Anderson ZurMuehlen Blog

Do you Need to File a 2016 Gift Tax Return by April 18?

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return.

Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.

When filing is required

Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

  • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
  • That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse,
  • That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions,
  • To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016,
  • Of future interests — such as remainder interests in a trust — regardless of the amount, or
  • Of jointly held or community property.

When filing isn’t required

No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Meeting the deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.

Have questions about gift tax and the filing requirements? Contact us to learn more.


© 2017

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Factoring Uncertainty into the Value of Your Business


Businesses currently face numerous uncertainties in the marketplace. As President Trump and Republican congressional leaders work toward fulfilling their campaign promises, tax laws could substantially change, the estate tax could be repealed, and various laws and regulations (including the Dodd-Frank and Affordable Care Acts) could be repealed or revised. Interest rates and inflation could both rise. Economic relationships with other countries could also change. Some of these changes could be good for your business, while others could have negative effects on the value of your business.

History Lesson

Business valuation professionals are no strangers to dealing with market uncertainties — and neither are business owners and investors. The approach to valuing a business interest doesn’t change because of the uncertainties surrounding the current political environment.

Under the market and income approaches, the value of a business continues to be a function of expected economic returns and market, industry and specific company risk. These fundamentals didn’t change during other events that caused uncertainty earlier in the 21st century, such as the terrorist attacks on September 11, 2001, or the Great Recession that lasted from December 2007 to June 2009.

Key Considerations

Here are some considerations when valuing a business in today’s volatile political climate.

Public market returns. The inputs that valuators use to determine discount rates and pricing multiples are typically based, in part, on data from the public stock and bond markets. So far, public markets have reacted to the election results in a positive manner. In general, the proposed changes to taxes and business regulations are likely to lower expenses and increase cash flow for many businesses.

Company-specific risks. A factor that has changed substantially is the risk associated with specific companies and industries — and valuators face challenges as they attempt to measure these risks. For example, proposed regulatory changes might increase the value of companies that operate in the energy sector or the manufacturing sector. On the flipside, they might adversely affect the value of companies that operate in the government contracting or health care sectors.

Known (or knowable) information. Many private business valuations are prepared with a year-end effective date, because it corresponds to the cut-off date for their annual financial statements. Valuation experts can only use information known or knowable at the date of the valuation. But what did we know as of December 31, 2016?

Valuation experts constantly monitor market conditions. Realistically, at the end of 2016 and even today, there are many unknowns. The specific details of tax reforms and other regulatory proposals haven’t been fully put into effect or made into law. Since we can only speculate on what will happen in the future, business valuators must focus on the likelihood that the subject company will achieve its expected future income. The risk that a company won’t meet its financial forecasts is factored into its discount rate.

Contact a Valuation Pro

Experienced appraisers understand the importance of reacting to events that cause added uncertainty with an objective, measured response, rather than a knee-jerk response. In today’s marketplace, they understand that politicians have many divergent plans that may (or may not) be approved or take effect.

In the meantime, business owners and investors should stay calm and carry on. A valuation professional can help you stay atop the latest tax and regulatory changes and understand how they could impact your company’s expected return and risk profile in the future.

Contact Dan Vuckovich at 406.727.0888 for questions or more information.

© 2017

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The “Manufacturers’ Deduction” isn’t Just for Manufacturers

The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Sec. 199 deduction 101

The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.

The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.

How income is calculated

To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t — unless less than 5% of receipts aren’t attributable to DPGR.

DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as:

  • Tangible personal property (for example, machinery and office equipment),
  • Computer software, and
  • Master copies of sound recordings.

The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.

Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.



© 2017

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IRS Updates FAQs on Certain ACA Provisions

The Trump Administration and the Republican majority in Congress plan to repeal and replace the Affordable Care Act (ACA) in the coming months. In the meantime, however, employers must continue to comply with the existing rules for 2016, including the information reporting requirements and shared responsibility provisions.

The IRS previously issued three sets of FAQs that provide guidance on employer responsibilities under the Affordable Care Act (ACA). This guidance was recently updated to include significant clarifications and help employers ensure that they’re in compliance with the rules. Here, we highlight the extensive updates that were issued in December 2016 and that you may find useful in fulfilling your information-reporting obligations for 2016, if you’re subject to the requirements.


