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Many parents failing to educate children about money

BY KEN TYSIAC

AUGUST 9, 2012

Many children aren’t learning much about money from their parents, a new survey shows.

Three in 10 parents never talk to their children about money or have had just one big talk with their children on the subject, according to a U.S. telephone survey conducted for the AICPA by Harris Interactive.

On average, children are 10 years old when their mother or father has their first conversation with them about money, and mothers are more likely to talk with children about money at an earlier age than fathers, the survey showed. Just 13% of parents surveyed talk daily with their children about financial matters.

Sixty-seven percent of parents surveyed strongly agree that they know enough about personal finance to teach their children good habits. Yet parents participating in the survey were more likely to have talked to their children about other important topics, including:

•  The importance of good manners (95%).

• The benefits of good eating habits (87%).

• The importance of getting good grades (87%).

• The dangers of drugs and alcohol (84%).

• The risks of smoking (82%).

This week, Federal Reserve Chairman Ben Bernanke said early financial education is important for individual well-being and also the economic health of the United States.

"Based on our findings, parents seem more concerned about the politeness of their children than their financial fitness," Ernie Almonte, CPA, vice chair of the AICPA’s National CPA Financial Literacy Commission, said in a statement. "Dollars and cents should get the same attention as ‘please’ and ‘thank you’ at home. Financial education builds critical skills that help put life goals within reach and strengthen the economy. Parents must make financial lessons a priority in both conversation and action as early as possible."

Almonte, who is also a past AICPA Board chairman, said it is important to teach children the right lessons about financial responsibility, and said that in his work he has encountered financial misunderstandings that people have held for decades.

The National Financial Literacy Commission offers the following tips for parents in educating their children:

Start early.  As soon as children are able to express a want, discuss basics like delayed gratification that are the foundation for budgeting and saving for a goal. Require children to save some of their birthday cash and money earned in after-school jobs. Give them small jobs to earn an allowance to pay for toys or other wants. Make saving fun by giving them a grocery list, and have them clip coupons and comparison shop by reviewing store fliers. Split the savings with them to reward their effort.

Repeat often.  The more you discuss good financial habits, the more likely your child is to make them a part of their daily life. During dinner, talk about saving for a big purchase, such as a family vacation, and how it might affect the budget. Show them your pay stub to talk about taxes and saving for retirement, and review their savings account and college account statements with them.

Walk the talk.  No matter what you say to your children about money, your actions are even more important. If you cave in easily when they make a fuss over a toy at the store, you will have difficulty convincing them to delay gratification and stick to a budget.

For more information on financial education and responsibility, visit the AICPA’s 360 Degrees of Financial Literacy.

Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.

On July 1, President Trump signed into law a sweeping, bipartisan IRS reform bill called the Taxpayer First Act ( P.L. 116-25). This legislation aims to broadly redesign the IRS for the first time in over 20 years.

On July 1, President Trump signed into law a sweeping, bipartisan IRS reform bill called the Taxpayer First Act ( P.L. 116-25). This legislation aims to broadly redesign the IRS for the first time in over 20 years.

Reworked IRS Reform Bill

The Senate approved the Taxpayer First Act by voice vote on June 13. The measure was unanimously approved in the House on June 10.

The reworked IRS reform bill, originally introduced in the last Congress, was revised in early June after the House passed a prior version in April. However, the original House-approved bill (HR 1957) was quickly doomed in the Senate because of controversy surrounding the IRS’s Free File program.

The provision codifying the IRS’s Free File program was removed from the original bill, and the measure was reintroduced as HR 3151. Congress then quickly sent it to the president’s desk.

Taxpayer First Act Provisions

The Taxpayer First Act aims to reform the IRS into a more taxpayer-friendly agency. It requires the IRS to develop a comprehensive customer service strategy, as well as a plan to redesign the IRS’s structure, modernize its technology, and enhance its cyber security.

The measure also:

• codifies and enhances an independent Office of Appeals within the IRS;
• waives the application fee for an offer in compromise (OIC) by a low-income taxpayer;
• sets new electronic filing requirements;
• clarifies information available about low-income taxpayer clinics (LITCs);
• codifies the Volunteer Income Tax Assistance (VITA) Program;
• requires notice regarding the closure of taxpayer assistance centers (TACs);
• improves the IRS whistleblower program;
• modifies the private debt collection program;
• clarifies procedures for equitable relief from joint liability;
• establishes new safeguards on seizing funds believed to be structured to avoid the $10,000 financial reporting requirement; and
• modifies procedures for the issuance of summons and notice of third-party contacts by the IRS.

Hill Reaction

"This signing is the culmination of a lengthy, bipartisan process undertaken by the [House] Ways and Means Committee to implement pro-taxpayer reforms at the IRS for the first time in more than 20 years," Senate Finance Committee (SFC) Ron Wyden, D-Ore., said in a July 1 statement. "New protections for low-income taxpayers, practical enforcement reforms, and upgraded assistance for taxpayers and small businesses will all now go into place."

Additionally, the House’s top Republican tax writer issued a statement after Trump signed the IRS reform legislation. "I’m proud that after three years of thoughtful bipartisan work, our bold package of reforms to the Internal Revenue Service are the law of the land," Ways and Means ranking member Kevin Brady, R-Tex., said on July 1. "Thank you to President Trump for signing this historic legislation, which is the biggest and boldest step in over 20 years to redesign and restructure the IRS into an agency with a singular mission – quality taxpayer service."

