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Joint Committee On Taxation: Federal Tax System For 2018

Joint Committee On Taxation

This document, prepared by the staff of the Joint Committee On Taxation (“Joint Committee Staff”), provides a summary of the present-law Federal Tax System as in effect for 2018.

The current Federal tax system has four main elements:

(1) an income tax on individuals and corporations (which consists of both a “regular” income tax and, in the case of individuals, an alternative minimum tax);

(2) payroll taxes on wages (and corresponding taxes on self-employment income) to finance certain social insurance programs;

(3) estate, gift, and generation-skipping transfer taxes; and

(4) excise taxes on selected goods and services. This document provides a broad overview of each of these elements.

A number of aspects of the Internal Revenue Code of 1986 (the “Code”), are subject to change over time. For example, some dollar amounts and income thresholds are indexed for inflation, including the standard deduction, tax rate brackets, and the annual gift tax exclusion. In general, the Internal Revenue Service (“IRS”) adjusts these numbers annually and publishes the inflation-adjusted amounts in effect for tax years beginning in a calendar year before the beginning of that year. However the IRS publication for 2018 (Rev. Proc. 2017-58) is out of date due to the December 2017 passage of Public Law No. 115-97, An Act to Provide for
Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, often referred to as the Tax Cuts and Jobs Act (“TCJA”).Where applicable, this document generally includes actual or estimated dollar amounts in effect for 2018 and notes whether dollar amounts are indexed for inflation.

Please download this 32 page document in its entirety here.

 

FATCA Historical (R)Evolution: Legislative History Reveals That FATCA Had Little To Do With Collecting Tax Revenue From U.S. Persons Evading Tax Through Offshore Bank Accounts (Part I)

Prior to the enactment of FATCA, Congress and the Executive were in possession of concrete-evidence revealing FATCA would fail to collect any meaningful amount of tax-revenue from U.S. persons evading tax through offshore financial center holdings.  Congress should have halted enactment of HIRE – if in fact, FATCA’s purpose was to collect tax-revenue from offshore tax evasion by U.S. persons.

The United States Congress used estimates from the Joint Committee on Taxation (JCT) as the foundation for supporting the Foreign Account Tax Compliance Act (FATCA), contained in the Hiring Incentives to Restore Employment Act (HIRE).

HIRE was a tax expenditure designed to encourage U.S. small business to hire new employees.  HIRE included two tax expenditures of note: a payroll tax exemption to employers and a one-thousand dollar tax credit for employers hiring employees between February of 2010 and January of 2011.[1]  FATCA was included in HIRE because the tax revenue collected from FATCA was supposed to offset the tax expenditures authorized by HIRE.[2]  The tax revenue FATCA was said to be targeting was from U.S. persons with foreign bank accounts who were evading tax.

In July of 2008, and around the time of the UBS scandal and the Global Financial Crisis the U.S. Senate Permanent Subcommittee on Investigations held a hearing and issued a report entitled “Tax Haven Banks and U.S. Tax Compliance”.[3]  The underlying justification for FATCA as a substantial revenue raiser rested on a single statement found in a footnote in the 2008 hearing report:  “Each year, the United States loses an estimated $100B in tax revenue due to offshore tax abuses.”[4]  In a 2009 follow-up report, the Ways and Means’ Subcommittee on Select Revenue Measures held a hearing entitled:  Banking Secrecy Practices and Wealthy Americans.  During this hearing, the Senate increased the U.S. tax revenue loss-estimate by 50 percent stating: “Contributing to the annual tax gap are offshore tax schemes responsible for lost tax revenues totaling an estimated $150B each year.”[5]  The estimates entered into the record during these hearings measured the offshore tax gap, or the amount of tax revenue[6] that would be collected if offshore tax evasion by U.S. persons holding foreign bank accounts was ended.  One month, before HIRE was signed into law by President Obama, new evidence revealed the offshore tax gap was nowhere near as large as previously thought.

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IRS Rules: FATCA Reporting For U.S. Taxpayers

IRS, U.S. Citizens Reporting Foreign Assets, TaxConnections

The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to combat tax evasion by U.S. persons holding accounts and other financial assets offshore. The Treasury Department and the IRS continue to develop guidance concerning FATCA. For current and more in-depth information, please visit FATCA.

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. There are serious penalties for not reporting these financial assets (as described below). This FATCA requirement is in addition to the long-standing requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1).

FATCA will also require certain foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions will include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies. Some non-financial foreign entities will also have to report certain of their U.S. owners.

Therefore, if you set up a new account with a foreign financial institution, it may ask you for information about your citizenship. FATCA provides special (and lessened) reporting requirements about the U.S. account holders of certain financial institutions that do not solicit business outside their country of organization and that mainly service account holders resident within it. In order to qualify for this favorable treatment, however, the local foreign financial institution cannot discriminate by declining to open or maintain accounts for U.S. citizens who reside in the country where it is organized.