The employer shared responsibility provisions of the ACA require an applicable large employer (ALE) to pay a penalty if it doesn’t offer minimum essential health coverage (or doesn’t offer coverage that is affordable and provides minimum value) to its full-time employees and at least one full-time employee purchases coverage through a health insurance marketplace and receives a premium tax credit. Full-time employees are generally those who average at least 30 hours of service per week during a given month.

An ALE for a calendar year is an employer that employed an average of at least 50 full-time employees or the equivalent on business days during the preceding calendar year. To determine the number of full-time equivalent employees (FTEs), the overall hours worked by part-time employees during a month are added up, and the total is divided by 120 hours (equal to four weeks multiplied by 30 hours per week) and added to the number of full-time employees. However, the actual penalty is applicable solely to the health coverage status of full-time employees, not FTEs.

FAQs on Information Reporting

There are various reporting requirements associated with the employer shared responsibility provisions that apply to both coverage providers and employers. In general, every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs and other entity that provides “minimum essential coverage” must file annual returns reporting information for each individual for whom such coverage is provided. They also must furnish a written statement to each individual listed on the return showing the information that must be reported to IRS for that individual.

The information reported on Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, is used to determine whether an employer may be liable for a penalty under the employer shared responsibility provisions of the ACA, as well as the amount of any penalty. Form 1095-C is also used by the IRS and the employee in determining the eligibility of the employee (and his or her family members) for the premium tax credit.

The FAQs provide additional information about completing these forms for the 2016 calendar year (for filing in 2017). Here’s what’s been revised under the updated guidance:

Question 9. Do ALE members that are combined to form a single employer (an “aggregated ALE group”) file one authoritative transmittal reporting summary information for all ALE members in the aggregated ALE group?

The revisions clarify that an aggregated ALE group may not file one authoritative transmittal reporting summary information for all members in the group. Rather, the reporting requirements apply separately to each member.

Question 26. Should an ALE member report coverage under a Health Reimbursement Arrangement (HRA) for an individual who’s enrolled in both the HRA and the employer’s other self-insured major medical group health plan?

Under the updated guidance, enrollment in an HRA must generally be reported in the same manner as enrollment in other minimum essential coverage, unless an exception applies. One such exception is that if an individual is covered by two or more plans that provide minimum essential coverage and that are provided by the same reporting entity, reporting is required for only one of them for that month.

Question 27. Should an ALE member report coverage under an HRA for an individual who’s eligible for the HRA because the individual is enrolled in the employer’s insured group health plan?

The revised guidance states that if an individual is eligible for an HRA because the individual is enrolled in an employer’s insured group health plan for which reporting is required, reporting generally isn’t required for the HRA.

However, an ALE member must report HRA coverage for an employee who’s enrolled in the HRA but not enrolled in another group health plan of the employer.

FAQs on Offers of Health Insurance Coverage

Certain employers are required to report to the IRS information about whether they offered health coverage to their employees and, if so, information about the coverage offered. This information also must be provided to employees. With respect to reporting offers of health insurance coverage, the FAQs provide that:

Question 23. For purposes of reporting, including reporting facilitated by a third party, may an ALE member file more than one Form 1094-C?

The revisions explain that an ALE member may file more than one Form 1094-C, provided that one (and only one) of those transmittals is an “authoritative transmittal” reporting aggregate employer-level data for the ALE member.

Question 24. May an ALE member satisfy its reporting requirements for an employee by filing and furnishing more than one Form 1095-C that together provide the necessary information?

Under the updated guidance, an ALE member may not satisfy its reporting requirements for an employee by filing and furnishing more than one Form 1095-C that together provide the necessary information. There must be only one Form 1095-C for each full-time employee for that full-time employee’s employment with the ALE member.

FAQs on the Shared Responsibility Rules

If you still have questions about whether you’re considered an ALE for 2016 and whether you’ve complied with the shared-responsibility requirements, you may find the revised FAQs regarding the employer shared responsibility provisions helpful:

Question 8. If an employer hires additional employees, including some part-time employees, how does it determine if the entity has become large enough to be an ALE?

The revisions clarify that if an employer hires additional employees, including some part-time employees, during the current calendar year, the employer must take those employees into account when determining if it’s an ALE for the next calendar year.

Question 9. Do the employer shared responsibility provisions apply only to large employers that are for-profit businesses or to other large employers as well?

