January 25, 2013: Latest IRS Court Case Update

Today, John Ams, NSA Executive Director is attending American Bar Association Tax Section Meeting in Orlando, FL. Here's the latest information from this afternoon's panel made up of IRS lawyers.

As you know the IRS on Wednesday, January 23, 2013 filed a motion for a stay of the court decision in Loving v. Commissioner.

Per the court rules, the plaintiffs will file legal motions in response to the IRS request on Tuesday, January 29, 2013.

Two days later on Thursday, January 31, 2013, the IRS will have a chance to file motions in response to whatever the plantiffs file on Tuesday.

It therefore seems clear that the court will not have any future rulings until after the start of filing season on January 30, 2013.

Announcement 2013-13 contains corrections to Revenue Procedure 2013-6, as published on January 2, 2013 (2013-1 I.R.B. 198).  In particular, this announcement clarifies [as provided below] that applications for determination letters should continue to be submitted to the Covington, KY address in section 6.15 of Rev. Proc. 2013-6.  Comments submitted by interested parties in connection with the determination letter process should be sent to a different address in Cincinnati, OH in section 17.02 of Rev. Proc. 2013-6.  

Announcement 2013-13 will be published in the Internal Revenue Bulletin 2013-9 on Feb. 25, 2013. 

Announcement 2013-13 amends Revenue Procedure 2013-6 to: 

• correct the address for interested party comments, and

• clarify that the mailing address for determination letter applications has not changed.

The corrected mailing address for interested party comments is:

Internal Revenue Service
EP Determinations
Attn: Customer Service Manager
P.O. Box 2508
Cincinnati, OH 45202

Applicants should continue to send their determination letters applications to:

Internal Revenue Service
EP Determinations
P.O. Box 12192
Covington, KY 41012-0192

Sign up now for this Feb. 21 Phone Forum. Revenue Procedure 2013-12 made various changes to the IRS correction programs that plan sponsors and practitioners can use to fix mistakes in retirement plans. The changes include being able to now correct 403(b) plan document failures and new Voluntary Compliance Program procedures. Janet Mak, Manager of EP Voluntary Compliance, and Paul C. Hogan, EP Voluntary Compliance Program Coordinator will discuss the new revenue procedure. If you have a specific matter that you would like addressed, please email us at ep.phoneforum@irs.gov by Feb. 15.

Note: This forum will be held twice on Feb. 21. The first session will be held at 11:00am ET and the second session will be held at 2:00pm ET. Please register only for the session in which you plan to participate. The port cannot be freed up for another participant if you can't attend the session you are registered for.

Review the following annual procedure updates that affect tax-exempt organizations:

• Rev. Proc. 2013-4 
  Rulings and information letters; issuance procedures. Revised procedures are provided for furnishing ruling letters, information letters, etc., on matters related to sections of the Code currently under the jurisdiction of the Office of the Division Commissioner, Tax Exempt and Government Entities. Rev. Proc. 2012-4 superseded.
• Rev. Proc. 2013-5
  Technical advice. Revised procedures are provided for furnishing technical advice to area managers and appeals office by the Office of the Division Commissioner, Tax Exempt and Government Entities, regarding issues in the employee plans area (including actuarial matters) and in the exempt organizations area. Rev. Proc. 2012-5 superseded.
• Rev. Proc. 2013-8
  User fees for employee plans and exempt organizations. Current guidance for complying with the user fee program of the Service as it pertains to requests for letter rulings, determination letters, etc., on matters under the jurisdiction of the Office of the Division Commissioner, Tax Exempt and Government Entities Division, is provided. Rev. Proc. 2012-8 superseded.
• Rev. Proc. 2013-9
  Determination letters and rulings. This document sets forth procedures for issuing determination letters and rulings on the exempt status of organizations under sections 501 and 521 of the Code. The procedures also apply to the revocation and modification of determination letters or rulings, and provide guidance on the exhaustion of administrative remedies for purposes of declaratory judgment under section 7428 of the Code. Rev. Proc. 2012-9 superseded.
• Rev. Proc. 2013-10
  This document sets forth procedures for issuing determination letters and rulings on private foundation status under section 509(a) of the Code, operating foundation status under section 4942(j)(3), and exempt operating foundation status under section 4940(d)(2), of organizations exempt from Federal income tax under section 501(c)(3). This revenue procedure also applies to the issuance of determination letters on the foundation status under section 509(a)(3) of nonexempt charitable trusts described in section 4947(a)(1). Rev. Proc. 2012-10 superseded.

