2019 Estate & Tax Planning Professional Seminar
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
2019 Estate & Tax
Planning
Professional Seminar
Candice DeClark-Peace, JD, CPA
Clark, Schaefer, Hackett & Co.
10100 Innovation Drive
Dayton, Ohio 45342
937-226-0070
cdeclark@cshco.com
Introduction
Today’s presentation will focus on developments that
impact the way we, as professionals, approach tax
planning and tax compliance. Let’s look at -
1. Look at what the IRS has focused on in 2019 and
their announced focus for 2020;
2. Review legislative actions since Nov 2018;
3. Look at IRS pronouncements, Revenue Rulings; etc
for guidance as we move forward.
2
1IRS Updates
• Congress, thru bipartisan support, is funding the
“rebuilding” of the IRS.
- as part of the Senate appropriations bill, HR 6147, IRS
was given an additional $200 million to increase enforcement
The increase in support comes with the IRS announcement
that the “voluntary compliance” level among US Taxpayers
has remained at 81%. Remember; 40 years ago; the
voluntary compliance rate was > 95%.
3
IRS Updates
• Focus of Enforcement Programs of Taxpayers
- Correspondence non-audit contacts
Matching notices
1116 notices
1095 notices
- Aggressively pursue identified high risk issues
Non-filers
Misuse of tax exempt status
Tax shelters
4
2IRS Updates
• - Continued focus on LB&I issues
OVDP (Offshore Voluntary Disclosure Program)
Micro-Captive Insurance
Related Party Transactions
R/E Developers-use of completed contract method
S-Corp basis (losses in excess of)
S-Corp distributions
Conservation Easements
Virtual Currency
5
IRS Updates
This should alert us that the IRS
remains focused on our high-income
individual clients along with business
income coming from flow-through
entities
6
3IRS Updates
The IRS has announced a continued effort to hold tax
preparers accountable. Currently; the IRS, having increased
information gathering techniques, is identifying areas of
abuse and non-compliance among tax prepares.
Once identified; the IRS is committed to sanctioning of the
offending preparer
-criminal prosecution
- civil sanctions (including limiting the ability of
the individual to prepare returns or practice before the IRS)
7
Other IRS Updates
• Announcement of Outside Collection firms
-CBE Group (Cedar Falls, IA)
-Conserve (Fairport, NY)
-Performant (Livermore, CA)
-Pioneer (Horseheads, NY)
Important as any other contact should be viewed as a Scam
Remember-IRS contact routinely starts with regular mail
delivery. ONLY, when the Taxpayer fails to respond will the
IRS resort to in person or telephone contact.
8
4Other IRS Updates
• 10/25/2019 – Delegation Order
The Office of Chief Counsel will now be handling Taxpayer
Appeal’s of a denial by the IRS for an Appellate review
10/16/2019
The IRS updated its procedure on Passport restrictions for
“seriously delinquent” Taxpayers.
- owe the IRS > $52,000
- Notice of Federal Tax Lien has been filed
- Taxpayer is not in a payment plan nor has been labeled
as currently not collectable
- IRS has notified the State Department to deny
application or renewal of the passport
9
Other IRS Updates
• FS-2019-14 (Oct 2019)
Provides guidance on treatment of family members in the
family business
FS-2019-13
Provides guidance on tax issues for individuals caring for a
family member
FS-2019-11
Provides guidance on credits available to employers
providing paid family leave (affects 2018 and forward)
10
5Other IRS Updates
• IR-2019-132 (July 2019)
Provides IRS current position on handling and enforcement
of tax attributes of Cryptocurrency.
IRS will contact > 10,000 taxpayers that have had virtual
currency transactions and “potentially” have failed to report
income from said transactions.
- Contacts are designed to encourage taxpayers to take
corrective actions BEFORE the IRS issues “proposed”
adjustments to income
- Contacts refer taxpayers to IRS.gov for proper handling
11
Other IRS Updates
• Criminal investigations related to identity theft have
dropped by 75% over the last five years (TIGTA)
• This drop in work load now allows the Criminal
Investigation (CI) Division of the IRS to reallocate
resources to “main stream” tax evasion cases
• July 2019; IRS announced designed to increase fraud
referrals from the general public
12
6Estate & Trust Updates
• “ I thought……”
You could not make changes to an irrevocable trust.
