Vernoia, Enterline + Brewer, CPA LLC

Archive for May, 2015

Agencies post FAQs on wellness programs

Wellness programs sponsored by employers are growing in popularity. The Patient Protection and Affordable Care Act expanded the opportunities for employers to sponsor wellness programs. In April, the IRS, along with the U.S. Departments of Health and Human Services (HHS) and Labor (DOL), released frequently asked questions (FAQs) about wellness programs.


Wellness programs are generally offered through employer-provided health plans as a means to help employees improve health and reduce health care costs. Participatory wellness programs generally are available without regard to an individual’s health status. These include programs that reimburse for the cost of membership in a fitness center; that provide a reward to employees for attending a monthly, no-cost health education seminar; or that reward employees who complete a health risk assessment, without requiring them to take further action.

Another type of wellness program is health-contingent wellness programs. These programs generally reward individuals who meet a specific standard related to their health. Examples of health-contingent wellness programs include programs that provide a reward to those who do not use, or decrease their use of, tobacco, or programs that reward those who achieve a specified health-related goal, such as a specified cholesterol level, weight, or body mass index, as well as those who fail to meet such goals but take certain other healthy actions.

The agencies issued final regulations in 2013 (T.D. 9620). The final regulations apply to group health plans (both insured and self-insured) and to group health insurance issuers. Under the final regulations, participation in a wellness program must be made available to all similarly-situated individuals, regardless of health status.


In the FAQs, the agencies explained that a health-contingent wellness program must be reasonably designed to promote health or prevent disease. The agencies described some programs that would be contrary to the goals of wellness programs under the Affordable Care Act. For example, a wellness program designed to discourage enrollment in the plan or program by individuals who are sick or potentially have high claims experience would not be considered reasonably designed, the agencies explained.  Programs that require unreasonable time commitments or travel may be considered overly burdensome, they added.

FAQs about Affordable Care Act Implementation (Part XXV),

“Doc Fix” bill includes enhanced IRS levy authority on Medicare providers

On April 16, President Obama signed the Medicare Access and CHIP Reauthorization Act of 2015 (P.L. 114-10), also known as the “doc fix” bill. In addition to overhauling Medicare’s payment system to physicians, the new law provides the IRS with enhanced levy authority to collect unpaid taxes from Medicare providers.


Since 2003, Congress has regularly passed “doc fix” bills to avoid cuts in Medicare payments to physicians. The new law is intended to put in place a long-term fix to these cuts. The law repeals the prior payment mechanism and establishes a streamlined payment process. The law also increases, starting in 2018, the percentage that higher-income beneficiaries pay toward their Part Medicare B and D premiums. Additionally, the new law funds the Children’s Health Insurance Program (CHIP) though September 30, 2017.

The “doc fix” and extension of CHIP were the result of bipartisan agreements. The House approved the bipartisan bill in March by a vote of 392 to 37. The Senate voted 98 to 2 in early April to approve the bill.

IRS levy

Along with the “doc fix” and CHIP, lawmakers voted to give the IRS enhanced levy authority. The Federal Payment Levy Program (FPLP) authorizes the IRS to collect unpaid taxes through a continuous levy on certain qualified federal payments. Before being amended by the new law, Code Sec. 6331(h)(3) provided that a continuous IRS levy to collect an unpaid tax liability of a Medicare provider was limited to 30 percent of a qualified payment. Under the new law, the IRS can levy up to 100 percent of a qualified payment owed to a Medicare provider to collect an unpaid tax liability.

Medicare Access and CHIP Reauthorization Act of 2015 (P.L. 114-10).

IRS revises FATCA reporting for certain foreign retirement, pension and savings accounts

The IRS has announced in Updated Instructions to Form 8938, Statement of Specified Foreign Financial Assets, that certain retirement-type accounts located in jurisdictions with intergovernmental agreements (IGAs) do not have to be reported on Form 8938 for tax years beginning on or before December 12, 2014. This avoids a potential $10,000 reporting penalty. The applicable accounts are retirement and pension accounts, non-retirement savings accounts, and accounts satisfying certain regulatory conditions under Code Sec. 1471.


The Foreign Account Tax Compliance Act generally requires U.S. citizens, resident aliens, and others with an interest in specified foreign financial assets that exceed the reporting threshold to file Form 8938 to report the assets. Specified foreign financial assets include certain assets that are not in an account maintained by a U.S. or foreign financial institution.