The House has approved a bipartisan repeal of the Affordable Care Act’s (ACA) so-called "Cadillac"excise tax on certain high-cost insurance plans.

The House has approved a bipartisan repeal of the Affordable Care Act’s (ACA) so-called "Cadillac"excise tax on certain high-cost insurance plans.

ACA Cadillac Tax Repeal

The Middle Class Health Benefits Tax Repeal Bill (HR 748) cleared the House on the evening of July 17 by a 419-to-6 vote. The bipartisan bill would repeal the 40 percent excise tax under the ACA known as the "Cadillac tax" on certain high-cost employer-sponsored health care plans.

Congress has repeatedly delayed the ACA’s "Cadillac" tax, which is currently set to go into effect in 2022. However, HR 748 would fully repeal the tax.

Although the measure has bipartisan support in the Senate, as for when it will get its legs in the upper chamber remains to be seen. Lately, Senate Majority Leader Mitch McConnell, R-KY., has been viewed on Capitol Hill as focusing more on moving nominations than considering tax bills.

HR 748’s Large Price Tag May Signal Hope for Tax Extenders

Notably, HR 748 dodged House Democrats’ "pay as you go" rules for tax legislation, thus carrying with it a large price tag with no offsets. The nonpartisan Congressional Budget Office (CBO) has estimated that the bill would cost the federal government more than $196 billion over 10 years.

Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, has signaled that Democrats’ support for repealing the ACA’s "Cadillac"tax without pay-fors may signal a newly opened door for tax extenders. Grassley has consistently expressed that he is focused on addressing the previously and soon to be expired tax breaks known as tax extenders but has been waiting for the Democratic controlled House to send such a bill, noting that tax legislation must originate in the House.

However, House Democrats’ tax extenders bill, the Taxpayer Certainty and Disaster Tax Relief Bill of 2019 (HR 3301) would offset its costs by causing the GOP tax law’s increase in estate tax exemption amounts to sunset early at the beginning of 2023. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), the estate tax provisions would expire at the start of 2026.

The bill cleared the House Ways and Means Committee last month but has not yet reached the House floor. Senate Republicans have called any proposal to repeal provisions under the TCJA a "nonstarter."

The IRS has released final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.

The IRS has released final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.

The Treasury Department and the IRS had issued the temporary regulations ( T.D. 9766) to clarify that the rule that a disregarded entity is treated as a corporation for employment tax purposes does not apply to the self-employment tax treatment of any individuals who are partners in a partnership that owns a disregarded entity. The temporary regulations continued to explicitly provide that the owner of a disregarded entity who is treated as a sole proprietor for income tax purposes is subject to self-employment taxes. A notice of proposed rulemaking ( REG-114307-15) cross-referencing T.D. 9766was published on the same day.

The final regulations adopt the proposed regulations as amended. The corresponding temporary regulations are removed.

Disregarded Entity

These regulations affect partners in a partnership that owns a disregarded entity, and contain amendments to 26 CFR part 301. Generally, under Reg. §301.7701-2(c)(2)(i) and except as otherwise provided, a business entity that has a single owner and is not a corporation under Reg. §301.7701-2(b)is disregarded as an entity separate from its owner (a disregarded entity). However, Reg. §301.7701-2(c)(2)(iv)(B) treats a disregarded entity as a corporation for purposes of employment taxes imposed under Subtitle C of the Internal Revenue Code. This exception to the treatment of disregarded entities does not apply to taxes imposed under Subtitle A of the Code, including self-employment taxes.

Effective Date

These regulations are effective on July 2, 2019.

Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.

Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.

Why Truncate?

The Protecting Americans from Tax Hikes (PATH) Act of 2015 ( P.L. 114-113) amended Code Sec. 6051(a)(2) by replacing the requirement that employers include employees’ SSNs on copies of Forms W-2 furnished to employees with a requirement to use an "identifying number for the employee."Because the SSN was no longer required to appear on Forms W-2 furnished to employees, the IRS published proposed regulations in 2017 to allow employers to truncate employees’ SSNs on those Forms W-2 ( REG-105004-16). The amendments were intended to aid employers’ efforts to protect employees from identity theft.

The final regulations adopt the proposed regulations without substantive changes to the content of the rules.

SSN Truncation on Forms W-2

The final regulations permit employers to truncate employees’ SSNs on copies of:

• Forms W-2 furnished to employees to report wages paid, employment taxes withheld, etc.;
• Forms W-2 furnished to employees to report wages paid in the form of group-term life insurance;
• Forms W-2 furnished to payees to report third-party sick pay; and
• Forms W-2c furnished to correct errors on Forms W-2.

The regulations do not apply to any other forms. Also, truncation is not mandatory; the regulations permit truncation but do not require it.

Under the general truncation rules, a TTIN cannot be used on a statement or document if a statute, regulation, other guidance published in the Internal Revenue Bulletin, form, or instructions:

• specifically requires use of an SSN, IRS individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or IRS employer identification number (EIN); and
• does not specifically permit truncation.

For instance, an employer cannot truncate an employee’s SSN on copies of Forms W-2 filed with the Social Security Administration.

