercise of Congress’ taxing power. Four justices dissented and would have overturned the law.

Since 2010, the IRS has issued extensive guidance on the tax provisions in the health care legislation. Many of the tax provisions were effective in 2010, 2011 and 2012; but others are scheduled to take effect after 2012 and in subsequent years. These include an additional 0.9 percent Medicare tax for higher income individuals (tax years beginning after December 31, 2012), a Medicare tax of 3.8 percent on investment income for higher income individuals, trusts and estates (tax years beginning after December 31, 2012), and a higher threshold to claim an itemized deduction for unreimbursed medical expenses (tax years beginning after December 31, 2012 with a temporary waiver for individuals age 65 and older). Our office will keep you posted of developments.

Foreign accounts

The IRS announced in June streamlined procedures for U.S. citizens who are nonresidents, including dual citizens, who have failed to file U.S. income tax and information returns, such as Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). The IRS also reported it has collected more than $5 billion from its 2009 and 2011 offshore voluntary disclosure initiatives (OVDI). The IRS reopened the 2011 OVDI in January 2012 but with less generous terms.


In June, the IRS issued new temporary and proposed regulations on corporate inversions. The regulations remove the facts and circumstances test from regulations issued in 2009 and replace it with a bright-line rule describing the threshold of activities required for an expanded affiliated group (EAG) to have substantial business activities in the relevant foreign country. The regulations apply to transactions completed on or after June 7, 2012, the IRS explained.


The IRS unveiled in June a safe harbor under which it will not challenge a determination by a publicly traded partnership that income from discharge of indebtedness (cancellation of debt "COD" income) is qualifying income (passive-type income) under Code Sec. 7704(d). To benefit from the safe harbor, the COD income must result from debt incurred in activities that produce qualifying income.

Mortgage interest deduction

In May, the U.S. Tax Court found that a taxpayer who filed as married filing separately was limited to a deduction for interest paid on $500,000 of home acquisition indebtedness plus interest paid on $50,000 of home equity indebtedness (Bronstein, 138 TC No. 21). The court found that the plain language of the statute mandated this result, which is half the $1 million/$100,000 limit imposed on other taxpayers.

Deferred compensation

The IRS issued proposed regulations intended to tighten the definition of substantial risk of forfeiture (SRF) that applies to compensatory transfers of property in connection with the performance of services under Code Sec. 83 in June. As a result, fewer restrictions would qualify as an SRF.

Statute of limitations

On April 25, 2012, the U.S. Supreme Court resolved a split among the circuit courts of appeal by concluding that an overstatement of basis does not result in an omission of income for statute of limitations (SOL) purposes (Home Concrete & Supply, LLC). As a result the IRS has three years, rather than six years, to act against taxpayers who overstate basis except where fraud can be proved. The issue has arisen in a number of tax shelter cases where a taxpayer overstates basis in a partnership interest, resulting in an understatement of income.


In April, a taxpayer successfully persuaded the Tax Court that her documentary film work was for-profit and not a hobby (Storey, TC Memo. 2012-115). The IRS had determined that the taxpayer, who had a full-time job as an attorney, had engaged in filmmaking without the intent to make a profit. The Tax Court found that the taxpayer had become skilled in filmmaking by attending classes, spent many hours outside of her full-time job on filmmaking and concluded that the taxpayer had a for-profit motive.

Estate tax

The IRS issued temporary and proposed regulations in June on temporary portability election for qualified estates. The portability election generally allows the estate of a deceased spouse dying after December 31, 2010 and before January 1, 2013 to transfer the decedent’s unused estate tax exclusion amount, if any, to the surviving spouse.

Local lodging expenses

In May, the IRS issued proposed reliance regulations outlining when an employee may treat local lodging expenses as working condition fringe benefits or accountable plan reimbursements; and when employers may treat qualified expenditures as deductible business expenses. The proposed regulations also provide a safe harbor for an employee to deduct local lodging expenses if certain requirements are satisfied.

Deposit interest

The IRS issued final regulations in April requiring U.S. banks and other financial institutions to report interest on deposits paid to a nonresident alien (NRA). The requirement applies to residents of any country having a tax information exchange agreement (TIEA) with the U.S. The reporting requirement applies to interest payments made on or after January 1, 2013, the IRS explained.

Health savings accounts

The IRS announced in May inflation-adjusted amounts for health savings accounts (HSAs) in 2013. For 2013, the annual contribution limit for an individual with self-only coverage under a high deductible health plan (HDHP) is $3,250 compared to $3,100 for 2012. For 2013, the annual contribution limit for an individual with family coverage under a HDHP is $6,450, compared to $6,240 for 2012. A HDHP is defined as a health plan with an annual deductible that is not less than $1,250 for self-only coverage and $2,500 for family coverage for 2013.

Fresh start initiative

The IRS announced in May an expansion of its Fresh Start initiative, designed to help taxpayers struggling financially. The IRS provided more flexible terms to its offer in compromise (OIC) program. The IRS also instructed its examiners on taxpayers’ ability to pay when student loans or state/local taxes are outstanding.

Economic substance

The Health Care and Education Reconciliation Act (HCERA) codified the economic substance doctrine. In April, IRS Chief Counsel released instructions to its personnel on when they may raise the codified economic substance doctrine.

Telephone tax refunds

In April, the IRS reminded taxpayers of the July 27, 2012 deadline to request refunds of federal excise taxes paid on long-distance telephone communications billed after February 23, 2003 and before August 1, 2006. In 2006, the IRS had announced that would stop collecting the three percent excise tax on long-distance telephone communications. Individuals who filed a 2006 return but who did not request a telephone excise tax refund should file an amended return or Form 1040-EZT (if not required to file a 2006 return).


The Supreme Court held in May that tax on a bankrupt debtor’s post-petition farm sale was not dischargeable in bankruptcy (Hall). The Supreme Court found that federal income tax liability resulting from a debtor farmer’s post-petition farm sale was not "incurred by the estate" under Bankruptcy Code Sec. 503(b).

IRS administration

In April, IRS Commissioner Douglas Shulman announced that he will step down at the end of his five-year term in September 2012.  Shulman has overseen such high-profile programs as the offshore voluntary disclosure initiative (OVDI), the return preparer oversight initiative and modernization of the agency’s operating systems.

If you have any questions about these or any federal tax developments, please contact our office.