Federal taxes
President Obama released his fiscal year (FY) 2012 federal budget recommendations in February. The president proposed to extend the Bush-era income tax rate reductions for all taxpayers except for higher income taxpayers (which the White House defines as individuals with incomes over $200,000 and married couples with incomes over $250,000). The president also proposed, among other things, to make permanent the American Opportunity Tax Credit and extend some popular but temporary individual tax incentives. For businesses, the president proposed, among other things, to make permanent the research tax credit. 

 Bonus depreciation
The IRS issued much-anticipated guidance on 100 percent bonus depreciation (enacted by the Tax Relief, Unemployment Reauthorization Extension and Job Creation Act of 2010). The IRS explained the relationship between 100 percent bonus depreciation and 50 percent bonus depreciation (enacted by the Small Business Jobs Act of 2010). The IRS also allowed, among other things, businesses to elect to deduct 50 percent bonus depreciation instead of 100 percent bonus depreciation in certain situations. 

 Information reporting
Congress passed the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (2011 Taxpayer Protection Act) to repeal expanded information reporting on Form 1099 for certain business payments and rental property expense payments. The provisions had been widely criticized as being unduly burdensome on taxpayers, especially small businesses. See below for more info.

 Basis overstatement
The Seventh Circuit Court of Appeals held that a six-year statute of limitations applies to overstatements of basis. (Beard, January 26, 2011). The Court of Appeals for the Federal Circuit also ruled in favor of the IRS (Grapevine Imports, Ltd., March 11, 2011). The decisions uphold IRS regulations that specifically apply the six-year limitation period to the assessment of tax attributable to partnership items. The decisions also continue a split among the circuit courts of appeal whether an overstatement of basis is an omission of gross income for purposes of the Code Sec. 6501(e) six-year limitations period. In February, two other courts of appeal ruled against the IRS. The Fourth Circuit Court of Appeals (in Home Concrete & Supply, February 7, 2011) and the Fifth Circuit Court of Appeals (in Burks, February 9, 2011) found that an overstatement of basis is not an omission of gross income.

Offshore accounts
The IRS announced a second offshore voluntary compliance initiative in February. The 2011 initiative is similar to one offered to taxpayers in 2009 but with a different penalty framework. The initiative is scheduled to run through August 31, 2011 and is designed to encourage taxpayers to disclose unreported offshore accounts. Generally, taxpayers must pay a penalty of 25 percent of the amount in the foreign bank account with the highest aggregate account balance covering the 2003 to 2010 period. Some taxpayers may be eligible for reduced penalties of 12.5 percent (generally taxpayers whose offshore accounts did not surpass $75,000 in any calendar ear covered by the initiative) or five percent (generally taxpayers who meet very narrow criteria, including but not limited to, infrequent and minimal contact with the foreign account).  

In related news, the Treasury Department issued final rules on the filing of Form TD-F 90-22.1 (Report of Foreign Bank and Financial Accounts), known as "FBAR." The Bank Secrecy Actrequires each United States person to file an FBAR if the person has a financial interest in, or signature authority over, one or more accounts in a foreign country and the aggregate value of those accounts exceeds $10,000 at any time during the calendar year. 

 IRS liens
The IRS announced new measures to help taxpayers struggling during the economic slowdown. The agency is revising its lien processes, making changes to installment agreements for small businesses, and expanding a streamlined offer in compromise (OIC) program. Among other changes, liens can now be withdrawn immediately once full payment of taxes is made if the taxpayer so requests. The IRS also announced it will increase the dollar thresholds when liens are generally filed. Streamlined installment agreements will be made available to more small businesses. 

Flexible spending arrangements

Health care reform legislation enacted in 2010 made some important changes to flexible spending arrangements (FSAs). Beginning January 1, 2011, the costs of over-the-counter (OTC) medications and drugs may be reimbursed under an FSA only if the medications and drugs are purchased with a prescription (subject some exceptions). Previously, taxpayers could use FSA dollars to purchase OTC medications and drugs without a prescription. The IRS issued guidance on the use of FSA debit cards for prescribed OTC medications and drugs early in 2011.

Exempt organizations
The IRS announced that more small tax-exempt organizations would be eligible to file a simplified annual information return. For tax years beginning on or after January 1, 2010, tax-exempt organizations with annual gross receipts of $50,000 or less can file Form 990-N, Electronic Notification e-Postcard. The threshold previously was $25,000 in annual gross receipts. 