The IRS intends to incorporate the revised regulations into forms and instructions.

Effective Date; Applicability Date

The final regulations are effective on July 3, 2019, but when they apply varies. Reg. §31.6051-1, Reg. §31.6051-3, and Reg. §1.6052-2, as amended, apply for statements required to be filed and furnished under Code Sec. 6051 and Code Sec. 6052 after December 31, 2020. Reg. §31.6051-2, as amended, applies on July 3, 2019. Reg. §301.6109-4, as amended, applies to returns, statements, and other documents required to be filed or furnished after December 31, 2020.

IRS final regulations provide rules that apply when the lessor of investment tax credit property elects to pass the credit through to a lessee. If this election is made, the lessee is generally required to include the credit amount in income (50 percent of the energy investment credit). The income is included in income ratably over the shortest MACRS depreciation period that applies to the investment credit property. No basis reduction is made to the investment credit property.

IRS final regulations provide rules that apply when the lessor of investment tax credit property elects to pass the credit through to a lessee. If this election is made, the lessee is generally required to include the credit amount in income (50 percent of the energy investment credit). The income is included in income ratably over the shortest MACRS depreciation period that applies to the investment credit property. No basis reduction is made to the investment credit property.

Partners and S shareholders who receive the credit (i.e., are the ultimate credit claimants) must make income inclusions in proportion to their share of the credit.

No Basis Increase for Partners and S Shareholders

The regulations resolve a contentious issue against taxpayers. They provide that a partner’s income inclusions are not treated as an item of partnership income under subchapter K. A similar rule applies to S corporations. Therefore, basis adjustment rules that would increase a partner’s outside basis or S shareholder’stock basis if the income inclusion amounts were treated as items of income do not apply. The IRS says its interpretation is appropriate because the investment credit and limitations on the investment credit are determined at the partner and S shareholder level.

Coordination With Recapture Rules

If a recapture event occurs an adjustment is made to the lessee’s (or ultimate claimant’s) gross income to account for any difference between the amounts that were included in income and the credit that is allowed after recapture. Special rules are provided when the amount of the unrecaptured credit exceeds the income inclusions and when the income inclusions exceed the unrecaptured credit.

Election to Accelerate Income Inclusion Upon Lease Termination

The lessee (or ultimate claimant) may make an irrevocable election to include in gross income any remaining income inclusion amounts in the tax year in which a lease terminates or is otherwise disposed of. If a partner or S shareholder disposes of its partnership or S corporation interest, the partner or S shareholder may also make an irrevocable election to include remaining inclusion amounts in income in the year of disposition. These elections may only be made if the recapture period has expired and a recapture event had not occurred during the recapture period.

Effective Date

The final regulations are effective on July 17, 2019 and apply to investment credit property placed in service on or after September 19, 2016.

Effective July 17, 2019, the list of preventive care benefits that can be provided by a high deductible health plan (HDHP) without a deductible or with a deductible below the applicable minimum deductible is expanded. The list now includes certain cost effective medical care services and prescription drugs for certain chronic conditions.

Effective July 17, 2019, the list of preventive care benefits that can be provided by a high deductible health plan (HDHP) without a deductible or with a deductible below the applicable minimum deductible is expanded. The list now includes certain cost effective medical care services and prescription drugs for certain chronic conditions.

HDHPs and Health Savings Accounts

Individuals covered by an HDHP generally may establish and deduct contributions to a Health Savings Account (HSA). To qualify as an HDHP, a plan may not provide benefits for any year until the minimum deductible for that year is satisfied. However, an HDHP is not required to have a deductible for preventive care.

Current Rule for Chronic Conditions

Under the existing rule, preventive care generally does not include any service or benefit intended to treat an existing illness, injury, or condition. As a result, the cost barriers for care have resulted in some individuals diagnosed with certain chronic conditions failing to get effective and necessary care that would prevent making the chronic condition worse. Failure to address chronic conditions can lead to amputation, blindness, heart attacks, and strokes that require considerably more extensive medical intervention.

Treatments for Chronic Care as Preventive Care

The following medical care services are now classified as preventive care for someone with that chronic condition:

• angiotensin converting enzyme (ACE) inhibitors for individuals diagnosed with congestive heart failure, diabetes, or coronary artery disease;
• anti-resorptive therapy for individuals diagnosed with osteoporosis or osteopenia;
• blood pressure monitor for individuals diagnosed with hypertension;
• peak flow meter for individuals diagnosed with asthma;
• inhaled corticosteroids for individuals diagnosed with asthma;
• glucometer for individuals diagnosed with diabetes;
• hemoglobin A1c testing for individuals diagnosed with diabetes;
• insulin and other glucose lowering agents for individuals diagnosed with diabetes;
• retinopathy screening for individuals diagnosed with diabetes; and
• statins for individuals diagnosed with heart disease and/or diabetes.

The continuity safe harbor placed-in-service date deadlines for the investment tax energy credit (Code Sec. 48) and the renewable electricity production credit (Code Sec. 45(a)) may be tolled if a construction delay is caused by national security concerns raised by the Department of Defense (DOD).

The continuity safe harbor placed-in-service date deadlines for the investment tax energy credit (Code Sec. 48) and the renewable electricity production credit (Code Sec. 45(a)) may be tolled if a construction delay is caused by national security concerns raised by the Department of Defense (DOD).

