Vernoia, Enterline + Brewer, CPA LLC

Archive for June, 2015

Fiduciaries have ongoing duty to monitor plan investments

Tens of millions of Americans participate in employer-sponsored retirement plans. Plan trustees have many responsibilities, including investment decisions. In May, in a unanimous decision, the Supreme Court held that fiduciaries have a continuing obligation to monitor retirement plan investments.


Employer-sponsored retirement plans are governed by federal law (ERISA). ERISA allows plan participants to bring an action against trustees for different reasons, such as a breach of fiduciary duty. Generally, ERISA provides that a breach of fiduciary duty complaint is timely if filed no more than six years after the date of the last action which constituted a part of the breach or violation or in the case of an omission the latest date on which the fiduciary could have cured the breach or violation.


In the case before the Supreme Court, which was filed in 2007, the plaintiffs argued that plan trustees had breached their fiduciary duties in 1999 and 2002. A federal district court and the Ninth Circuit Court of Appeals found that the claims arising from 1999 were untimely because they were not filed within the six year period. The Ninth Circuit found the plaintiffs had not established a change in circumstances that might trigger an obligation to review and to change investments within the six year period. The plaintiffs’ appealed to the Supreme Court, which agreed to hear the case.

Supreme Court’s decision

Justice Breyer delivered the Supreme Court’s opinion. ERISA’s fiduciary duty is derived, Breyer explained, from the common law duty of trusts. An ERISA fiduciary must discharge their responsibility with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with the matters would use, Justice Breyer further explained. The Uniform Prudent Investor Act, Breyer added, confirms that managing embraces monitoring and that a trustee has continuing responsibility for oversight of the suitability of the investments already made.

The Ninth Circuit did not consider the role of a fiduciary’s duty of prudence when it rejected the plaintiffs claims as untimely, the Supreme Court held. “The duty of prudence involves a continuing duty to monitor investments and remove imprudent ones under trust law,” Justice Bryer wrote. “The Ninth Circuit erred by applying a six-year statutory bar based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty.” The Supreme Court remanded the case to the Ninth Circuit for a determination at what point a fiduciary would be treated as having violated the continuing duty to monitor plan investments.

Tibble v. Edison Int’l., SCt., May 18, 2015

NJ – Filing deadline for 2014 senior freeze applications extended

The New Jersey Department of the Treasury has announced that, for property tax purposes, the filing deadline for the 2014 Senior Freeze Program application has been extended to October 15, 2015. The program reimburses eligible senior citizens and disabled persons for property tax or mobile home park site fee increases on their principal residences. To qualify, a taxpayer must meet all the eligibility requirements for each year from the base year through the year for which the taxpayer is applying. Press Release, State of New Jersey Department of the Treasury, May 27, 2015

IRS updates list of private delivery services for filing returns

The IRS has updated its list of designated private delivery services that taxpayers may use to submit documents to the agency while qualifying for the “timely mailing treated as timely filing rule.” This is the rule that provides that a return or other document (such as a refund claim or Tax Court petition, or a payment delivered by the U.S. Postal Service) will be considered timely filed if its postmark date is no later than the due date of the return or payment and is sent to the proper address.

Taxpayers who use a designated private delivery service from the list to mail a document to the IRS by that document’s due date will generally be considered timely filed under Code Sec. 7502, the agency explained. In other words, returns sent by private delivery services qualify only if the IRS has designated that particular private delivery service on its official list. In the most recent update, published as Notice 2015-38, the IRS has added four new delivery services to the list. It also removed five services. The IRS last updated the list in Notice 2004-83.

Updated list

Effective May 6, 2015, the IRS has added the following new services to the list of designated delivery carriers:

  • FedEx First Overnight
  • FedEx International First Next Flight Out
  • FedEx International Economy
  • UPS Next Day Air Early AM

Also effective May 6, 2015, the IRS has removed the following services previously designated because the carrier had substantially altered or discontinued them since the list was last updated in 2004:

  • DHL Same Day Service
  • DHL Next Day 10:30 am
  • DHL Next Day 12:00 pm
  • DHL Next Day 3:00 pm
  • DHL 2nd Day Service

The IRS further cautioned taxpayers that not all FedEx or UPS services are designated delivery services.