The American Taxpayer Relief Act of 2012 extended a modification of the tax treatment of payments to controlling exempt organizations to January 1, 2014. The special rule previously applied only to payments received or accrued before January 1, 2012. 

Generally, interest, annuities, royalties and rents received by controlling organizations from controlled entities are subject to tax under section 512(b)(13). However, exempt organizations may exclude “qualifying specified payments” from unrelated business income if received or accrued before January 1, 2014. 

Other provisions in the Taxpayer Relief Act that affect charitable organizations:

The Pension Protection Act of 2006 contained several time-limited provisions for favorable tax treatment of certain contributions. These provisions generally expired at the end of 2007 and have been extended several times for two-year periods, most recently in 2010. Some, but not all, of these provisions are extended by the TRA. Specifically, TRA extends the following through the end of 2013:

• IRA Charity Contribution (Code Section 408(d)(8)(F), permitting a distribution of up to $100,000 tax-free from an IRA to a qualifying charity by those over 70 ½ years old. As in the previous extension, taxpayers have the month of January 2013 to elect to make charitable distributions treated as effective in 2012. See related article and IRS news release. 
• Contribution of Conservation Easement (Code Section 170(b)(1)(E)(vi)), permitting favorable deductions for donating conservation interests in capital gain real property to charity
• Contribution of Food Inventory (Code Section 170(e)(3)(C)(iv)), permitting enhanced deductions for contributions of food inventories
• Contributions of property by S corporations (Code Section 1367(a)), limiting an S corporation shareholder’s reduction in basis of the S corporation’s stock to a pro rata share of basis (rather than fair market value) of property contributed by the corporation

Two provisions for enhanced charitable deductions – contributions of book inventories to public schools and corporate contributions of computer inventory – were not extended. These were in Code Sections 170(e)(3)(D)(iv) and 170(e)(6)(G), respectively.

Starting in 2014, certain employers – including certain for-profit, non-profit, and government entity employers – must offer health coverage to their full-time employees or a shared responsibility payment may apply. On Dec. 28, 2012, the Treasury Department and the IRS issued proposed regulations on the Employer Shared Responsibility provisions. Comments may be submitted electronically, by mail or hand delivered to the IRS. For additional information on the Employer Shared Responsibility provisions and the proposed regulations, see our questions and answers.

The Earned Income Tax Credit has made the lives of working people a little easier since 1975. EITC can be a boost for workers who earned $50,270 or less in 2012. Yet the IRS estimates that one out of five eligible taxpayers fails to claim their EITC each year. The IRS wants everyone who is eligible for the credit to get the credit that they’ve earned.

Here are the top five things the IRS wants you to know about this credit.

1. EITC is valuable.  The EITC not only reduces the federal tax you owe, but could result in a refund. You base the amount of EITC on your earned income and the number of qualifying children in your household. The average credit was around $2,200 last year. If you qualify, the credit could be worth up to $5,891. 

2. Review your eligibility.  If your financial, marital or parental situations change from year to year, you should review the EITC eligibility rules. Just because you didn’t qualify last year doesn’t mean you won’t this year.

3. File your return.  If you are eligible for the EITC, you must file a federal income tax return to claim the credit – even if you are not otherwise required to file. Remember to include Schedule EIC, Earned Income Credit, when you file your Form 1040. If you file Form 1040A, use the EIC worksheet and keep it for your records. If you use IRS e-file to prepare and file your tax return, the software will guide you and not let you forget this important step. E-file does the work and figures your EITC for you!

4. Know the qualifications.  You should understand the qualifications for EITC before claiming it, including:

• • You do not qualify for EITC if your tax filing status is Married Filing Separately.
  • You must have a valid Social Security number for yourself, your spouse – if filing a joint tax return – and any qualifying child listed on Schedule EIC.
  • You must have earned income. You have earned income if you are paid wages, you are self-employed, you have income from farming or you receive disability income.
  • Married couples and single people without children may qualify. If you do not have qualifying children, you must also meet age and residency requirements as well as dependency rules.
  • Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay as earned income for the purpose of computing the EITC. Even if you make this choice, your combat pay will remain nontaxable.