Background

In general, the energy credit may only be claimed if construction on a qualified facility begins before January 1, 2022. In the case of the production credit, construction must begin before January 1, 2017 (January 1, 2020 for a wind facility). Once construction begins, taxpayers are required to make continuous progress toward completion under either a continuous construction test or a continuous efforts test. These tests are deemed satisfied under the continuity safe harbor if the facility is placed in service within four calendar years after the calendar year in which construction begins.

Tolling Requirements

A construction deadline in the continuity safe harbor is tolled if all of the following requirements are satisfied:

• one or more necessary government permits or approvals for construction have been issued;
• construction has begun;
• the DOD provides written notice that the construction plan should be modified in the interest of national security;
• the plan is modified in a way that is acceptable to the DOD to mitigate the national security concerns; and
• as a result of the plan modification, new or additional permits or licenses must be obtained which will delay the placed-in-service date of the facility or energy property.

Tolling Period

The tolling period of the continuity safe harbor begins on the day the DOD provides written notice that the plan of construction requires modification to meet national security concerns.

The tolling period ends when one of the following events occurs:

• all new or additional permits or licenses are obtained;
• written confirmation is received that all of the required new or additional permits or licenses will not be issued; or
• the relevant federal or state authorities are notified in writing that the modification to the plan will no longer be pursued.

The maximum length of the tolling period is four years.

No Rulings

The IRS will not issue private letter rulings or determination letters regarding the application of the tolling provision or the beginning of construction requirement.

Modified Rulings

Notice 2013-29, 2013-1 C.B. 1085, Notice 2013-60, 2013-2 C.B. 431, Notice 2014-46, 2014-2 C.B. 520, Notice 2015-25, 2015-13 I.R.B. 814, Notice 2016-31, 2016-23 I.R.B. 1025, Notice 2017-4, 2017-4 I.R.B. 541, and Notice 2018-59, 2018-28 I.R.B. 196, are modified.

The Treasury and IRS have issued proposed regulations on provisions dealing with passive foreign investment companies (PFICs). Proposed regulations published on April 25, 2015, also have been withdrawn ( NPRM REG-108214-15).

The Treasury and IRS have issued proposed regulations on provisions dealing with passive foreign investment companies (PFICs). Proposed regulations published on April 25, 2015, also have been withdrawn ( NPRM REG-108214-15).

U.S. persons who own interests in PFICs are subject to rules that limit deferral on passive income earned by foreign corporations ( Code Sec. 1291– Code Sec. 1298). In general, a PFIC is a foreign corporation that in any given year:

• has income that is 75 percent or more passive income (income test); or
• owns, on average, assets that are 50 percent or more passive-income-producing (asset test).

The proposed regulations provide general guidance regarding PFICs, and guidance on the PFIC insurance exception. Specifically, the proposed regulations cover:

• the determination of ownership in a PFIC, and the treatment of certain income received or accrued by a foreign corporation and assets held by a foreign corporation under Code Sec. 1297;
• rules for determining whether a U.S. person that directly or indirectly holds stock in a PFIC is treated as a PFIC shareholder, and whether a foreign corporation is a PFIC; and
• whether a foreign insurance company is a qualifying insurance company (QIC) under Code Sec. 1297(f), and the amounts of income and assets that a QIC can exclude under the PFIC insurance exception.

General Guidance

The proposed regulations specify that, in applying the asset test, the period over which the average percentage is calculated is at least quarterly. However, taxpayers are allowed to use a shorter period, such as a monthly of daily measurement of asset values.

The proposed regulations address attribution of ownership under the look-through subsidiary rules of Code Sec. 1297(c) for determining PFIC status. These rules treat a foreign corporation (FC1) that owns 25 percent or more of another foreign corporation (FC2) as owning and earning a proportional amount of the other foreign corporation’s income and assets. The proposed regulations allow attribution from FC2 to FC1, if FC1 has a greater than 50 percent ownership interest in FC2.

The proposed regulation also provide a partnership look-through rule for the treatment of a partnership interest owned by a foreign corporation, for purposes of determining whether the foreign corporation is a PFIC. Under the rule, the same 25 percent ownership threshold applies to partnership interests as is applied to interests in corporations.

PFIC Insurance Exception

The income of a QIC derived in the active conduct of a trade or business is not treated as passive income for purposes of determining whether a corporation is a PFIC. The QIC test is based on the ratio of the foreign insurance company’s "applicable insurance liabilities" to total assets. Applicable insurance liabilities are the smallest of:

• insurance liabilities on the company’s most recent applicable financial statement (AFS);
• liabilities required by local law or regulation; or
• as provided under Treasury regulations.

Current law allows a foreign corporation to use a local AFS if it does not do financial reporting based on the rigorous and widely-accepted U.S. generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS).

The proposed regulations provide a special rule for foreign corporations that change their method of preparing their AFS by ceasing to prepare this statement under either U.S. GAAP or IFRS without a non-federal tax business purpose for the change. The foreign corporation must continue to prepare its AFS under either U.S. GAAP or IFRS. Failing to do so will mean the foreign corporation has no applicable insurance liabilities for the QIC test.