IRS procedures deemed “inadequate” to stop erroneous claims for education credits

Although the IRS has developed processes to identify erroneous education credit claims, those processes only identified 50 percent of the more than 3.6 million questionable education credit claims identified during a recent review, the Treasury Inspector General for Tax Administration (TIGTA) has found in a new audit report. Specifically, TIGTA estimated that taxpayers received billions of dollars of education credits, even when they did not supply a Form 1098-T, Tuition Statement, and/or the student for which the claim was made was not attending an eligible institution. Furthermore, TIGTA found that the IRS approved millions of dollars of claimed American Opportunity Tax Credits (AOTCs) on behalf of students who had already claimed the credit for the maximum number of years or who were otherwise unqualified to receive the credit.


Under current law, there are two educational tax credits available to taxpayers: the Lifetime Learning Credit and the AOTC, which replaces the Hope Credit through 2017. The benefits and requirements for each credit are different. Among the numerous differences is that the AOTC Is available only for the first four tax years of postsecondary education; the Lifetime Learning Credit may be claimed for an unlimited number of years. Similarly, a taxpayer may only claim the AOTC if the student is enrolled in a program leading to a degree at least half-time for at least one academic period during the year. The Lifetime Learning Credit does not require that the program lead to a degree, and the student need only be enrolled in one or more courses.

Return preparers

TIGTA found that as of the end of 2013, more than 49 percent of the 3.6 million taxpayers with questionable education credit claims identified were prepared by a tax return preparer. This occurred despite the IRS’s plans to increase the coordination among its operating divisions and staffing in the Office of Professional Responsibility. The IRS also started identifying questionable AOTC claims prepared by tax return preparers for its Automated Questionable Credit Program and freezing the portion of the refund related to the questionable AOTC claim.


TIGTA made five recommendations, but the IRS disagreed with all but two. Following release of the report, the IRS stated that it had taken a number of steps to ensure education credit compliance and had reduced the number of claims by $4.5 billion in one year. Instead, the IRS efforts in this area are hampered by the complexity of laws affecting education credits and by funding limitations. The IRS also alleged that the dollar amounts in the TIGTA report had been overstated.

How do I? File an amended return

A taxpayer who discovers an error after filing his or her income tax return may need to file an amended return. A change in filing status, income, deductions, or credits would require an amended return. This could happen, for example, if an investment broker sends a corrected Form 1099 that changes the amount of dividends or capital gains earned by the taxpayer. Or a taxpayer who sold stock may recalculate the basis of the stock for determining gain or loss. A taxpayer amending his or her federal income tax return may also need to amend a state tax return, to reflect the change or correction.

An amended return would be needed if a partnership sends a corrected Schedule K-1 showing the amount of income or losses earned by the partnership. This could also happen if the partnership is slow to provide Schedule K-1 to its owners or beneficiaries, and the taxpayer files an income tax return before receiving the K-1.

Form 1040X

Taxpayers use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended return. Form 1040X can be used to change a previously filed Form 1040, 1040A, or 1040EZ. Form 1040X cannot be filed electronically; the instructions for Form 1040X indicate where to file the form. Taxpayers should file a separate Form 1040X for each year being amended, and mail each form in a separate envelope.

At the top of the form, the taxpayer should enter the year of the return being amended. Form 1040X has three columns for reporting the change or correction. Column A is used to show the amount(s) reported on the original return. Column C shows the corrected figures. Column B shows the difference between Columns A and C. On the back of the form is an area where the taxpayer can explain the specific changes being made and the reason for each change. The taxpayer should attach a copy of any form or schedule that is affected by the change.

Refund Deadline

To claim a refund, a taxpayer must file Form 1040X within three years after the date the original return was filed, or within two years after the date the tax was paid, whichever is later. Returns filed before the due date (without regard to extensions) are considered filed on the due date. The IRS indicates that it may take up to 16 weeks to process an amended return.

FAQ: What is the saver’s credit?

Under Code Sec. 25B, a low-income taxpayer can claim a tax credit for a portion of the amounts contributed to an individual retirement account, 401(k) plan, or other retirement plan. A credit is allowed for up to $2,000 of contributions to qualified retirement savings plans. The maximum credit is $1,000 for individuals and $2,000 for married couples. A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. However, the percentage of contributions for which the credit is allowed decreases depending on the individual’s adjusted gross income.

The credit is also reduced for any distributions from qualified retirement plans that the taxpayer, or the taxpayer’s spouse if they file a joint return, has received during the tax year, the previous two tax years, or the period of the following year before the due date for the return on which the return is filed, including extensions. A taxpayer can claim the credit in addition to any other deduction or exclusion that would apply to the contribution. Contributions for which the credit is claimed are treated as after-tax contributions and can be included in the taxpayer’s investment in the contract, thus reducing the amount of income included in distributions from the retirement plan.