The IRS has entered into IGAs with various foreign jurisdictions to implement FATCA’s reporting requirements. Under a Model 1 IGA, foreign financial institutions report their U.S. accounts to their home government, which transfers the information to the IRS. Under a Model 2 IGA, the institution reports its accounts directly to the IRS, supplemented by information exchanges between the governments.

Reporting Announcement

The IRS has now announced that, for tax years beginning on or before December 12, 2014, if the foreign jurisdiction has an IGA in effect (or is treated as having an IGA in effect) on or before the last day of the taxpayer’s tax year, certain accounts do not have to be reported on Form 8938 if the accounts are excluded from the definition of a financial account in the IGA. However, the accounts must be reported on Form 8938 for tax years beginning after December 12, 2014.

Update to Instructions, Form 8938

U.S. Resident who ignored checkbox and instructions is liable for failure to file FBAR penalty

An individual taxpayer has learned the hard way that the IRS does not look kindly upon the failure to read all the items on a tax return and its instructions. Even though he voluntarily chose to participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP) by reporting foreign assets, the IRS nevertheless held him liable for the maximum civil penalty for his failure to file the Report of Foreign Bank and Financial Accounts (FBAR).

The IRS and district court (during the subsequent litigation) held the taxpayer liable for this penalty for each of the four year at issue. The district court found that the taxpayer had ignored the instructions for Form 1040, Schedule B, when preparing his own tax returns. When he did hire a professional tax return preparer, however, he still chose not to disclose his interest in the foreign accounts. Therefore, he lacked reasonable cause for the failure.

Ultimately, the district court found that the taxpayer’s behavior suggested a willful failure. As such, the IRS was surely entitled to impose the maximum penalty for a non-willful failure.


The IRS is responsible for enforcing 31 U.S.C. §5314 of the Bank Secrecy Act of 1970, which requires a person residing in the United States who has foreign accounts totaling more than the threshold amount at any time during the year to report them to the IRS by June 30 of that year on Form TD F 90-22.1 (currently known FinCEN Form 114, Report of Foreign Bank and Financial Account, or “FBAR”). A person has reasonable cause for failing to file an FBAR when the failure is committed despite an exercise of ordinary business care and prudence. The person may be excused from the penalty if he can show he had reasonable cause.

The tax years in question in this case range from 2005 to 2008. The taxpayer began to timely file FBARs in 2009 after learning of the IRS’s Offshore Voluntary Disclosure Program. The taxpayer voluntarily participated in the IRS’s program and amended six years of tax returns to report previously unreported income for each of those years from his foreign accounts. Nevertheless, the IRS recommended the maximum penalty ($10,000) for the taxpayer’s non-willful failure to file an FBAR for each of the four years at issue.

Court’s analysis

The district court found that the taxpayer, a U.S. resident who had kept a bank account with a branch of a Swiss bank located in the Bahamas from 1989 until 2003, did not have reasonable cause for failing to file the FBAR for 2005 through 2008. Although the individual claimed that he had asked a Bahamian law firm about the tax implications of incorporating and running a business in the Bahamas while a U.S. citizen, he did not point to any advice he received that made him believe he was free from any obligation to report the business’s account to the IRS.

Furthermore, the district court found that the taxpayer had ignored the question on Form 1040, Schedule B, asking whether he had an interest in or signature authority over a foreign financial account. The court found that this showed a lack of exercise of ordinary business care or prudence.  Had the taxpayer read this question and the instructions for the FBAR during the years in which he prepared his own tax returns, the individual would have discovered that he should have answered “yes” to the question on Form 1040, Schedule B. Furthermore, during the years when the taxpayer hired a tax return preparer, the evidence showed that he answered “no” to the question on the preparer’s tax organizer asking whether he had an interest or signature authority over a foreign financial account.

For all these years, the taxpayer admitted that he had understood that he owned more than 50-percent of the stock of a corporation that owned a foreign bank account. The court noted that the fact that the taxpayer appeared to have ignored these questions on Schedule B and the tax organizers suggested the taxpayer had actually committed a willful failure to file—a higher violation than the one at issue.

The years in question range from 2005 to 2008. The taxpayer began to timely file FBARs in 2009 after learning of the IRS’s Offshore Voluntary Disclosure Program. After learning about the program, the taxpayer amended six years of tax returns to report income for each of those years from his foreign accounts. Nevertheless, the IRS recommended the maximum penalty ($10,000) for the taxpayer’s non-willful failure to file an FBAR for each of the four years at issue.

FAQ…do I need a receipt for every gift to charity

The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS’s requirements.