Additionally, if an AFS is prepared under local accounting standards that do not require discounting unpaid losses and other loss reserves on an economically reasonable basis, AFS insurance liabilities must be reduced under U.S. GAAP or IFRS discounting principles.

Applicability Date

The proposed regulations are proposed to apply to tax years of U.S. persons that are shareholders in certain foreign corporations beginning on or after the date of publication of the Treasury Decision adopting these regulations as final regulations in the Federal Register.

Until the regulations are final:

• taxpayers may choose to apply the proposed regulations (other than Proposed Reg. §1.1297-4and Proposed Reg. §1.1297-5) for open tax years;
• U.S persons and shareholders in certain foreign corporations may apply Proposed Reg. §1.1297-4 and Proposed Reg. §1.1297-5, for tax years beginning after December 31, 2017; and
• taxpayers may rely on Notice 88-22, 1988-1 CB 489, providing guidance on the income and asset tests.

Comments

Written or electronic comments and requests for public hearing must be received by September 9, 2019. Send submissions to: CC:PA:LPD:PR (REG-105474-18), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG-105474-18), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-105474-18).

Proposed regulations would provide an exception to the unified plan rule for multiple employer plans (MEPs). The purpose is to reduce the risk of plan disqualification due to noncompliance by other participating employers. The regulations would apply on or after the publication date of final regulations in the Federal Register. They cannot be relied upon until then. Comments and requests for a public hearing must be received by October 1, 2019.

Proposed regulations would provide an exception to the unified plan rule for multiple employer plans (MEPs). The purpose is to reduce the risk of plan disqualification due to noncompliance by other participating employers. The regulations would apply on or after the publication date of final regulations in the Federal Register. They cannot be relied upon until then. Comments and requests for a public hearing must be received by October 1, 2019.

Multiple Employer Plans

A MEP is a single plan with adopted by multiple unrelated employers. Multiple employer plans under Code Sec. 413(c) can be structured either as:

• an open MEP where an organization with employees takes the lead by establishing the plan for its own employees, and has other unrelated employers join the plan as co-sponsors;
• a closed MEP in which a group or association of employers that meets a commonality requirement takes the lead in establishing the plan, and members are free to adopt it.

Open MEPs are often established by organizations that specialize in providing benefits for smaller employers (typically, 401(k) plans). Note that MEPs are distinct from union multiemployer plans governed by Code Sec. 413(b), but share some of the same rules.

Under the unified plan rule in the current regulations for both MEPs and multiemployer plans, a qualification or operational failure by one employer can result in a total plan failure for all participating employers. The administration is trying to change that, to encourage MEP participation.

Proposed Exception

Under the proposed regulations, an eligible defined contribution MEP would qualify for an exception to the unified plan rule. The exception turns on the ability of the MEP plan administrator under the terms of the plan to spin off the assets and account balances attributable to employees of a noncompliant participating employer into a separate plan and then termination of that plan. A spinoff could be either a spinoff initiated by the unresponsive participating employer and implemented by the plan administrator, or a spinoff-termination implemented by the plan administrator.

The exception would be available if the participating employer is responsible for a qualification failure that it is unable or unwilling to correct. It would also be available if the participating employer is nonresponsive to the plan administrator’s reasonable and timely requests for information or for action.

Exception Requirements

Under the proposed exception, a defined contribution MEP would not be disqualified on account of a participating employer failure if the following conditions are satisfied:

• the MEP satisfies certain eligibility requirements, including established practices and procedures to promote compliance and a requirement to adopt relevant plan language;
• the MEP plan administrator provides notice and an opportunity for the unresponsive participating employer to take remedial action;
• the administrator implements a spinoff in the event the unresponsive participating employer fails to take appropriate remedial action; and
• the administrator complies with any information request by the IRS or a representative of the spun-off plan made in connection with an IRS examination of the spun-off plan, including an information request related to the unresponsive participating employer’s participation in the MEP for years prior to the spinoff.

Participating employer failures would include known compliance failures, as well as failure to provide information to the MEP plan administrator so that the administrator can determine whether there is an actual plan or operational failure.

Since taking office in January, President Trump has called for comprehensive tax reform. The President’s recently released fiscal year (FY) 2018 outlines some of his key tax reform principles. At the same time, White House officials said that more tax reform details will be released in coming weeks. These details are expected to describe rate cuts for individuals and businesses, new incentives for child and elder care, elimination of certain deductions and credits, and more.

Since taking office in January, President Trump has called for comprehensive tax reform. The President’s recently released fiscal year (FY) 2018 outlines some of his key tax reform principles. At the same time, White House officials said that more tax reform details will be released in coming weeks. These details are expected to describe rate cuts for individuals and businesses, new incentives for child and elder care, elimination of certain deductions and credits, and more. 

Note. The President’s budget is a blueprint for Congressional action. “This is the message from the President to the Congress and says, look, here are my priorities in terms of where I want to spend more; here's what I think should be spent; here's where the big-ticket items are,” White House Budget Director Mick Mulvaney told reporters in Washington, D.C. at a news conference unveiling the FY 2018 budget proposals.

Tax measures

The President’s FY 2018 budget highlights a number of tax reform proposals, leaving details for later. The President called for tax reform that lowers individual tax rates, expands the standard deduction, and protects homeownership, charitable giving and retirement saving. The FY 2018 budget also urges Congress to repeal the alternative minimum tax (AMT), the federal estate tax and the net investment income (NII) tax.