What I learned in law school was trusts could only be
modified by the consent of the grantor AND after the death
of the grantor a trust was irrevocable.
NO SO !
13
Estate & Trust Updates
The trend in recent years is to allow modification or
termination of trusts. The reasons stated that warranted
such an action:
- the complexity of laws governing trusts
- the duration of trust terms with the adoption of
dynasty trust rules make provisions and the application there
of less certain
- trusts have become more widely accepted making
application of prior standards less effective in achieving the
desired benefit
- general acceptance of the premise that modification
is “ok” to best serve the interest of all parties
14
7Estate & Trust Updates
Modification or termination of an irrevocable trust is allowed
under the Uniform Trust Code if:
- the settlor and beneficiaries agree; even if the
modification is in direct opposition of a material “purpose” of
the original trust language;
- the modification or termination has court approval;
- the beneficiaries agree (agreement of the settlor not
required) if the modification or termination is consistent with
the material “purpose” of the trust;
- some of the beneficiaries agree (not all and without
the agreement of the settlor) so long as the modification or
termination is consistent with the material “purpose” of the
trust AND the ALL beneficiaries are protected.
15
Estate & Tax Updates
The IRS is now “on board”
Ten private letter rulings were issued on 8/9/2019
PLRs 201932001 through 201932010
In each PLR; all with the same fact pattern, the
resulting tax attributes were defined
Facts
Trust is Grandfather GST-exempt (pre 9/25/1985)
No additional or constructive contributions
All income to son; no discretion for additional principal
At son’s death, principal to issue, per stirpes
16
8Estate & Trust Updates
Ruling #1
Trust termination and distribution did not
create GST liability
IRS reasoned that “as long as actuarial values of the
trust accurately represented the each interest there
was no shifting of beneficial interest
17
Estate & Trust Updates
Ruling #2
The trust termination and distribution of trust funds did not
result in a taxable gift.
IRS again, relying on actuarial values to determine each
beneficiaries interest would not “transfer” property and
therefore no taxable gift.
Ruling #3
Trust termination and distribution would cause recognition of
unrealized appreciation.
IRS found that “in substance” the transfer represented a
sale of son’s interest to the children.
18
9Estate & Gift Updates
How is each class of beneficiary treated for tax purposes:
The Son
The adjusted basis of trust assets is disregarded and his
entire distribution receive LTCG treatment
His estate is increased by the amount received
less any taxes paid.
The Children (of Son)
They are treated as having purchased their interest using
appreciated property. They recognize gain equal to the
amount of unrealized appreciation.
19
Estate & Trust Updates
The Grandchildren (of Son)
Their basis is a pro rata portion of the entire basis
of the property.
If converted to cash; their basis is considered in calculation
of taxable gain.
Given the PLRs, we have guidance when considering seeking
modification or termination of an irrevocable trust.
20
10Estate & Trust Updates
“I thought…….”
The Last Will & Testament of a Testator had to be signed;
(pen and ink) and depending on the state of jurisdiction;
witnessed by up to three qualifying witnesses.
This may no longer be true!
(depending upon adoption of your jurisdiction)
July 2019 the Uniform Wills Act was approved by the Uniform
Law Commission (ULC)
21
Estate & Trust Updates
The Uniform Wills Act creates a “process” to take the legal
process of document execution from “pen & ink”
into the “e-signing” age.
Concerns
- Fraud and/or duress
- Format is lacking in the Act (Word doc or PDF?;
Encryption ?; Storage ? )
-Revocation
-Boilerplate documents create an environment of “false
security”
22
11Estate & Trust Updates
Uniform Trust Decanting Act (UTDA)
Now adopted by eight states
(IL, AL, CA, NC, WA, NM, CO, VA)
Introduced in legislature in MA
Premise: if a Trustee has the power to make discretionary
distributions for the benefit of an individual, then the Trustee
should have the ability to distribute the property to a trust
for the same individual.
