September 30, 2010

Financial Focus

§ JPMorgan suspends foreclosures as it reviews filing process
JPMorgan Chase said its foreclosure suspension affects about 56,000 mortgages in 23 states and will last until it completes a review of its filing process. "It has come to our attention that in some cases employees in our mortgage-foreclosure operations may have signed affidavits about loan documents on the basis of file reviews done by other personnel, without the signer personally having reviewed those loan files," said Tom Kelly, a spokesman for the bank. The Wall Street Journal (9/30)

§ Companies debate annuities for 401(k) plans
The federal government is unlikely to mandate that companies include an annuity option in their employees’ 401(k) plans, experts say. The news could come as a relief to some chief financial officers who are concerned about potential liability from the products, which offer to turn nest eggs into a source of long-term income for retirees. Annuities have garnered interest as more employees look for ways to maximize their 401(k) savings. (9/28)

§ Congress approves a measure to fund the government for 2 months
Congress has passed a resolution that would allow the federal government to continue operating for the first two months of the next fiscal year, which begins Friday. The measure is necessary because Congress has not adopted a 2011 budget. Most programs and agencies are funded at the same rates as those of the expiring budget. CNN (9/30) , Bloomberg (9/30)

§ Other News

· Foreclosures increased in Q2, accounted for 24% of sales
USA TODAY (9/29)

Tax Spotlight

§ IRS helps clear up carryover rules for adoption tax credits
The Internal Revenue Service has issued guidance coordinating prior-year carryovers of unused child adoption credits. The credit will be refundable starting with the 2010 and 2011 tax years. The IRS also instituted rules for substantiating the status of adoptions. (9/29)

§ Other News

· House Ways and Means chairman says tax reform is next year’s focus
The Hill/On The Money blog (9/29)

Policy & Regulatory

§ Coalition implores Congress to ban tax-strategy patents
Eighteen national organizations, including the AICPA, wrote key lawmakers this week urging legislative action to ban tax-strategy patents. "Such patents may limit the ability of taxpayers to utilize fully interpretations of tax law intended by Congress — effectively creating a monopoly for the patent holders to determine who can and cannot utilize parts of the tax code," the letter reads. "We encourage you to include a tax strategy patent ban in a tax bill, the continuing resolution, or any other appropriate piece of legislation before the 111th Congress concludes." Read the AICPA’s news release for more information. (9/29)

The Senate late on September 27 approved, by voice vote, the Plain Writing Act of 2010 (HR 946), which requires the use of plain English in all federal documents, including those prepared by the IRS.

The legislation requires the federal government to write new publications, forms and publicly distributed documents in a "clear, concise, well-organized" manner that follows the best practices of plain language writing.

The measure passed the House in March 2010 by a wide margin but a companion measure was held up in the Senate by Sen. Robert F. Bennet, R-Utah. Bennet agreed to lift his hold after meeting with the original bill’s sponsor, Rep. Bruce Braley, R-Iowa. The Senate slightly modified the definition of plain writing with an amendment by Sen. Daniel K. Akaka, D-Hawaii, before sending the bill back to the House for final approval.

Braley said in a written statement that federal government documents, such as tax returns, federal college aid applications and Veterans Administration forms would be written "in simple easy-to-understand language."

By Jeff Carlson, CCH News Staff

The IRS is beginning to act on results obtained in its compliance initiative to step up payment of employment taxes on unreported tip income,

according to Service officials participating in a September 29 IRS webinar. The IRS representatives discussed Form 4137, Social Security and Medicare Tax on Unreported Income Tax, how the IRS plans to use that form to determine employment taxes due and what employers can expect from the IRS if contacted about the project in the future.

Compliance Initiative

Individuals receiving monthly tips in excess of $20 and not reporting them to their employers must generally report those amounts on Form 4137 to the IRS. In March 2010, John Tuzynski, chief of employment tax operations, IRS Small Business/Self-Employed Division, announced that the IRS was beginning to analyze its database of Form 4137 filings to determine whether employers listed on those forms actually paid employment taxes on the tip income reported (TAXDAY, 2010/05/15, I.4).

New Form 4137

Daniel R. Lauer, program manager, IRS National Tip Compliance Program, reported during the webinar that, as a result of its analysis thus far, the IRS slightly amended Form 4137. While generally the same, the form now has a place for employees to report their employer’s identification number (EIN). This addition, Lauer indicated, allows the IRS to aggregate Forms 4137 by employer, determine the total amount of tip income reported by all employees of a specific employer, and then estimate the employer’s employment tax liability on the total tip income.

Allocated Tips

Jackalyn Livingston, senior program analyst, IRS National Tip Compliance Program, reminded practitioners that Form 4137 is still applicable in the case of allocated tip income and that the IRS will also use the new version to check for employment tax payment on allocated tip income as well. Under Code Sec. 6503, she noted, employers are to allocate any tip income among all of their employees if that tip income is less than 8 percent of the business’s sales revenue.

New Notices

Also, as part of the project, the IRS will now issue a "pre-notice" to employers on Form 4520-P, Livingston explained. This form will indicate what amounts the IRS has gathered concerning their employment tax liability on tip income. This pre-notice also gives the employer time to gather records and pay the required amounts.

Subsequently, Livingston stated, the IRS will send the employer a notice and demand for payment on Form 4520. While this form will seek payment of the employment tax on tip income, the tax will already be due as of the date the notice and demand was issued.

Work in Progress

Despite these changes, Lauer indicated that the compliance initiative is "in its infancy" and that the IRS is open to any feedback as it evaluates and refines the program. The Service is developing a webpage within strictly devoted to tip income reporting. Additionally, he stated that the IRS is developing a set of guidelines to include in the Form 4520-P pre-notice, based on frequently asked questions the Service has received thus far. However, employers may soon begin receiving pre-notices based on their most current tax period, Lauer cautioned.

By Torie Cole, CCH News Staff

The Small Business Jobs Act of 2010 (HR 5297) temporarily reduces the Code Sec. 1374(d)(7) recognition period for net recognized built-in gains of S corporations.

For a tax year beginning in 2011, no tax is imposed on the net recognized built-in gain of an S corporation if the fifth tax year in the 10-year recognition period preceded that tax year.

To provide incentives for investment in equipment, the Small Business Jobs Act of 2010 (HR 5297) temporarily increases the Code Sec. 179 dollar and investment limits available to business taxpayers to $500,000 and $2,000,000,

respectively, for tax years beginning in 2010 and 2011; temporarily expands the definition of property qualifying for the deduction to include certain business real property; and extends the 50-percent first-year bonus depreciation allowance for property placed in service through 2010.

The Small Business Jobs Act of 2010 (HR 5297) amends Code Sec. 162(l)(4) to allow a deduction for self-employed health insurance costs in computing net earnings from self-employment for the 2010 tax year.

Therefore, for purposes of calculating self-employment tax and the self-employment tax deduction, self-employed individuals may deduct health insurance costs incurred in 2010 for themselves, their spouses, their dependents, and (effective March 30, 2010) any of their children who as of the end of the tax year have not attained age 27.

The Small Business Jobs Act of 2010 (HR 5297) includes provisions that allow small businesses to take greater advantage of the general business credit.

For the first tax year beginning after December 31, 2009, eligible small business credits may offset both regular and alternative minimum tax liability. In addition, the carryback period for eligible small business credits is extended from one to five years.

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