The President’s FY 2018 also highlights some business tax proposals, including lower rates for corporations and other business entities. To offset the cost of lower rates, unspecified business tax expenditures would be repealed.

Note. Federal law requires that every budget list all tax expenditures.  Generally, a tax expenditure is any item that causes a loss of revenue due to a special exclusion, exemption, or deduction from gross income or which a special credit, a preferential rate of tax, or a deferral of tax liability. The FY 2018 budget lists more than 160 tax expenditures.

Health care and taxes

The Affordable Care Act (ACA) created the NII tax and a number of other new taxes. The President’s budget assumes the ACA will be repealed and replaced with the American Health Care Act (AHCA). As passed by the House in April, the ACHA repeals the NII tax, the additional Medicare tax, the excise tax on medical devices, and more. The Senate is currently debating the AHCA.

Funding the IRS

Earlier this year, President Trump proposed to reduce the IRS’s funding and his FY 2018 budget reflects that. However, in past years, Congress has restored some of the proposed funding cuts to the IRS. Last year, Congress gave the IRS an additional $290 million with instructions to use the funds for taxpayer services and to curb tax-related identity theft.

Additionally, President Trump proposed giving the IRS more authority to correct errors on taxpayer returns. The FY 2018 budget also urges Congress to expressly grant the IRS authority to regulate return preparers.

Family leave

President Trump also proposed to create a new benefit within the Unemployment Insurance (UI) program. This new benefit would provide up to six weeks paid leave to mothers, fathers, and adoptive parents.

If you have any questions about the President’s FY 2018 budget, please contact our office. Our office will keep you posted of developments as Congress begins to debate the President’s proposals and more details are released by the White House.

The future of the Affordable Care Act and its associated taxes has moved to the Senate following passage of the American Health Care Act (AHCA) in the House in April. Traditionally, legislation moves more slowly in the Senate than in the House, which means that any ACA repeal and replacement bill may be weeks if not months away.

The future of the Affordable Care Act and its associated taxes has moved to the Senate following passage of the American Health Care Act (AHCA) in the House in April. Traditionally, legislation moves more slowly in the Senate than in the House, which means that any ACA repeal and replacement bill may be weeks if not months away. 

Note. At the time this article was prepared, few details have emerged about discussions in the Senate on the ACA’s taxes. Some senators have predicted that the Senate will write its own ACA repeal and replacement bill. A Congressional Budget Office (CBO) report, issued in late May, scored the House-passed AHCA as eventually causing 23 million fewer individuals to be covered, a number that may prompt the Senate to move further away from the House bill. It is also unclear if a Senate bill would repeal all or some of the ACA’s taxes. A Senate bill could also make other changes to the ACA, such as changes to the individual and employer shared responsibility requirements and the Code Sec. 36B premium assistance tax credit.

Health care taxes

As approved by the House, the AHCA repeals nearly all of the ACA’s taxes and delays the ones it does not repeal immediately. The House-passed version of the AHCA repeals the net investment income (NII) tax, the excise tax on medical devices, and the health insurance provider fee, among others, retroactively to the start of 2017. Further, the House-passed version of the AHCA delays the ACA’s excise tax on high-dollar health plans.

Whether the Senate will go along with repealing all or some of the ACA’s taxes is unclear. Some GOP members of the Senate Finance Committee had previously called for immediate repeal of the additional Medicare tax. Other Republican senators called for immediate repeal of the medical device excise tax. Our office will keep you posted of developments.

Code Sec. 36B credit

Individuals who obtain health insurance through the ACA Marketplace may qualify for a tax credit to help offset the cost of coverage. The House-passed version of the AHCA also revises the Code Sec. 36B premium assistance tax credit. The amount of the credit would vary depending on the taxpayer’s age, among other modifications. Again, it is unclear if the Senate will adopt these changes to the credit or make its own revisions.

Other provisions

An ACA repeal and replacement bill in the Senate also is expected to address, among other things,

• Individual and employer shared responsibility requirements
• Health savings accounts
• Code Sec. 45R small employer health insurance credit
• Branded prescription drug fee
• Medical expense deduction
• Minimum essential health benefits

Other health care bills

Just before Congress’ Memorial Day recess, the House Ways and Means Committee approved several bills related to the House version of the AHCA. One bill would allow individuals who have certain types of COBRA coverage to claim the revised Code Sec. 36B credit. Another bill would disallow advance payments of the credit unless the recipient is a citizen or national of the U.S. or an alien lawfully present in the U.S.

Administrative actions

The U.S. Department of Health and Human Services (HHS), the Department of Labor (DOL) and the IRS administer different parts of the ACA. In May, HHS announced that changes to the direct enrollment process for the ACA Marketplace. HHS also announced that online enrollment for the Small Business Health Options Program (SHOP) would be through an agent or broker.

Please contact our office if you have any questions about health care and taxes.

Many businesses consider the occasional wining and dining of customers and clients just to stay in touch with them to be a necessary cost of doing business. The same goes for taking business associates or even employees out to lunch once in a while after an especially tough assignment has been completed successfully. It's easy to think of these entertainment costs as deductible business expenses, but they may not be. As a general rule, meals and entertainment are deductible as a business expense only if specific conditions are met. What's more, the deduction for either type of expense generally is limited to 50 percent of the cost.

