Federal Tax News – January

By Team HRH | February 27, 2017

IRS Whistleblower Program had a “transformative year.” When someone tips the IRS that another person hasn’t paid taxes owed, the tipster may receive money from the Whistleblower Office. If the information is used, the IRS may pay up to 30% of the additional tax, penalty, and other amounts collected. In fiscal year 2016, the IRS paid 418 whistleblower awards, worth more than $61 million, compared to FY2015, when 99 awards were paid. Resources from across the IRS were deployed to clear up a backlog of cases, according to a recent report. The IRS rejected 12,395 claims from whistleblowers because the allegations were considered “Not Specific, Credible, or are Speculative in Nature.”

Meal and entertainment deductions were denied. A taxpayer was the sole shareholder of an LLC that recruited foreign workers for seasonal jobs. The IRS disallowed $6,193 that he claimed for meal and entertainment deductions and the U.S. Tax Court agreed. The taxpayer failed to meet the tax code’s strict substantiation rules. In order to claim a deduction, you must show: the amount of the expense, the time and place, the business purpose and the business relationship. In this case, the taxpayer submitted copies of receipts and a schedule summarizing their contents but many receipts were illegible or appeared to be for personal expenses. And handwritten notes on receipts failed to indicate the business relationship with the person being entertained. (TC Memo 2017-4)

The IRS announces audit targets. The IRS’s Large Business and International division has adopted a new audit strategy that focuses on specific issues or “campaigns.” The 13 specific issues the IRS has selected span a broad range of topics, including partnerships, S corporation losses, “micro-captive insurance transactions,” the Section 48C energy tax credit, tax strategies used by the television broadcast industry, related-party transactions, land developers using the “completed contract method,” nonfiling foreign businesses and individual taxpayers with unreported offshore income who didn’t file the proper returns.

President Trump vows to end the ban on tax exempt organizations being involved in politics. On Feb. 2, the President said he wants to “get rid of, and totally destroy, the Johnson Amendment,” a provision that bars tax-exempt organizations, including religious and educational institutions, from engaging in certain political activities if they want to retain exempt status. The ban, which has been in existence since 1954, doesn’t allow 501(c)(3) nonprofits to endorse candidates. A repeal of the ban would require approval by Congress. After the President’s statement, Republicans in Congress began discussing a bill to change the law. Passage is uncertain at this time.

Legal fees reclassified. Before being fired, a taxpayer received a bonus that her employer tried to recover, alleging breach of fiduciary duty. She countersued, alleging employment discrimination. All claims were dismissed. She reported the bonus as wages and deducted related legal fees on Schedule C, “Profit or Loss from Business.” The IRS reclassified the fees as a less valuable miscellaneous itemized deduction. The U.S. Tax Court agreed. One reason: The legal fees came from her status as a former employee, so they couldn’t be deducted on Schedule C as a business expense under Internal Code Section 162. Such expenses are only deductible if a taxpayer can establish they are ordinary, necessary and directly connected with his or her trade or business. (TC Summary Opinion 2017-2)

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