The revisions clarify that all employers that are ALEs are subject to the employer shared responsibility provisions. This includes for-profit, government and nonprofit employers, regardless of whether the entity is a tax-exempt organization.

Question 20. Is a full-time equivalent employee different than a full-time employee?

According to the revised answer to this question, the number of an employer’s FTEs is relevant only for purposes of determining whether the employer is an ALE.

Question 24. How does an employer count a particular employee’s hours of service if that employee works for two employers that are treated as one employer under the employer shared responsibility provisions (for example, different subsidiaries under a parent corporation that together form an aggregated ALE group)?

The rules for combining employers that have a certain level of common, or related, ownership, apply for purposes of determining whether an employer employs at least 50 FTEs.

Question 28. What counts as an “offer of coverage” under the employer shared responsibility provisions?

The updated guidance stipulates that an ALE makes an “offer of coverage” to an employee if it provides the employee an effective opportunity to enroll in the coverage (or to decline coverage) at least once for each plan year. Coverage refers to minimum essential health coverage under an eligible employer-sponsored plan.

Question 34. For purposes of the employer shared responsibility provisions, in determining what counts as an offer of coverage to at least 95% of an employer’s full-time employees (and their dependents), does an employer have to take into account full-time employees (and their dependents) that are eligible for coverage through another source?

Under the revisions, the determination of what counts as an offer of coverage to at least 95% of an ALE’s full-time employees applies regardless of whether any full-time employees have coverage from another source, such as Medicare, Medicaid or a spouse’s employer.

Question 43. Who’s an employee’s dependent for purposes of the employer shared responsibility provisions?

The revisions explain that a dependent is an employee’s child, including a child who has been legally adopted, or legally placed for adoption with the employee, who has not reached age 26. A dependent doesn’t include:

  • A spouse, or
  • A stepchild, foster child or child who doesn’t reside in the United States (or a country contiguous to the United States) and who isn’t a U.S. citizen or national.

Question 44. If an ALE is made up of multiple employers (called ALE members), is each separate ALE member liable for its own employer shared responsibility payment, if any?

According to the updated answer, if an ALE is made up of multiple ALE members, each separate ALE member is liable for its own employer shared responsibility payment.

Still Got Questions?

The rules for providing health care benefits can be overwhelming to employers. These FAQs offer some guidance, but tax and financial professionals can help explain the shared responsibility provisions and the related reporting requirements using plain English. Contact your advisors for additional guidance.

Also be aware that the deadlines for filing ACA information forms are fast approaching. The due date for filing 2016 Forms 1094-B, Transmittal of Health Coverage Information Returns; 1095-B, Health Coverage, 1094-C and 1095-C with the IRS are February 28, 2017, if not filing electronically, or March 31, 2017, if filing electronically. However, the IRS extended the information reporting deadlines until March 2, 2017, for furnishing 2016 Forms 1095-B and 1095-C to individuals.

In the meantime, stay tuned for changes to health care coverage requirements. Health care reform has been made a top priority during President Trump’s first 100 days in office and Congress has already begun to pass related legislation.

© 2017

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Tax Fraud Awareness: How to Protect Your Identity and Assets


The IRS, taxpayers and tax preparers share a common enemy: identity thieves. We all have a part to play in the fight against tax-related identity theft. Your role starts by learning the mechanics and warning signs. From there, taxpayers can take proactive steps to protect their data online and at home.

Understand How Tax Fraud Happens

Dishonest individuals may steal taxpayers’ personal and financial information from sources outside the IRS, such as social media accounts where people tend to share too many details or bogus phishing emails that appear to come from the IRS or a bank. Once they obtain an unsuspecting taxpayer’s data, thieves may use it to file fraudulent federal and state income tax returns, claiming significant refunds.

Paperless e-filing facilitates these scams: Thieves submit returns electronically, based on falsified earnings, and receive refunds via mail or direct deposit. Sure, the IRS maintains records of wages and other types of taxable income reported by employers, but they don’t usually match these records to the information submitted electronically before issuing refund checks. By the time the IRS notifies a victim that it’s received another tax return in his or her name, the thief is long gone and has already cashed the refund check.

In addition to refund fraud, thieves may use stolen personal information to access existing bank accounts and withdraw funds — or open new ones without the taxpayer’s knowledge. Criminals are becoming increasingly sophisticated and their ploys more complex, making identity theft harder to detect.