Many businesses consider the occasional wining and dining of customers and clients just to stay in touch with them to be a necessary cost of doing business. The same goes for taking business associates or even employees out to lunch once in a while after an especially tough assignment has been completed successfully. It's easy to think of these entertainment costs as deductible business expenses, but they may not be. As a general rule, meals and entertainment are deductible as a business expense only if specific conditions are met. What's more, the deduction for either type of expense generally is limited to 50 percent of the cost. 

Meals and entertainment directly connected to business. To be considered directly connected to business, the meal or entertainment event must meet three conditions:

• It must have been scheduled with more than a general expectation of deriving future income or a specific business benefit from the event. In other words, a meal or dinner date arranged for general goodwill purposes does not qualify.
• A business meeting, negotiation, or transaction must actually occur during the meal or entertainment, or immediately preceding and following it. In other words, business actually must be discussed.
• The main character of the event, considering the facts and circumstances, is the active conduct of your company's trade or business.

For example, an executive employee who treats a client to a golf game in order to discuss the general parameters of a business deal in an informal atmosphere is engaged in entertainment that is directly connected to business. So is a manager who discusses sensitive business plans with a subordinate over lunch at an off-premises restaurant.

Applicable limitations. In general, only 50 percent of expenses incurred for entertainment and meal expenses is deductible. A limited exception applies to entertainment or on-premise meals provided to employees.

Expenses with respect to entertainment facilities generally are not deductible at all. A facility includes any item of personal or real property owned, rented, or used by a taxpayer if it is used during the tax year for or in connection with entertainment. They include yachts, hunting lodges, fishing camps, swimming pools, tennis courts, bowling alleys, automobiles, airplanes, apartments, hotel suites and homes in vacation resorts.

Country club dues are not deductible (although the meals purchased with business clients at the club are, up to the 50 percent limit). Deductions for skyboxes or other private luxury boxes at sporting events are limited to the face value of a nonluxury box seat ticket multiplied by the number of seats in the box.

Record-keeping requirements. Even if a meal or entertainment expense qualifies as a business expense, none of the cost is deductible unless strict and detailed substantiation and recordkeeping requirements are met to the letter.

Please contact our offices for assistance on how to comply with these requirements at minimum cost and expense, and how your business’s typical meal and entertainment expenses fare under the deduction rules.

A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA is a retirement savings plan designed specifically for small employers. A SIMPLE IRA is an IRA-based plan with ease of use features intended to encourage small employers, which may otherwise not offer a retirement plan, to create a retirement plan.

Basics

Generally, any business with 100 or fewer employees can establish a SIMPLE IRA. If an employer establishes a SIMPLE IRA plan, all employees of the employer who received at least $5,000 in compensation from the employer during any two preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year, must be eligible to participate in the SIMPLE IRA.  For purposes of the 100-employee limitation, all employees employed at any time during the calendar year are taken into account

SIMPLE IRAs must be established under a written plan agreement.  All employees must be notified about the SIMPLE IRA plan. Generally, employees must be informed about his or her opportunity to make or change a salary reduction choice under the SIMPLE IRA plan and the employer's decision to make either matching contributions or nonelective contributions.  Employees are always 100 percent vested in a SIMPLE IRA.

Salary reduction contributions

SIMPLE IRAs are subject to important limits on salary reduction contributions.  The limit is $11,500 for 2012.  However, employees age 50 or over may make so-called $2,500 "catch-up" contributions for 2012.

Employer contributions

Employers have two choices in determining their contributions to a SIMPLE IRA plan:

• A two percent nonelective employer contribution, where employees eligible to participate receive an employer contribution equal to two percent of their compensation (limited to $245,000 per year for 2012 and subject to cost-of-living adjustments for later years), regardless of whether the employee makes his or her own contributions.
• A dollar-for-dollar match, up to three percent of compensation, where only the participating employees who have elected to make contributions will receive an employer contribution (this is called a matching contribution).

Each year, employers can choose which one they will use for the next year's contributions. This choice must be communicated to employees.  Owners of small businesses can use SIMPLE IRA plans as vehicles for retirement savings for themselves without reference to how many of their employees actually participate, as long as the employees are given the option.

The three percent matching contribution applies if the employee has made a contribution.  In contrast, the two percent nonelective contribution applies even if the eligible employee did not make a contribution.

Let's look at an example:  Jacob, age 29, has worked for his employer for five years. This year, the employer established a SIMPLE IRA plan for Jacob and its other 44 employees. The employer will match contributions made by Jacob and the other employees dollar-for-dollar up to three percent of each employee's compensation. Jacob contributes three percent of his yearly compensation to his SIMPLE IRA (three percent of $40,000 or $1,200).  His employer's matching contribution is also $1,200.  The total contribution to Jacob's SIMPLE IRA is $2,400.

The three percent limit on matching contributions may be reduced for a calendar year at the election of the employer, but only if the limit is not reduced below one percent; the limit is not reduced for more than two years out of the five-year period that ends with (and includes) the year for which the election is effective; and employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which employees can enter into salary reduction agreements. If an employer fails to satisfy the contribution rules, the SIMPLE IRA plan is in jeopardy of losing its tax benefits for the employer and all participants.

