In case you missed it, and the announcement is in news all over the place, the IRS will be open for business for 2013 tax returns on Friday, January 31, 2014. At this time there is no indication of further delays for certain forms. (In 2013, for 2012 tax returns, certain forms were not available until later in February or March.)
Businesses that advertise about filing before then are likely trying to mislead you, since little can be done before that date. Sure, the tax return can be prepared, but then it must be held until the IRS opens the door.
Update: The IRS will begin accepting entity/business tax returns (i.e., 1041, 1065, 1120, 1120S plus 720, 940, 941, and 2290) on Monday, January 13, 2014.
Thursday, December 19, 2013
Monday, December 16, 2013
But I din't get the money then!
Often people in business experience receipt of income in early January but soon thereafter receive a 1099-MISC indicating that the money was paid to them in the prior year. This is an important issue for cash-based taxpayers. What to do?
The issue is called "constructive receipt" and it does not qualify as simple.
The law states that constructive receipt occurs when you have access to or control of the money. If you receive a check in the mail, it is easy to see that you now have constructive receipt. Once the money is in your bank account, you clearly have constructive receipt on or before that point in time. This income must be claimed in the year that you have constructive receipt.
But what about that check you received January 2? Maybe it was mailed to you on December 31, so the payer will claim the expense for last year and issue you a 1099-MISC indicating that you were paid last year. But were you? If that check was mailed from across the country, then your constructive receipt will be when you received it. But if you could have stopped by the payer's office on December 31 and picked up the check, then you had constructive receipt last year regardless of when you actually received the check.
If your money is being held by a bank, then it is a bit more complicated. The facts and circumstances of your particular situation will dictate when constructive receipt occurred.
What do you need to do if your constructive receipt is in January but the 1099-MISC indicates that you received the payment in the prior year? First you will need documentation showing when you received the check in the mail. Be sure to keep the envelope showing the postmark as a minimum. You will also need documentation indicating how available the check was before January 1. Second there are some things that a tax practitioner can do to file your tax return postponing that income yet avoid an examination letter from the IRS. (That will be triggered automatically when the 1099-MISC information is not included on your tax return.) This is worthy of a conversation with your tax practitioner, so make that phone call!
Finally, have a merry Christmas!
The issue is called "constructive receipt" and it does not qualify as simple.
The law states that constructive receipt occurs when you have access to or control of the money. If you receive a check in the mail, it is easy to see that you now have constructive receipt. Once the money is in your bank account, you clearly have constructive receipt on or before that point in time. This income must be claimed in the year that you have constructive receipt.
But what about that check you received January 2? Maybe it was mailed to you on December 31, so the payer will claim the expense for last year and issue you a 1099-MISC indicating that you were paid last year. But were you? If that check was mailed from across the country, then your constructive receipt will be when you received it. But if you could have stopped by the payer's office on December 31 and picked up the check, then you had constructive receipt last year regardless of when you actually received the check.
If your money is being held by a bank, then it is a bit more complicated. The facts and circumstances of your particular situation will dictate when constructive receipt occurred.
What do you need to do if your constructive receipt is in January but the 1099-MISC indicates that you received the payment in the prior year? First you will need documentation showing when you received the check in the mail. Be sure to keep the envelope showing the postmark as a minimum. You will also need documentation indicating how available the check was before January 1. Second there are some things that a tax practitioner can do to file your tax return postponing that income yet avoid an examination letter from the IRS. (That will be triggered automatically when the 1099-MISC information is not included on your tax return.) This is worthy of a conversation with your tax practitioner, so make that phone call!
Finally, have a merry Christmas!
Friday, December 6, 2013
Change in Short Sale and Cancellation of Debt Income Rules?
Ouch! That's a long title! Long post too.
In the last couple of weeks California Senator Barbara Boxer received a letter response from the IRS on an inquiry made last May. The letter, from one IRS attorney, outlines what amounts to a potential change in taxation caused by a short sale of the primary residence.
Background: When the bank forecloses on you or agrees to forgive a remaining debt through a short sale, that cancellation of debt is considered income, or CODI. (The US Code can be found at http://www.law.cornell.edu/uscode/text. Title 26 is the Internal Revenue Code, or IRC. CODI is found in IRC §61(a)(12).) A few years ago Congress added an exception to this CODI for acquisition indebtedness within certain limits for a taxpayer's primary residence (IRC §108(a)(1)(E)). Unfortunately, this is expiring.