 Health care reform
Several federal district courts weighed-in on the constitutionality of health care reform legislation enacted in 2010. A federal district court in Mississippi rejected a constitutional challenge to the legislation (Bryant, DC-Miss., February 2, 2011). However, federal district courts in Florida and Virginia found that the health care reform legislation was unconstitutional (Florida, DC-Fla., January 31, 2011, Sebelius, DC-Va., December 13, 2010). The Third Circuit Court of Appeals is expected to be the first appellate court to rule on the constitutionality of health care reform. The Third Circuit has scheduled a hearing on the Virginia case in May. 

These are just some of the many federal tax developments during the first quarter of 2011. Please contact our office if you have any questions about these or any tax developments.

Taxpayers got some good news in April 2011 when Congress passed, and President Obama, signed legislation to repeal expanded information reporting requirements. The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (P.L. 112-9) repealed expanded business information reporting requirements previously scheduled to take affect for payments made after December 31, 2011 and also repealed rental property expense reporting which was effective for payments made after December 31, 2010.

The two (now repealed) information reporting requirements were enacted by Congress in 2010. Both were intended to boost tax revenues. Research has shown that taxpayers are more likely to report their tax liabilities when they know that the same information has been provided to the IRS by a third party.

The Patient Protection and Affordable Care Act (PPACA) generally required all businesses, charities and state and local governments to file an information return (Form 1099) when they made annual purchases aggregating $600 or more to a single vendor, other than a tax-exempt vendor, for payments made after December 31, 2011. The  PPACA also repealed the longstanding reporting exception for payments to a corporation. The IRS was planning to issue regulations on the expanded business information reporting requirements but repeal of them makes the regulations unnecessary.

The Small Business Jobs Act of 2010 required information reporting by landlords on certain rental property expense payments of $600 or more in conjunction with their rental properties made after December 31, 2010.  The types of expenses contemplated by the 2010 Small Business Jobs Act were, for example, payments to craftspersons, such as electricians and roofers. Payments for professional services, such as to accountants, also would have been covered by the 2010 Small Business Act. Some landlords, however, were exempt from reporting. They included, but were not limited to, landlords who received only a nominal amount of rental income. The IRS also was planning to issue regulations but repeal of the rental property expense reporting requirement makes the regulations unnecessary. 

Both of these provisions generated significant controversy after their enactment. Small businesses, in particular, complained that the requirements would be costly and burdensome. Businesses would have had to develop new systems to capture the required information. In some cases, the law would have required backup withholding.

Initially, it appeared that Congress preferred to reform rather than repeal the new reporting requirements. One proposal would have raised the reporting threshold from $600 to $5,000 and would have excluded some routine payments, such as office supplies, from reporting. Another proposal would have exempted all purchases made with a credit card from the reporting. 

By early 2011, momentum had built in Congress for complete repeal of the two reporting requirements. On March 3, 2011, the House approved the 1099 Comprehensive Taxpayer Protection Act. The Senate approved the bill on April 5, 2011 and President Obama signed the bill into law on April 14, 2011. Passage of the bill means that the expanded information reporting requirements under the PPACA are repealed as if they had never been enacted. Likewise, rental property expense reporting under the 2010 Small Business Jobs Act is repealed as if it had never been enacted.

The 1099 Comprehensive Taxpayer Protection Act did not repeal some other new information reporting requirements.  In particular, taxpayers need to take notice of three new information reporting requirements that are now in effect after having withstood campaigns to have them repealed since their enactment:

1. Health insurance benefits. The Patient Protection and Affordable Care Act of 2010 requires employers to report to their employees on Form W-2 the cost of employer-provided health insurance. This reporting requirement is optional for all employers in 2011, optional for small-employers only for 2012 and mandatory for all employers starting in 2013.

2. Broker reporting. The Emergency Economic Stabilization Act of 2008 expands Form 1099-B reporting to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. This reporting starts in 2011 for most stock acquisitions and in 2012 for most mutual fund transactions. The expanded form will also report whether gain or loss is long-term or short-term.

3. Payment card reporting. The Housing Tax Assistance Act of 2008 requires the reporting of various payment card transactions starting in 2011. Payment settlement entities are required to report payments made to merchants for goods and services in settlement of payment card and third-party payment network transactions.

Congress and the White House are currently negotiating a deficit reduction plan and a fiscal year (2012) federal budget. The deficit reduction plan and budget are expected to include a mix of revenue raisers and spending cuts. It is unlikely Congress will revive the two information reporting requirements repealed in April 2011 but lawmakers might impose other information reporting requirements. Speaking in Washington, D.C. in April 2011, IRS Commissioner Douglas Shulman endorsed making more use of information returns to increase taxpayer compliance. Shulman's remarks may resonate with many members of Congress who are looking for ways to reduce the nation's budget deficit.

 
If you have any questions about the 1099 Comprehensive Taxpayer Protection Act or information reporting in general, please contact our office.