23
Estate & Trust Updates
Uses of Decanting
Administrative:
-change situs and/or governing law
-change trustees; appoint directors/protectors
- clarify ambiguous provisions
Substantive
- limit beneficiary rights
- eliminate, add or modify power of appointment
- create a special needs trust for the beneficiary
24
12TCJA Developments
Let’s review the status of the TCJA legislation that occurred
since Nov of 2018:
1. Final Regulations release in Jan 2019; amended Feb 2019 on
IRC Section 199 as created under the TCJA (QBID)
- definitions for application of computation:
W-2 wages
Unadjusted basis immediately after acquisition (UBIA)
QBI
Qualified REIT dividends
Qualified PTP income
25
TCJA Developments
9/24/2019 Rev Proc 2019-38
Provides a safe harbor for rental real estate to qualify as a
trade or business for application of IRC Sec 199A
-excludes properties involving a triple net lease arrangement
-requires annual performance of 250 hours of rental services
by owner, agent, employees of owner
26
13TCJA Developments
Final Regulations change the anti-abuse rules; removing the
rule related to a trade or business being treated as a SSBT
Proposed Regs: A SSBT includes an otherwise qualified
trade or business if it provides 80% or more of its property
or services to a SSTB AND if there is 50% or more common
ownership.
Final Regs: If an otherwise qualified trade or business
provides property or services to a SSBT with 50% or more
common ownership, the portion of the business providing
property or services to the SSTB is treated as part of the
SSTB.
Also removed: an incidental qualified trade or business
with common ownership with a SSTB will be treated as part
of the SSTB. 27
TCJA Developments
Final Regulations clarifies Cost Recovery (IRC Sec 168)
terms and applications thereof:
1. Assets qualifying for Bonus Depreciation
Added: Qualified film or TV production property
Qualified live theatrical production property
Removed: Qualified Improvement Property (QIP) by
assigning a 39 year life; making it ineligible
(the removal was not intended but will take technical
correction legislation to change.)
28
14TCJA Developments
Cost Recovery-cont.
2. If the Taxpayer (or it’s predecessor) had a “prior interest”
in the property the property is treated as used.
Final Regs provide that in determining if the Taxpayer or it’s
predecessor had a depreciable interest in the property prior
to acquisition, ONLY the five calendar years immediately
prior to the Taxpayer’s current placed in service year of the
property are taken into account.
29
TCJA Developments
4/17/2019 – Round 2 Proposed Regulations for Opportunity
Zones (to date neither Round 1; issued 10/19/2018; or
Round 2 have been finalized) – significant issues still have
not been addressed.
While many clients are looking to OZFund Investments as
an alternative to Section 1031 – The uncertainties of tax
treatment in 2026 or the alternative 10 year holding period
that allows certain gains to be “erased” adds a new
dimension to tax planning for your real estate investing client
30
15Planning Discussions
Choice of Entity Selection-
TCJA provides new considerations for advising a client on
what entity structure to use for best facilitation of his or her
goals.
What factors would suggest S over C:
-corporate tax rates may rise
-individual tax rates may decline
-fear of an “unreasonable compensation” audit
-fear of the Accumulated Earnings Tax
-Cost of the NIIT on Dividends
-inability to use loses in C against 1040 income
31
Planning Discussions
Obstacles to moving from C to S
-entity eligibility
-limitation as to classes of stock
-shareholder eligibility
-timely election
-ability to re-elect
-built-in gains tax
-LIFO recapture
-Passive Investment Tax
-lingering C corp attributes
32
16Planning Discussions
Obstacles inmoving from S to C:
- Would compensation levels necessary to get desired tax
result be viewed as unreasonable?
- Accumulated earnings tax
- Personal Holding Company Tax
- Double tax on liquidation
- Withdrawing AAA form S years
- Possible required change of accounting method
33
IRS Audits – Practitioner Error ?
Facts:
Client wants to move funds from one P/P to another.