Recognize the Warning Signs

Taxpayers are the first line of defense against these scams. The IRS lists the following warning signs of tax-related identity theft:

Your electronic tax return is rejected. When the IRS rejects your tax return, it could mean that someone else has filed a fraudulent return using your Social Security number. Before jumping to conclusions, first check that the information entered on the tax return is correct. Were any numbers transposed? Did your college-age dependent claim a personal exemption on his or her tax return?

You’re asked to verify information on your tax return. The IRS holds suspicious tax returns and then sends letters to those taxpayers, asking them to verify certain information. This is especially likely to happen if you claim the Earned Income tax credit or the Additional Child tax credit, both of which have been targeted in refund frauds in previous tax years. If you didn’t file the tax return in question, it could mean that someone else has filed a fraudulent return using your Social Security number.

You receive tax forms from an unknown employer. Watch out if you receive income information, such as a W-2 or 1099 form, from a company that you didn’t do work for in 2016. Someone else may be using the phony forms to claim a fraudulent refund.

You receive a tax refund or transcript that you didn’t ask for. Identity thieves may test the validity of stolen personal information by sending paper refunds to your address, direct depositing refunds to your bank or requesting a transcript from the IRS. If these tests work, they may file a fraudulent return with your stolen data in the future.

You receive a mysterious prepaid debit card. Identity thieves sometimes use your name and address to create an account for a reloadable prepaid debit card that they later use to collect a fraudulent electronic refund.

If you suspect foul play, contact your tax preparer immediately. He or she can help determine whether you’re a victim of tax-related identity theft and identify steps to remedy the situation.

Take Preventive Measures

You may wonder how many taxpayers file electronic vs. paper returns. “There are 150 million households that file federal and state tax returns involving trillions of dollars…. More than 90% of these tax returns are prepared on a laptop, desktop or even a smartphone — whether they’re done by an individual or a tax preparer. This is a massive amount of sensitive data that identity thieves would love to get access to.… With 150 million households, someone right now is clicking on an email link they shouldn’t, or skipping an important computer security update, leaving them vulnerable to hackers,” said IRS Commissioner John Koskinen in a recent statement about the Security Summit Group. (See “IRS Creates Security Summit Group” above.)

How can you actively safeguard your personal data online and at home? Here are four simple ways to thwart tax-related identity theft:

1. Keep your computer secure. Simple, cost-effective security measures add up. For example, use updated security software that offers firewalls, virus and malware protection and file encryption. Be stingy with personal information, giving it out only over encrypted websites with “https” in the web address. Also back up computer files regularly and use strong passwords (with a combination of capital and lowercase letters, numbers and symbols).

2. Avoid phishing and malware scams. Be leery of emails you receive from unknown sources. Never open attachments unless you trust the sender and know what’s being sent. Don’t install software from unfamiliar websites or disable pop-up blockers.

3. Protect personal information. Treat personal information like cash. Don’t carry around your Social Security card in your wallet or purse. Be careful what you share on social media — identity thieves can exploit information about new car or home purchases, past addresses, vacations and even your children and grandchildren. Keep old tax returns in a safe location and shred them before trashing.

4. Watch out for scammers who impersonate IRS agents. IRS impersonators typically demand payment and threaten to arrest victims who fail to ante up. The Federal Trade Commission recently issued an alert about police raids on illegal telemarketing operations in India that led to the indictment of dozens of IRS impersonators. Remember: The IRS will never call to demand immediate payment, nor will they call about taxes you owe without first mailing you a bill.

Another simple way to prevent someone from filing a fraudulent return is simply to file your return as soon as possible. The IRS begins processing tax returns on January 23. If you file a tax return before would-be fraudsters do, their refund claims are more likely to be rejected for filing under a duplicate Social Security number.

Join the Fight

The deadline for filing your 2016 return is fast approaching. The IRS expects more than 70% of taxpayers to receive a refund for 2016, and it’s on high alert for refund fraud and other tax-related identity theft schemes. You can help the IRS in its efforts to fight tax fraud by watching for these warning signs and safeguarding your personal and financial information.

© 2017

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Help Prevent Tax Identity Theft by Filing Early

If you’re like many Americans, you might not start thinking about filing your tax return until close to this year’s April 18 deadline. You might even want to file for an extension so you don’t have to send your return to the IRS until October 16.