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Tips For Tax Preparers To Avoid IRS Investigations

Venar Ayar, IRS Investigations Into Tax Preparer Fraud

The IRS is particularly interested in investigating tax preparer fraud because it affects so many returns. If the IRS shuts down a single corrupt tax preparer, it could prevent hundreds of fraudulent returns from being prepared each tax season.

Most tax preparers, however, are honest professionals who want to avoid accidentally creating a problem with the IRS. The following tips can help increase the odds you’ll have a successful tax season without receiving any unwanted mail from the IRS:

Understand Your Due Diligence Requirements

You have the ability to reasonably rely on a client’s statements. The client has their own duty to tell the truth on their tax return. However, you also have to verify the information and ask the right questions, especially when certain red flags are raised.

It’s not uncommon for clients to go to multiple tax preparers, complete the interview, then see which preparer is offering the biggest return. Although each return should be identical, this puts the preparer in a tough position because they want to keep their client’s business.

Don’t make the mistake of turning a blind eye to obvious errors or omissions in order to give a client a bigger refund. It’s not worth an IRS investigation. Ask the right questions to get the refund they deserve under our tax laws, even if it’s not the refund they want.

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NTA: Real Vs. Unreal Audits And Why This Distinction Matters

Nina Olson, Real Vs. Unreal Tax Audits

Around five months ago, in my 2017 Annual Report to Congress, I identified IRS audit rates and the distinction between “real” and “unreal” audits, as the fourth Most Serious Problem facing taxpayers. I had previously written about this topic in my 2011 and 2016 Annual Reports to Congress, and discussed it in a blog post six years ago.

So, what’s the deal with “real vs. “unreal” audits and why should you care?  I need to first give you a little background. Under section 7602 of the Internal Revenue Code (IRC), the IRS has the authority to examine any books, papers, records, or other data that may be relevant to ascertain the correctness of any return. I call these types of examinations, which can occur through correspondence, at the taxpayer’s home or business, or at an IRS office, “real” or traditional audits.

However, “real” audits don’t quite end the story. The IRS has several other types of compliance contacts with taxpayers that it does not consider to be “real” audits. These types of contacts, which I call “unreal” audits, include math error corrections, Automated Underreporter (AUR) (a document matching program), identity and wage verification, and Automated Substitute for Return (ASFR) (a non-filer program). Why are these types of contacts, which constitute the majority of IRS compliance contacts, important?  First of all, they require taxpayers to provide documentation or information to the IRS and may feel very much like a “real” examination to taxpayers. More importantly, “unreal” audits lack taxpayer protections typically found in “real” audits, such as the opportunity to generally seek an administrative review with the IRS Office of Appeals (Appeals) or the statutory prohibition against repeat examinations. And in case you are curious, the IRS is planning for the increased use of “unreal” audits through automated means with its “Future State” Initiative.

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Relocation To A New Employer: Moving Expense Deductions No Longer Allowed

Charles Woodson, Tax Advisor, Relocation Expense Deductions

Prior to the passage of tax reform, individuals who moved as the result of a job change or job relocation could deduct their unreimbursed moving expenses if the driving distance from their home to the new job location was at least 50 miles more than the driving distance from home to the old job location. There was also a requirement that the individual work in the new location for a specified minimum period of time after the move.

Unfortunately, tax reform effectively repealed that deduction after 2017, except for members of the Armed Forces on active duty who move pursuant to a military order. On top of that, if an employer reimburses the employee for the expenses—whether by paying a moving van company, airline, or other vendor directly, or by reimbursing the employee for their moving expenses—the reimbursement will be treated as taxable wages subject to withholding of income, Medicare, and Social Security taxes.

If a move is required by an employer, there is a possible workaround by having the employer include enough in the

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Tax Executives: Who Wants To Work For A Billionaire?

TaxConnections Executive Search Services Division has been retained by a global billionaire to run his office. Having conducted numerous searches for billionaires and their families over many years, allow me to tell you that the three top candidates will be the only individuals who will be revealed this well known family name and business enterprise. These highly confidential searches are always conducted to protect the privacy of the billionaire but the good news is you are protected as carefully as we protect the client.

The billionaire resides in Southern California and is searching for a highly intelligent, organized Head of Tax(HOT) to manage a diversified portfolio of private equity, real estate and media investments. The HOT will oversee all matters around tax planning, tax strategy and manage the entire tax team. In this role, you will be working with family office CFO and other executives who are team-focused towards strategic business operations for this billionaire with multiple business investments and acquisitions. Role requires tax executive who has the gravitas and the highest professional ethical standards and character.

If interested to learn more, please send a message to Kat Jennings, TaxConnections CEO to request a private discussion.

 

 

Reasons The IRS May Audit You

Venar Ayar, Reasons IRS Audits You

Contrary to popular belief, there is nothing inherently threatening or sinister about an IRS audit. During the audit, the agency will simply double-check your numbers to ensure that there are no discrepancies in your tax returns. Therefore, if you are truthful and conscientious, you do not have to worry.