One way to understand the IRS’s requirements is to break them down by monetary amount and the type of donation, money and/or household items or clothing.

  • To deduct a contribution of cash, check, or other monetary gift (regardless of the amount), a taxpayer must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.
  • To claim a deduction for contributions of cash or property equaling $250 or more, the taxpayer must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
  • If the total deduction for all noncash contributions for the year is over $500, the taxpayer must file Form 8283, Noncash Charitable Contributions, with the IRS.
  • Donations valued at more than $5,000 generally require an appraisal by a qualified appraiser.

The IRS also requires that donations of clothing and household items be in good used condition or better to be deductible. Special rules apply to donations of motor vehicles, boats and aircraft.

Tax Court sheds light

In April, the U.S. Tax Court issued an instructive decision (Kunkel, TC Memo. 2015-71) on the steps taxpayers must take to deduct a contribution to a charitable organization. The taxpayers in Kunkel made a number of donations, some by cash and others of household items and clothing, but the court disallowed nearly all of the claimed deductions because the taxpayers failed to follow the rules.

In this case, the taxpayers reported $42,000 in charitable contributions, comprising $5,000 in cash and $37,000 in noncash donations. The noncash contributions were donations of books, clothing, furniture, and household items. The taxpayers told the IRS that they took the household items, clothing and books to charities in batches, which they claimed were worth less than $250 because they believed this eliminated the need to get receipts. Other times, one or more charities came to the taxpayers’ residence and picked up the household items (however, the taxpayers were not home at the time of the pickup and the charities left undated doorknob hangers as receipts).

The Tax Court reminded the taxpayers that for all contributions of $250 or more, a taxpayer generally must obtain a contemporaneous written acknowledgment from the charity. The court found it implausible that the taxpayers had made their donations in batches worth less than $250. The court calculated that this would mean they had made these donations on 97 different occasions in one year. The court also found that the doorknob hangers were inadequate substantiation of their claimed donations. The doorknob hangers not specific to taxpayer, did not describe the property contributed, and were not contemporaneous written acknowledgments, the court found.

This article is a very high level overview of the IRS’s substantiation requirements for donations to charity. If you have any questions about the substantiation or other requirements for a gift you are making to a charity, please contact our office for more details.

How do I…Protect against tax-related identity theft?

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

Tax-related identity theft

Tax-related identity theft most often occurs when a criminal uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Often, criminals will claim bogus tax credits or deductions to generate large refunds. Fraud is particularly prevalent for the earned income tax credit, residential energy credits and others. In many cases, the victims of tax-related identity theft only discover the crime when they file their genuine return with the IRS. By this time, all the taxpayer can do is to take steps to prevent a recurrence.

Being proactive

However, there are steps taxpayers can take to reduce the likelihood of being a victim of tax-related identity theft. Personal information must be kept confidential. This includes not only an individual’s Social Security number (SSN) but other identification materials, such as bank and other financial account numbers, credit and debit card numbers, and medical and insurance information. Paper documents, including old tax returns if they were filed on paper returns, should be kept in a secure location. Documents that are no longer needed should be shredded.

Online information is especially vulnerable and should be protected by using firewalls, anti-spam/virus software, updating security patches and changing passwords frequently. Identity thieves are very skilled at leveraging whatever information they can find online to create a false tax return.


Criminals do not only steal a taxpayer’s identity from documents. Telephone tax scams soared during the 2015 filing season. Indeed, a government watchdog reported that this year was a record high for telephone tax scams. These criminals impersonate IRS officials and threaten legal action unless a taxpayer immediately pays a purported tax debt. These criminals sound convincing when they call and use fake names and bogus IRS identification badge numbers. One sure sign of a telephone tax scam is a demand for payment by prepaid debit card. The IRS never demands payment using a prepaid debit card, nor does the IRS ask for credit or debit card numbers over the phone.

The IRS, the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Tax Commission (FTC) are investigating telephone tax fraud. Individuals who have received these types of calls should alert the IRS, TIGTA or the FTC, even if they have not been victimized.

Tax-related identity theft is a time consuming process for victims so the best defense is a good offense. Please contact our office if you have any questions about tax-related identity theft.