But there’s another date you should keep in mind: January 23. That’s the date the IRS will begin accepting 2016 returns, and filing as close to that date as possible could protect you from tax identity theft.

Why early filing helps

In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Another important date

Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2016 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2016 interest, dividend or reportable miscellaneous income payments.

Delays for some refunds

The IRS reminded taxpayers claiming the earned income tax credit or the additional child tax credit to expect a longer wait for their refunds. A law passed in 2015 requires the IRS to hold refunds on tax returns claiming these credits until at least February 15.

An additional benefit

Let us know if you have questions about tax identity theft or would like help filing your 2016 return early. If you’ll be getting a refund, an added bonus of filing early is that you’ll be able to enjoy your refund sooner.

© 2017

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2017 Q1 Tax calendar: Key Deadlines for Businesses and Other Employers


Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

  • File 2016 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • File 2016 Forms 1099-MISC, “Miscellaneous Income,” reporting nonemployee compensation payments in Box 7 with the IRS, and provide copies to recipients.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2016. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2016. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2016 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

File 2016 Forms 1099-MISC with the IRS and provide copies to recipients. (Note that Forms 1099-MISC reporting nonemployee compensation in Box 7 must be filed by January 31, beginning with 2016 forms filed in 2017.)

March 15

If a calendar-year partnership or S corporation, file or extend your 2016 tax return. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.

Contact us for more information.

© 2016

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Few Changes to Retirement Plan Contribution Limits for 2017

Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, most of the limits remain unchanged for 2017. The only limit that has increased from the 2016 level is for contributions to defined contribution plans, which has gone up by $1,000.

Type of limit
2017 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
Contributions to defined contribution plans
Contributions to SIMPLEs
Contributions to IRAs
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
Catch-up contributions to SIMPLEs
Catch-up contributions to IRAs

Nevertheless, if you’re not already maxing out your contributions, you still have an opportunity to save more in 2017. And if you turn age 50 in 2017, you can begin to take advantage of catch-up contributions.

However, keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions. If you have questions about how much you can contribute to tax-advantaged retirement plans in 2017, check with us.


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Employee, Partner or Both? Recent Developments Help You Decide

Are you an employee, a partner, a partner who doesn’t know it — or a combination of these classifications? The answer can have serious tax implications. If you participate in a business that’s operated as a partnership or a limited liability company, here are some recent developments that you need to know.

IRS Position on Dual Status

Longstanding IRS guidance in Revenue Ruling 69-184 states that a partner can’t also be an employee of the same partnership. taxrulescourtwpHowever, this policy has recently come into question. Some tax experts have been prodding the IRS to allow dual employee/partner status in certain circumstances.

For example, it can be argued that dual status is appropriate when an employee of a partnership receives a small interest in the partnership as equity-oriented compensation. Continued status as an employee would allow the individual to continue to participate in tax-favored employee benefit programs sponsored by the partnership.

In a recently issued temporary regulation, the IRS stated that, until further notice, there’s no exception to the Revenue Ruling 69-184 stipulation that a partner in a partnership can’t also be an employee of the same partnership. So, for now, once an employee of a partnership receives an ownership interest in the partnership, that individual is treated as a partner — regardless of how small the partnership interest may be.

However, the IRS says it might consider changing this stance if it can be shown that allowing dual employee/partner status in certain cases is desirable and wouldn’t lead to abuse of tax rules.

Important note: These considerations apply equally to multimember LLCs that are treated as partnerships for tax purposes and their employees and members.

IRS Position on Partners in Partnerships that Own Disregarded SMLLCs

In a recently issued temporary regulation, the IRS clarified the federal employment tax treatment of partners in a partnership that also owns a disregarded single-member (one-owner) LLC (SMLLC). A disregarded SMLLC is generally ignored for federal tax purposes. So, a disregarded SMLLC that’s owned by a partnership is simply treated as an unincorporated branch or division of the partnership, and all of the SMLLC’s tax items are included in the partnership’s tax return.

The new temporary regulation says that partners in the parent partnership can’t also be treated as employees of the disregarded SMLLC. Therefore, these individuals may be subject to self-employment tax on income passed through from the disregarded entity and they’re prohibited from participating in certain tax-favored employee benefit programs sponsored by the disregarded SMLLC. The new temporary regulation is effective as of the later of:

  • August 1, 2016, or
  • The first day of the latest-starting plan year following May 4, 2016, of an affected employee benefit plan.