Eligible Individuals

The saver’s credit is available for any individual, other than a full-time student, who is age 18 or over at the close of the tax year, provided the individual is not claimed as a dependent for the same tax year. The credit is not available for single taxpayers or married taxpayers filing separately with adjusted gross income (AGI) more than $30,000 for 2014, and $30,500 for 2015; heads of households with AGI more than $45,000 for 2014, $45,750 for 2015; or married taxpayers filing jointly with AGI more than $60,000 for 2014, $61,000 for 2015.

The AGI limits are adjusted annually for inflation. The AGI amounts for single taxpayers are one-half the indexed amounts for married taxpayers filing a joint return, and the limits for heads of households are three-fourths the indexed amounts for married taxpayers filing a joint return. These amounts are adjusted for inflation.

Amount of Credit

The saver’s credit is equal to a percentage, ranging from 50 percent to 0, depending on adjusted gross income (AGI), of the individual’s qualified retirement savings contributions for the tax year, up to a maximum amount of contributions of $2,000. For married taxpayers filing jointly, contributions up to $2,000 a year for each spouse can give rise to the saver’s credit.

Claiming the Credit

Taxpayers claim the saver’s credit on Form 8880, Credit for Qualified Retirement Savings Contributions, and attach the form to their Form 1040 or 1040A. The instructions for the form indicate how to calculate the credit. The saver’s credit is a non-refundable personal credit. Thus, the amount of the credit is limited by the taxpayer’s tax liability. Taxpayers can also take a projected saver’s credit into account in figuring the allowable number of withholding allowances claimed on Form W-4, Employee’s Withholding Allowance Certificate.

Liability for the “nanny” tax

Employers of course have to pay employment taxes on the wages they pay to their employees. A nanny who takes care of a child is considered a household employee, and the parent or other responsible person is her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.

Payments and Withholding

As a household employer, the parent must withhold and pay Social Security and Medicare taxes if the cash wages paid to the nanny exceed the threshold amount for the year. If the amount paid is less than the threshold, the parent does not owe any Social Security or Medicare taxes. The threshold for 2015 is $1,900. If the employee earns more than $1,000 in any calendar quarter, the parent must also pay federal unemployment (FUTA) tax on wages paid, up to $7,000. Publication 926, Household Employer’s Tax Guide, has more information about withholding and paying employment taxes.

If the amount paid is more than the threshold, the parent must withhold the employee’s share of Social Security and Medicare taxes unless the parent chooses to pay both the employee’s and the employer’s share. The taxes are 15.3 percent of cash wages, 7.65 percent each for the employee and the employer. This includes 6.2 percent for Social Security and 1.45 percent for Medicare (hospitalization insurance).

The parent is not required to withhold income tax from the nanny’s wages. However, the parent and the nanny may agree to withholding income tax from the nanny’s wages. The nanny must provide a filled-out Form W-4, Employee’s Withholding Allowance Certificate, to the employer.

The employment taxes amounts are part of the parent’s tax liability and can trigger an estimated tax penalty if not enough is paid during the year. The parent submits estimated tax payments on Form 1040-ES, Estimated Tax for Individuals.

Forms to File

If the parent must pay Social Security and Medicare taxes, or if the parent withholds income tax, the parent must file Schedule H, Household Employment Taxes, with the parent’s Form 1040. The parent may also need to file a Form W-2, Wage and Tax Statement, and furnish a copy of the form to the nanny. To complete Form W-2, the parent must obtain an employer identification number (EIN) from the IRS, either by applying online or by submitting Form SS-4, Application for Employer Identification Number.

How the IRS resolves an identity theft case

The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS’s resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.

Even with a wait time of 120 days, taxpayers who find themselves victims of tax refund identity theft likely find the road to resolution a frustrating and time consuming process. This article seeks to explain the various pulleys and levers at play when communicating with the IRS about an identity theft case.

Initiating an ID theft case

A taxpayer may become aware that he or she is a victim of tax-related identity theft when the IRS rejects their tax return because someone has already filed a return using the taxpayer’s name and/or social security number. A taxpayer may also receive correspondence directly from the IRS that informs them, prior to filing, that someone has filed a suspicious return under their information. In other cases, a taxpayer may have had his or her identity information compromised and wishes to alert the IRS as to the possibility that he or she may be targeted by an identity thief.