A couple of years ago the California Legislature established a law that restricted banks that agree to a short sale from pursuing additional relief on the mortgage. Some aggressive tax practitioners asserted the position that this changed the nature of the loan to be non-recourse; there is no CODI from the forgiveness of a non-recourse loan. That is great for taxpayers, and in fact we lost a client this year because we did not take this aggressive position (which we believe is contrary to law, as identified below).
News: The recent letter from the IRS indicated that this treatment of a mortgage resolved through a short sale would cause the loan to be non-recourse and therefore there would be not CODI. This would indeed be great news!
However, maybe it is not that simple. This is only a letter from one attorney, not a memorandum from the IRS Chief Counsel. Such letters do not carry any authority and, in the past, have at times been followed by authoritative communication that contradicted the letter.
In this case the position expressed, while very much desired by taxpayers, runs contrary to various court cases. (See the 1999 case Briarpark v Commissioner for a key landmark case.) More importantly, the letter directly contradicts Treasury Regulations 1.6050P-1(b)(2)(i)(F). (Treasury Regulations, or Regs, are extensive writings generated in support of the actual law or code, often at the direction of Congress. They are authoritative in court, subordinate only to the Code and the US Constitution.) Before the IRS should take the position presented in the letter, the Regs should be updated, and that process takes time....
Certainly this letter is gaining traction in the trade media. The California Franchise Tax Board has now stated that if the IRS takes that position that they will follow.
I will not speculate where this will go, but it will be interesting to watch, and I'll undoubtedly follow-up from time to time as we have new developments. Until then, if you hear about this "new rule" or "new position the IRS is taking," I suggest you contain your enthusiasm until this is resolved.
In the last couple of weeks California Senator Barbara Boxer received a letter response from the IRS on an inquiry made last May. The letter, from one IRS attorney, outlines what amounts to a potential change in taxation caused by a short sale of the primary residence.
Background: When the bank forecloses on you or agrees to forgive a remaining debt through a short sale, that cancellation of debt is considered income, or CODI. (The US Code can be found at http://www.law.cornell.edu/uscode/text. Title 26 is the Internal Revenue Code, or IRC. CODI is found in IRC §61(a)(12).) A few years ago Congress added an exception to this CODI for acquisition indebtedness within certain limits for a taxpayer's primary residence (IRC §108(a)(1)(E)). Unfortunately, this is expiring.
A couple of years ago the California Legislature established a law that restricted banks that agree to a short sale from pursuing additional relief on the mortgage. Some aggressive tax practitioners asserted the position that this changed the nature of the loan to be non-recourse; there is no CODI from the forgiveness of a non-recourse loan. That is great for taxpayers, and in fact we lost a client this year because we did not take this aggressive position (which we believe is contrary to law, as identified below).
News: The recent letter from the IRS indicated that this treatment of a mortgage resolved through a short sale would cause the loan to be non-recourse and therefore there would be not CODI. This would indeed be great news!
However, maybe it is not that simple. This is only a letter from one attorney, not a memorandum from the IRS Chief Counsel. Such letters do not carry any authority and, in the past, have at times been followed by authoritative communication that contradicted the letter.
In this case the position expressed, while very much desired by taxpayers, runs contrary to various court cases. (See the 1999 case Briarpark v Commissioner for a key landmark case.) More importantly, the letter directly contradicts Treasury Regulations 1.6050P-1(b)(2)(i)(F). (Treasury Regulations, or Regs, are extensive writings generated in support of the actual law or code, often at the direction of Congress. They are authoritative in court, subordinate only to the Code and the US Constitution.) Before the IRS should take the position presented in the letter, the Regs should be updated, and that process takes time....
Certainly this letter is gaining traction in the trade media. The California Franchise Tax Board has now stated that if the IRS takes that position that they will follow.
I will not speculate where this will go, but it will be interesting to watch, and I'll undoubtedly follow-up from time to time as we have new developments. Until then, if you hear about this "new rule" or "new position the IRS is taking," I suggest you contain your enthusiasm until this is resolved.
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