An affected plan would include any employee benefit plan sponsored by the disregarded SMLLC that was adopted before and in effect as of May 4, 2016.

Important note: These considerations apply equally when a disregarded SMLLC is owned by a multimember LLC that is treated as a partnership for tax purposes.

Appeals Court Ruling on Oil and Gas Working Interest Income

The self employment (SE) tax is the government’s way of collecting Social Security and Medicare taxes on net income from self employment. What you may not know is that profits from passive investments in oil and gas working interests are subject to SE tax, according to a Tax Court decision that was recently affirmed by the 10th Circuit Court of Appeals. (Methvin v. Commissioner, 117 AFTR 2d 2016-2231, June 24, 2016.)

The taxpayer in this case owned small percentage working interests in several oil and gas properties. Owning a working interest entitles you to a percentage share of the net profits, if any, from an oil and gas property. The taxpayer had an agreement with the operator of the properties that allocated the taxpayer a share of the revenue and expenses from the properties. He had no right to be involved in the management or operation of the properties, and he had no expertise in oil and gas drilling or extraction. (His background was as a computer company executive.)

The taxpayer’s working interests represented no more than about a 2% to 3% interest in any single property, and they weren’t part of any formal business organization — such as a partnership, limited partnership, LLC or corporation — that was registered under applicable state law. Instead, the working interests were governed by a purchase and operation agreement entered into by the taxpayer, other working interest owners and the operator/manager of the properties.

Despite these informal arrangements, the oil and gas ventures that the taxpayer was involved in constituted partnerships for federal income tax purposes. However, the parties involved in the ventures exercised their right to be excluded from the partnership tax rules found in the section of the Internal Revenue Code that applies specifically to partnerships.

Consequently, there wasn’t a requirement to file annual partnership returns for the ventures. Instead, the operator provided the taxpayer with annual accounting summaries that showed the revenues and expenses allocated to the taxpayer’s working interests. The operator also issued an annual Form 1099-MISC to the taxpayer that showed his share of the net revenues from his working interests.

While the taxpayer reported the net revenue on his federal income tax returns, he didn’t pay any SE tax on the net revenue. After auditing his 2011 return, the IRS claimed that the taxpayer’s net profits from the oil and gas working interests were subject to SE tax because they constituted income from a business carried on by a partnership.

The taxpayer contended that he wasn’t engaged in the oil and gas business and wasn’t a partner in any oil and gas partnership. He argued that his minority working interests were merely investments in which he had no active involvement. Therefore, the taxpayer believed he didn’t owe SE tax on his working interest income, and he took his case to the U.S. Tax Court.

Court Decisions

The Tax Court noted that taxpayers who aren’t personally active in the management or operation of a business may nevertheless be liable for SE tax on their share of net SE income from the business if the business is carried on by a partnership in which the taxpayer is a member. In this case, the taxpayer and other parties involved in the oil and gas ventures elected out of the partnership federal income tax provisions. However, the election out applied only to tax provisions that are included in Subchapter K of the Internal Revenue Code (such as the requirement to file an annual partnership return on Form 1065). The SE tax provisions are not found in Subchapter K.

Therefore, the Tax Court ruled that the oil and gas ventures were still considered partnerships for SE tax purposes and that the taxpayer owed SE tax on his net income from his working interests.

On appeal, the 10th Circuit agreed, affirming that those working interests should be treated as partnership interests and that the profits from the investments were subject to SE tax.

Bottom Line

Business arrangements, including employment and compensation arrangements, can have surprising (and sometimes costly) tax consequences. For that reason, seeking advice from a tax professional before entering into arrangements is a smart idea. That way, there won’t be unpleasant surprises, and better tax results can often be achieved with some advance planning.

Contact us for advice.

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FBI Case Exposes Massive Telefraud Scheme


Do you dread getting phone calls from unfamiliar sources? It seems that callers are more likely to be aggressive solicitors, pushy telemarketers or even devious con artists than legitimate business people. Criminals typically target the elderly, disabled people or immigrants, threatening them with fines, penalties or deportation if they don’t make payments to the callers. In some cases, unsuspecting victims lose their entire life savings.blogpostpic

The FBI recently exposed a telephone scam involving dozens of individuals and entities that were indicted by a grand jury in
Texas. The defendants were allegedly involved in a transactional organization that victimized tens of thousands of U.S. residents through frauds that caused hundreds of millions of dollars in losses.