If you have any questions about matching contributions to SIMPLE plans or how to set up a SIMPLE plan, please contact our office.

Retired employees often start taking benefits by age 65 and, under the minimum distribution rules, must begin taking distributions from their retirement plans when they reach age 70 ½. According to Treasury, a 65-year old female has an even chance of living past age 86, while a 65-year old male has an even chance of living past age 84. The government has become concerned that taxpayers who normally retire at age 65 or even age 70 will outlive their retirement benefits.

The government has found that most employees want at least a partial lump sum payment at retirement, so that some cash is currently available for living expenses. However, under current rules, most employer plans do not offer a partial lump sum coupled with a partial annuity. Employees often are faced with an “all or nothing” decision, where they would have to take their entire retirement benefit either as a lump sum payment when they retire, or as an annuity that does not make available any immediate lump-sum cash cushion. For retirees who live longer, it becomes difficult to stretch their lump sum benefits.

Longevity solution

To address this dilemma, the government is proposing new retirement plan rules to allow plans to make available a partial lump sum payment while allowing participants to take an annuity with the other portion of their benefits. Furthermore, to address the problem of employees outliving their benefits, the government would also encourage plans to offer “longevity” annuities. These annuities would not begin paying benefits until ages 80 or 85. They would provide you a larger annual payment for the same funds than would an annuity starting at age 70 ½. Of course, one reason for the better buy-in price is that you or your heirs would receive nothing if you die before the age 80 or 85 starting date. But many experts believe that it is worth the cost to have the security of knowing that this will help prevent you from “outliving your money.”

To streamline the calculation of partial annuities, the government would allow employees receiving lump-sum payouts from their 401(k) plans to transfer assets into the employer’s existing defined benefit (DB) plan and to purchase an annuity through the DB plan. This would give employees access to the DB plans low-cost annuity purchase rates.

According to the government, the required minimum distribution (RMD) rules are a deterrent to longevity annuities. Because of the minimum distribution rules, plan benefits that could otherwise be deferred until ages 80 or 85 have to start being distributed to a retired employee at age 70 ½. These rules can affect distributions from 401(k) plans, 403(b) tax-sheltered annuities, individual retirement accounts under Code Sec. 408, and eligible governmental deferred compensation plans under Code Sec. 457.

Tentative limitations

The IRS proposes to modify the RMD rules to allow a portion of a participant’s retirement account to be set aside to fund the purchase of a deferred annuity. Participants would be able to exclude the value of this qualified longevity annuity contract (QLAC) from the account balance used to calculate RMDs. Under this approach, up to 25 percent of the account balance could be excluded. The amount is limited to 25 percent to deter the use of longevity annuities as an estate planning device to pass on assets to descendants.

Coming soon

Many of these changes are in proposed regulations and would not take effect until the government issues final regulations. The changes would apply to distributions with annuity starting dates in plan years beginning after final regulations are published, which could be before the end of 2012. Our office will continue to monitor the progress of this important development.

The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.

In light of these dangers, the IRS has taken numerous steps to combat identity theft and protect taxpayers. There are also measures that you can take to safeguard yourself against identity theft in the future and assist the IRS in the process.  

IRS does not solicit financial information via email or social media

The IRS will never request a taxpayer’s personal or financial information by email or social media such as Facebook or Twitter. Likewise, the IRS will not alert taxpayers to an audit or tax refund by email or any other form of electronic communication, such as text messages and social media channels.

If you receive a scam email claiming to be from the IRS, forward it to the IRS at phishing@irs.gov. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov', forward that link to the IRS at phishing@irs.gov.

How identity thieves operate

Identity theft scams are not limited to users of email and social media tools. Scammers may also use a phone or fax to reach their victims to solicit personal information. Other means include:

-Stealing your wallet or purse
-Looking through your trash
-Accessing information you provide to an unsecured Internet site.

How do I know if I am a victim?

Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice. If you believe the notice is not from the IRS, contact the IRS to determine if the letter is a legitimate IRS notice.

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification, such as a Social Security card, driver's license or passport, along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 1-978-684-4542.

What should I do if someone has stolen my identity?

If you discover that someone has filed a tax return using your SSN you should contact the IRS to show the income is not yours. After the IRS authenticates who you are, your tax record will be updated to reflect only your information. The IRS will use this information to minimize future occurrences.

What other precautions can I take?

There are many things you can do to protect your identity. One is to be careful while distributing your personal information. You should show employers your Social Security card to your employer at the start of a job, but otherwise do not routinely carry your card or other documents that display your SSN.

Only use secure websites while making online financial transactions, including online shopping. Generally a secure website will have an icon, such as a lock, located in the lower right-hand corner of your web browser or the address bar of the website with read “https://…” rather than simply “http://.”

Never open suspicious attachments or links, even just to see what they say. Never respond to emails from unknown senders. Install anti-virus software, keep it updated, and run it regularly.

For taxpayers planning to e-file their tax returns, the IRS recommends use of a strong password. Afterwards, save the file to a CD or flash drive and keep it in a secure location. Then delete the personal return information from the computer hard drive.

Finally, if working with an accountant, query him or her on what measures they take to protect your information.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

• Past-due child support
• Federal agency non-tax debts
• State income tax obligations, or
• Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).