For all such cases, the IRS has created Form 14039, Identity Theft Affidavit. Taxpayers who are actual or potential victims of tax-related identity theft may complete and submit the Affidavit to ensure that the IRS flags the tax account for review of any suspicious activity. Taxpayers who have been victimized are asked to provide a short explanation of the problem and how they became aware of it.

The Identity Theft Affidavit may also be submitted by taxpayers that have not yet become victims of tax-related identity theft, but who have experienced the misuse of their personal identity information to obtain credit or who have lost a purse or wallet or had one stolen, who suspect they have been targeted by a phishing or phone scam, etc. The form asks these taxpayers to briefly describe the identity theft violation, the event of concern, and to include the relevant dates.

Once the Form 14039 has been completed and submitted, the taxpayer should expect to receive a Notice CP01S from the IRS by mail. The Notice CP01S simply acknowledges that the IRS has received the taxpayer’s Identity Theft Affidavit and reminds the taxpayer to continue to file all federal tax returns.

The IRS has implemented a pre-screening procedure for suspicious tax returns. Rather than halt the refund process entirely, which can prevent a refund claimed on a legitimately filed return, the IRS has provided taxpayers with the opportunity to verify their identity.

Now when the IRS receives a suspicious return, it will send a Letter 5071C or Notice CP01B to the taxpayer requesting him or her to either visit or call the toll-free number listed on the header of the letter (1-800-830-5084) within 30 days. When the taxpayer does this, the taxpayer will encounter a series of questions asking for personal information. If the taxpayer fails to respond to the verification request or responds and answers a question incorrectly the IRS will flag the return as fraudulent and follow the prescribed procedures for resolving identity theft cases.

Resolving the case

After a tax return has been flagged with the special identity theft processing code, the IRS will assign the case to a tax assistor. TIGTA reported that the IRS assigns each case priority based first on its age and then by case type—for example, with cases nearing the statute of limitations placed first, followed by cases claiming disaster relief, and then identity theft cases. However, TIGTA has reported that cases are frequently reassigned to multiple tax assistors, and there are often long lag times where no work is accomplished toward resolution. National Taxpayer Advocate Nina Olson also noted in her recent “Identity Theft Case Review Report” on a statistical analysis of 409 identity theft cases closed in June 2014 that a significant number of cases experience a period of inactivity averaging 78 days.

After resolution

The IRS has also created the Identity Protection Personal Identification Number (IP PIN) project, which is meant to prevent taxpayers from being victimized by identity thieves a second time after the IRS has resolved their cases and closed them. The IP PIN is a unique six-digit code that taxpayers must entered on their tax return instead

The IRS assigns an IP PIN to a taxpayer by sending him or her a Notice CP01A. Generally this Notice is issued in December in preparation for the upcoming filing season. The taxpayer then enters it into the appropriate box of his or her federal tax return (i.e. Forms 1040, 1040A, 1040EZ or 1040 PR/SS). On paper returns, this box is located on the second page, near the signature line. When e-filing, the tax software or tax return preparer will indicate where the taxpayer should enter the IP PIN, social security number or taxpayer identification number (TIN) at time they file their tax return. The IP PIN is only good for one tax year.

Taxpayers who have been assigned an IP PIN, but who have lost or misplaced it cannot electronically file their tax returns until they have located it. Previously such taxpayers had no way to retrieve their IP PIN and had to file on paper. Beginning on January 14, 2015, however, taxpayers who had lost their IP PINs were able to retrieve them by accessing their online accounts and providing the IRS with specific personal information and answer a series of questions to verify identity.

Latest breach

The IRS announced on May 26th that 100,000 taxpayers became victims of a new identity theft scheme discovered in mid-May 2015. Identity theft criminals used stolen personal identification information to access the IRS’s online “Get Transcript” application and illegally download these taxpayers’ tax transcripts. The IRS is concerned that the criminals intend to use taxpayers’ past-year return information to file false tax returns claiming tax items and refunds that look legitimate and that do not trigger the IRS’s filters for finding suspicious returns.

Within this latest breach of security, identity thieves had attempted to download a total of 200,000 transcripts, but had only been successful half of the time, according to an announcement by IRS Commissioner John Koskinen. Because the IRS has yet to see how many taxpayers were actually victimized, the IRS may not provide IP PINs to all of these 200,000 taxpayers. However, the 100,000 taxpayers whose tax transcripts were downloaded will receive free credit monitoring services at the IRS’s expense, Koskinen stated.