Fraud by Phone

Unfortunately, telefraud remains a common and persistent problem in this country. Victims are often reluctant to report such fraud, due to embarrassment and/or fear. So, any statistics are likely to underestimate its true prevalence.

Elderly people represent an estimated 80% of the victims of such scams — a disproportionate amount of the population, according to recent research by the Federal Trade Commission (FTC). They’re attractive to scammers who assume that they’re trusting, too polite to hang up or easily duped. What’s more, senior citizens may be sitting on a sizable retirement nest egg.

Several branches of the federal government — including the IRS, the FBI and the FTC — have established websites that provide information about fraud detection and reporting scams. Ultimately, however, it’s important to use common sense and handle unknown callers with a healthy dose of skepticism. (See “How to Handle Suspect Calls” at right.)

Case Facts

The FBI recently unsealed its indictment against 61 individuals and entities that were charged in connection with the massive telefraud scheme. Currently, 20 individuals have been arrested, while 32 individuals and five call centers in India have been charged. An additional U.S.-based defendant is in the custody of immigration authorities.

The defendants are charged with conspiracy to commit identity theft, impersonation of an officer of the United States, wire fraud and money laundering. One defendant has been separately charged with passport fraud.

“The indictment we unsealed and the arrests we made today demonstrate the Justice Department’s commitment to identifying and prosecuting the individuals behind these impersonation and telefraud schemes, who seek to profit by exploiting some of the most vulnerable members of our communities,” said Assistant Attorney General Leslie R. Caldwell in a press release. “This is a transnational problem, and demonstrates that modern criminals target Americans both from inside our borders and from abroad. Only by working tirelessly to gather evidence, build cases and working closely with foreign law enforcement partners to ensure there are no safe havens can we effectively address these threats.”

According to the press release, the defendants perpetrated a sophisticated scheme organized by conspirators in India, including a network of call centers in Ahmedabad. Using information obtained from data brokers and other sources, the call center operators allegedly called potential victims while impersonating IRS or U.S. Citizenship and Immigration Services agents. These call center operators would threaten arrest, imprisonment, fines or deportation if the victims didn’t pay the requested taxes or penalties.

The Mechanics

When someone agreed to make payment, the call center would then immediately turn to a network of U.S.-based co-conspirators to liquidate and launder the extorted funds as quickly as possible, using prepaid debit cards or wire transfers. Prepaid debit cards were often registered through misappropriated information of identity theft victims. Wire transfers were handled by associates using fake names and fraudulent IDs.

To direct funds into accounts of U.S.-based individuals, the co-conspirators allegedly used “hawalas.” With these, money is transferred internationally outside of the formal banking system. According to the indictment, the co-conspirators kept a percentage of the proceeds for themselves, but they weren’t aware of the illicit nature of the operation.

The Victims

According to the indictment, one of the call centers reportedly extorted $12,300 from an 85-year-old victim in San Diego by threatening her with arrest if she didn’t pay fictitious tax violations. On the same day that she was scammed, one of the U.S defendants used a reloadable debit card loaded with her funds to purchase money orders in Texas.

In another instance, the defendants extorted $136,000 from a victim in Hayward, Calif. The scammers called this person multiple times over a period of 20 days, fraudulently representing to be IRS agents and demanding payment for alleged tax violations. The victim was instructed to purchase 276 stored-value cards, which the defendants then transferred to reloadable debit cards. Part of the victim’s money ended up on cards, which were activated by using stolen personal information.

At times, the call center operators would offer small short-term loans or advise targets that they were eligible for grants. Then the conspirators would request a “good faith deposit” to demonstrate the ability to pay back the loan, or payment of a fee for processing the grant. Victims never received any money after making the requested payment.

The Department of Justice has established a website to provide information about the case to victims, as well as the general public. Anyone who believes they have been scammed, or is a victim of fraud or identity theft relating to another telefraud, may contact the FTC at this website.

Protect Your Assets

Telefraud is ongoing and prevalent. Every year, scammers seem to get craftier and bolder with telephone fraud schemes. Regardless of your station in life, you can’t be too careful when you’re answering the phone. If you receive a call from an unfamiliar number, evaluate the caller with skepticism and common sense.

© 2016

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