At times audits are completely random; however, the IRS usually selects taxpayers on the basis of suspicious or unscrupulous activity. As a rule of thumb, it is better to avoid subterfuge. If you are worried about being audited by the IRS this tax season, the following are some red flags that may land you in the hot seat.

Errors and Omissions

It is true that mistakes often happen in life. That being said, when you are filing your tax return, you must play close attention to all details, and be meticulous. It is likely that if you make simple mathematical errors, they will be noticed by the agency, which can lead to your tax return being audited.

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Income Shifting Strategies To Help Business Owners Become More Tax Efficient

Haik Chilingaryan, Tax Lawyer, Tax Savings For business Owners

This segment discusses different strategies that can potentially help a business owner become more tax efficient. Some methods include the restructuring of a business and establishing tax-deductible retirement plans.

Synopsis

The concept of characterization of income (or shifting of income) may result in the preservation of significant wealth. One method of shifting of income is through retirement planning. Another method is the restructuring of a business entity.

Retirement Planning

If the taxpayer is working and participating in a 401K with his employer, or he has an IRA, meaning it’s funded entirely by the taxpayer, the money that goes into such accounts may save him on taxes.

When the taxpayer puts money in such plans, he decides that instead of paying taxes now, he will instead pay taxes when he take those funds out, preferably when his tax brackets are likely to be reduced at his retirement. That’s because his total taxable income is likely to be lowered since he is no longer working, thereby lessening his income tax obligations.

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President Trumps Tax Reform Bill Increases Inheritance Tax Deduction To $11,800,000

Charles Woodson, Estate Tax, Inheritance Tax Expert

A frequent question is whether inheritances are taxable. This is a frequently misunderstood question related to taxation and can be complicated. When someone passes away, all of their assets will be subject to inheritance taxation, and whatever is left over after paying the inheritance tax passes to the decedent’s beneficiaries.

Sound bleak? Don’t worry, very few decedents’ estates ever pay any inheritance tax, primarily because the code exempts a liberal amount of the estate from taxation; thus, only very large estates are subject to inheritance tax. In fact, with the passage of the Tax Cuts & Jobs Act (tax reform), the estate tax deduction has been increased to $11,180,000* for 2018 and is inflation adjusted in future years. That generally means that estates valued at $11,180,000* or less will not pay any federal estate taxes and those in excess of the exemption amount only pay inheritance tax on amounts in excess of the exemption amount. Of interest, there are less than 10,000 deaths each year for which the decedent’s estate exceeds the exemption amount, so for most estates, there will be no estate tax and the beneficiaries will generally inherit the entire estate.

* Note that, as with anything tax-related, the exemption is not always a fixed amount. It must be reduced by prior gifts in excess of the annual gift exemption, and it can be increased for a surviving spouse by the decedent’s unused exemption amount.

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New Lease Accounting Standards – Steps For Compliance

Jim Marshall, Lease Accounting Standards

The new lease accounting standards will require some extra time and work for many companies as they race to satisfy the new requirements.

In these new rules, two leases (finance and operating) will be required on the balance sheets.

CFO sums it up this way:

Under the new guidance, an arrangement contains a lease only when the arrangement conveys the right to control the use of an identified asset. That’s a change from legacy guidance, under which an arrangement can contain a lease even without such a right if the customer takes substantially all of the output from the lease over the term of the arrangement.

In addition to the lack of bright lines used under legacy guidance, FASB added a new criterion that focuses on assets that have a specialized nature with no alternative use at the expiration of a lease. That’s important, as it may modify the lease’s legacy classification.

As 2018 progresses, your business will want to develop procedures for gathering and documenting the wide array of leases kept by your company. These procedures will need to be efficient, as technologically advanced as possible, and centralized in order to be sustainable and accurate.

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Tax Reform’s Impact On Individual’s Taxes

Haik Chilingaryan, Tax Reform And Individual Taxes

During this post, we discuss how the new changes in the tax laws may have an overall positive effect on individual rates and deductions. However, a crucial component of the Tax Cuts and Jobs Act is that the rates and other provisions of the new tax code have a sunset provision, which means that on December 31, 2025, all of the rates are likely to be reinstated unless some legislation is introduced that will retain these rates or lower them even further.

Synopsis

The Tax Cuts and Jobs Act of 2017, otherwise known as GOP tax reform bill, largely went into effect on January 1, 2018. A crucial component of TCJA is that the rates and other provisions of the new tax code have a sunset provision. This means that on December 31, 2025, all of the rates are likely to be reinstated unless some legislation is introduced that will retain these rates or lower them even further.

The following are the list of major changes under the new tax code:

  1. Brackets Lowered (rates sunset on December 31, 2025)
  2. Personal Exemptions Repealed
  3. Standard Deduction Nearly Doubled
  4. State and Local Tax Deduction limited to $10,000
  5. 21% flat rate for C-corporations
  6. Qualified Business Income Deduction for Pass-Through Businesses
  7. Estate Tax Exemption More Than Doubled

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