A New Code on the Horizon?
In his State of the Union Address on January 25, 2011, President Barack Obama urged Congress to simplify the Internal Revenue Code stating, “So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years – without adding to our deficit.” This statement follows the January 12, 2011, statement of Treasury Secretary Timothy Geithner, where he said, “We’re examining whether we can find the political support for a comprehensive tax reform.” However, such a lofty goal may not be easily attained.
The administration’s one condition with regards to a complete overhaul of the Internal Revenue Code is that such overhaul must either raise revenue or be revenue neutral. To comply with this condition, in conjunction with lowering the corporate tax rate, both Democrats and Republicans alike agree that painful choices would be required. Such painful choices may include: 1) curbing the deduction for interest on home mortgages; 2) reducing subsidies for corporations with overseas investments; and 3) reducing subsidies for oil and gas companies.
These necessary choices make a total tax reform a political nightmare. The most apt comparison is the 1985-86 Internal Revenue Code overhaul that dramatically lowered individual tax rates while subjecting more income to taxation by curbing special breaks and incentives. This previous overhaul took more than a year and a half to pass Congress at a time when many Democrats and Republicans were working together. In an ever more polarized Congress as we presently have, such reform may never become a reality.
1099 Reporting Requirement
On January 25, 2011, Max Baucus and Harry Reid reintroduced legislation to fully repeal the 1099 reporting requirement that was part of the Patient Protection and Affordable Care Act of 2010 (“Health Care Act”). Beginning in 2012, the new reporting rules require businesses to file Form 1099 when the business pays a single payee more than $600 in a single year.
On the same day, two other Senators introduced similar legislation to repeal the 1099 reporting requirements, but provided an offset through rescissions in federal spending. One of these bills, which was proposed by Senator Debbie Stabenow of Michigan, was adopted by the Senate on February 2, 2011 as an amendment to a reauthorization of the Federal Aviation Administration. This legislation would fully repeal the reporting mandate for businesses that was enacted in the Health Care Act. Several groups, including the National Association of Manufacturers, have urged lawmakers through letters to support Senator Stabenow’s amendment.
Similar legislation was rejected in November of last year. Many businesses have submitted comments and letters to their Congressmen because of the increased burden due to these new reporting requirements.
As a reminder, under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”), the default rule for decedents who died between January 1, 2010 and December 17, 2010 requires the application of a $5,000,000 estate tax exemption, a maximum estate tax rate of 35% and application of the stepped-up basis rule to fair market value. However, executors may elect to apply the rules providing for no estate tax and a modified carryover basis regime. Under the modified carryover basis regime, an executor is allowed to allocate a $1.3 Million basis increase to certain appreciated property (but not above fair market value) and an additional $3 Million basis increase to property passing to a decedent’s spouse. Because of extensions granted under the Act, executors have until September to file an estate tax return and make any qualified disclaimers.
The basis increase under the modified carryover basis rules must be made on Form 8939. The Form 8939 has not yet been finalized as the IRS is making adjustments for the law changes contained in the Act. The American Bar Association has recently encouraged the IRS to review and revise the draft version of this form based on numerous comments from practitioners.
The Worker, Homeownership, and Business Assistance Act of 2009, which was signed by President Obama in November 2009, requires specified tax return preparers, who expect to file more than 10 individual returns, to file them electronically. An individual income tax return includes any return of income tax imposed by subtitle A of the Internal Revenue Code for individuals, estates, and trusts.
For this purpose, a return is considered filed by a tax return preparer if the preparer or any member, employee, or agent of the preparer or the preparer’s firm submits the tax return to the IRS on a taxpayer’s behalf.
The IRS announced through Proposed Regulations that it was phasing in the e-filing requirement over two (2) years. Therefore, for 2011, a tax return preparer must electronically file if the preparer expects to file – or that preparer is a member of a firm that reasonably expects in the aggregate to file – 100 or more individual income tax returns during the year. The AICPA sent a letter on January 3, 2011 with comments to the Commissioner of the Internal Revenue Service asking the IRS to increase the phase-in threshold from 100 returns to 200 returns because of the increased burden on tax preparers.
Clients of specified tax return preparers may choose not to electronically file. The clients would independently file a paper copy of the tax return. However, preparers should document each client’s choice and keep a signed copy of the appropriate statement on file.
In addition, a specified tax return preparer may request a waiver by filing Form 8944 (Preparer E-File Hardship Waiver Request). Waivers will be reviewed and approved in cases where the preparer demonstrates that complying with the new requirement would be an undue hardship. Such waiver is valid for one calendar year. The waivers must be filed by April 1, 2011.
Several comments have been submitted on the proposed regulations. Final regulations are expected to be issued very soon.
Louisiana Filing Extensions
The Louisiana Department of Revenue announced last week that it will not require the electronic filing of corporate and individual income tax extensions and payments for 2010 tax returns due in 2011. Proposed rules issued on November 20, 2010 would have required electronic filing of corporate and individual income tax extensions beginning with returns due on or after January 1, 2011.
The Louisiana Department of Revenue intends to mandate such electronic filing for extensions for the 2011 tax return year (filed in 2012).
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