Second plan is not set up when distribution is made. Advisor
puts in-kind distribution into a retail account.
When second account is “up” Advisor sells in-kind holdings
and rolls cash into new P/P. Rollover is done in the 60 day
time frame.
Composite 1099 on retail account uses carryover basis on in-
kind securities and reports “gain” to the IRS.
1099R issued showing a taxable distribution-Code 1
Preparer ignores Composite 1099 and shows 1099R as -0-
taxable.
IRS selects for a Matching Notice
34
17IRS Audit – Practitioner Error?
Facts:
As part of a litigation support engagement we were charged
with preparing unfiled tax returns for the wife and one
business entity. The unfiled returns covered 2012 thru 2018.
In reviewing the deposition of the “family” CPA we learned:
- While returns were prepared for all periods; nothing was
filed. Wife was told that returns were filed electronically.
- Returns prepared had numerous errors:
1. bad debt deduction on cash basis returns
2. expensing entire r/e purchases under Sec 179
35
IRS Audit – Practitioner Error?
3. Deduction of husband’s expenses in the business that
related to husband’s hobby
4. Improper depreciation methods and lives used on rental
properties
When returns are filed Wife will have tax liability; penalty
and interest of > $175k.
In the deposition of the CPA; when confronted with the
findings “plead the 5th”
36
18IRS Audit – Practitioner Error?
Facts:
An audit of 2017 and 2018 for a W-2 wage earner; rental
property and itemized deductions in both years. In 2018,
client has a Schedule C with -0- revenue and $8,344 in
expenses.
Practitioner is a “no show” at the scheduled Office Audit
initial appointment. Practitioner texts client: Personal issues
prevent me from representing you in this matter.
Audit is rescheduled and client reaches out to us. Review of
return in conjunction with review of client’s records shows:
37
IRS Audit – Practitioner Error?
1. Practitioner has moved 2106 expenses to Schedule C
(client has no separate trade or business)
2. Practitioner has taken personal utilities AND rental
property utilities on Schedule E. (personal utilities in
2017 return were also on 2106 OIH)
3. Practitioner recorded as medical bill ALL charges
appearing on EOBs ($31,720) instead of the actual out of
pocket ($6115)
4. No depreciation schedule could be located. Remember;
Practitioner refused to assist. On a $92,000 rental;
annual depreciation was $6790. Backing into allowable
depreciation; the IRS allowed only $2,049.
38
19IRS Audit – Practitioner Error?
The Client owed $14k for 2017 and $12k for 2018 to the IRS.
The Client owed $3k for each year to the State of OH. We
were able to convince the IRS that no penalty should be
applied. Why?
What ethical issues are present in these cases?
-AICPA has issued 7 Statements on Standards for Tax
Services (SSTS)
-ABA Model Code of Professional Responsibility contains 9
Canons; each of which contains an explanation of the ethical
issues.
39
Ethical Obligation
Those of us who prepare tax returns or represent clients
before the IRS have a duty under Circular 230 and under the
ethical codes or our respective professions.
What is our duty with respect to these three cases?
40
20CRAZY TAX DEDUCTIONS!
1. A mink coat as a business deduction?
2. A saltwater aquarium as a medical expense?
3. Private elementary education-medical deduction?
4. Beer as a medical expense?
5. Visits to a prostitute (provided to a client to “seal the
deal”)?
6. Underwear?
7. Clarinet lessons – medical deduction?
8. Pink hair dye?
9. Office pet?
41
Crazy Tax Deductions?
10. Your $30,000 motorcycle?
11. Bodybuilder expenses: body oil, supplements, etc?
12. Breast augmentation for a stripper?
13. Landscaping for your home office?
14. Paying your lover for services? (income shifting)
15. Beer as a promotional give-a-way?
16. Swimming pool?
17. Sex change operation?
18. In Germany can you deduct bribes?
19. In Italy a tax credit (1000 euros) to move out of Mom
and Dad’s home
20. Is the value of stolen property received taxable?
42
21Thank You!
Have a healthy an
successful 2020
22You can also read