Individuals can begin to prepare for the 2016 filing season

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

IRS Recommended Action Steps

Specifically, the IRS advised the taxpayers take the following steps now to jump start a successful 2016 filing season for their 2015 tax year returns:

  • Consider filing a new Form W-4, Employee’s Withholding Allowance Certificate, with an employer if certain life circumstances have changed (such as a change in marital status or the birth of a child). A new child could mean an additional exemption and/or tax credits that might lower your tax liability. Therefore you might benefit from claiming an extra withholding allowance. Conversely, getting married (or divorced) could change your income, making it advantageous to readjust your withholding accordingly.
  • Report any changes or projected changes in income to the Health Insurance Marketplace (if taxpayer obtained insurance through a marketplace). Income affects the calculation of subsidy payments. Recipients of the advance premium tax credit may owe tax for 2015 if their subsidy payments are too high.
  • Maintain accurate and organized tax records, such as home loan documents or financial aid documents. Many deductions must be substantiated with evidence, and staying organized now could facilitate the tax return filing process in the future.
  • Find a tax return preparer. Looking for a qualified tax return preparer may be easier in the off-season, when you are under no immediate pressure to select a person. This can provide taxpayers with more time to evaluate a preparer’s credentials.
  • Plan to increase itemized deductions. If a taxpayer plans to purchase a house, contribute to charity, or incur medical expenses that may not be reimbursed during 2015, it may be beneficial to consider whether itemizing deductions would be more beneficial than claiming the standard deduction for 2015.
  • Stay informed of the latest tax law changes. Keeping on top of developments can reduce confusion in the long run.

IRS reports decline in audit coverage following budget shortfalls

The IRS budget has suffered significant funding cuts to the past few fiscal year (FY) budgets. Most recently, IRS Commissioner John Koskinen told reporters that the IRS has been forced to absorb a $346 million cut to its FY 2015 budget. Such drastic reductions directly impact the IRS’s ability to enforce the nation’s tax laws. This became evident after the IRS issued its annual Data Book for FY 2014. (The Data Book provides statistical information on examinations, collections, taxpayer assistance, and other activities.) This year, the Data Book indicated that IRS audit rates have fallen for individuals and large corporate taxpayers between FY 2013 and FY 2014. On the other hand, the audit rate for partnerships increased slightly, ostensibly as a result of the IRS’s recent policy favoring more audits of this long-neglected sector.

Exam coverage: individuals

Individual returns filed in 2013, including both business and nonbusiness taxpayers, were audited at just under an overall 0.9 percent rate during FY 2014, based on more than 145.2 million individual returns filed. The audit rate for individuals in all income categories declined from FY 2013 to FY 2014. The drop was highest for taxpayers with income between $1 and $5 million. The audit rate for this category of taxpayers dropped by nearly three percentage points.

Individual business tax returns with and without the earned income credit (other than farm returns), were audited at a 1.59-percent rate, based on 679,093 audited returns out of nearly 42.7 million filed. This represents a decline from the 1.78 rate from FY 2013, based on 759,179 audited returns out of nearly 42.7 million filed.

Exam coverage: corporations

The IRS examined nearly 1.35 percent of all corporate returns (other than S corps) during FY 2014, based on a total of nearly 1.92 million returns and 25,905 examinations. The IRS reported that during FY 2014 it recommended more than $17.1 billion in additions to tax for corporate returns. The additions to tax recommended for returns filed by corporate taxpayers with more than $20 billion in assets comprised approximately 50.6 percent of the total additions to tax. Large corporations with total assets between $5 billion and $20 billion experienced an audit rate of only 44 percent, representing a dramatic decrease from FY 2012 when the audit rate for this same category of taxpayer was nearly 61 percent.

Exam coverage: partnerships

Partnerships and S corps filed a total of approximately 8.4 million returns during FY 2014, a slight increase from FY 2013 when these types of entities filed 8.3 million returns. In addition, the audit rate increased slightly from 0.42 percent in FY 2013 to 0.43 percent for FY 2014. By contrast, the audit rate for all types of businesses fell slightly from 0.61 percent in FY 2013 to 0.57 percent in FY 2014. This trend is likely to continue as IRS officials have recently announced that the agency intends to concentrate more heavily on partnership audits in the future.

Commissioner Koskinen noted in the 2014 Data Book that during FY 2014, the IRS had audited tax returns of about 1.2 million individuals, nearly 12 percent less than the previous year. The figure was, in fact, the lowest it has been since FY 2005. Despite this, the IRS admitted that it had managed to hold steady the number of tax returns processed (approximately 240 million) and amount of revenue collected (approximately $3.1 trillion). However, the IRS estimated that as a result of the enforcement cuts, the federal government likely will lose an estimated $2 billion in revenue that otherwise would have been collected.