5. Use the EITC Assistant.  It’s easy to determine if you qualify. The EITC Assistant, a helpful tool available on IRS.gov, removes the guesswork from eligibility rules. Just answer a few simple questions to find out if you qualify and to estimate the amount of your EITC.

With IRS Free File, you can claim EITC by using brand name tax preparation software to prepare and e-file your tax return for free. It's available exclusively at IRS.gov/freefile. Free help preparing your return to claim your EITC is also available at one of thousands of Volunteer Income Tax Assistance sites around the country. To find the volunteer site nearest to you, use the VITA locator tool on IRS.gov.

For more information about the EITC, see IRS Publication 596, Earned Income Credit. It’s available in English and Spanish on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• EITC Assistant
• IRS Free File
• VITA locator tool
• Schedule EIC
• Publication 596, Earned Income Credit (EIC)

IRS YouTube Videos:

• Earned Income Tax Credit - English | Spanish

IRS Podcasts:

• Earned Income Tax Credit - English | Spanish 

IRS YouTube Video: 
Earned Income Tax Credit:  English | Spanish

Podcast:
Earned Income Tax Credit:  English | Spanish

WASHINGTON - The Internal Revenue Service and partners nationwide launched the Earned Income Tax Credit Awareness Day outreach campaign today, aimed at helping millions of Americans who earned $50,270 or less take advantage of the Earned Income Tax Credit (EITC).

Local officials and community organizations across the country are sponsoring over 250 news conferences and other outreach events highlighting the benefits of this key work incentive for low-and moderate-income workers and working families.

The annual campaign is necessary because one-third of the eligible population changes each year as their financial, marital and parental statuses change. Although an estimated four out of five eligible workers and families get the credit, one in five still miss out on it, either because they don’t claim it when filing, or don’t file a tax return at all.

“A large part of the nation sees major changes every year with their tax situation,” said IRS Acting Commissioner Steven T. Miller. “This year, millions of workers could qualify for EITC for the first time, and the IRS urges them not to overlook this valuable credit.”

The EITC varies by income, family size and filing status. The average EITC amount last year was around $2,200. People can see if they qualify by visiting IRS.gov and answering a few questions using the EITC Assistant. In tax year 2011, over 27 million eligible workers and families received nearly $62 billion total in EITC.

Workers, self-employed people and farmers who earned $50,270 or less last year could receive larger refunds if they qualify for the EITC. That could mean up to $475 in EITC for people without children, and a maximum credit of up to $5,891 for those with three or more qualifying children. Unlike most deductions and credits, the EITC is refundable. In other words, those eligible may get a refund from the IRS even if they owe no tax. 

The EITC provides a financial boost for millions of hard-working Americans. However, the IRS reminds taxpayers that even though most federal tax refunds are issued in less than 21 days, many factors can affect how long it may take for taxpayers to get their refunds. It is also possible that a tax return could require additional review and therefore take longer to process. Taxpayers can track the status of their refund with the “Where’s My Refund?” tool available for use on the IRS.gov website after the IRS starts processing tax returns on Jan. 30.

How to Claim the EITC

Following the late tax law changes made by Congress, the IRS plans to open the 2013 tax filing season and begin processing both paper and e-filed individual income returns on Jan. 30 after updating forms and completing programming and testing of its processing systems. The vast majority of taxpayers who qualify can begin to file EITC claims with their federal tax return starting on Jan. 30, 2013.

To get the EITC, workers must file a tax return, even if they are not required to file, and specifically claim the credit. Those eligible for the EITC have free options to file a tax return to claim the credit:

• Free File on IRS.gov Free brand-name tax software walks people through a question and answer format to help them prepare their returns and claim every credit and deduction for which they are eligible. The program also allows people to file electronically for free, using Free File Fillable Forms, which are online versions of our paper forms designed for taxpayers comfortable preparing their own returns.
• Free tax preparation sites EITC-eligible workers can seek free tax preparation at thousands of Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites. To locate the nearest site, taxpayers can search www.IRS.gov or call the IRS at 800-906-9887. Taxpayers can also find VITA/TCE sites by calling their community’s 211 or 311 line for local services.
• IRS Taxpayer Assistance Centers EITC-eligible workers can seek free assistance in IRS locations across the country. Locations are listed online at www.IRS.gov. Hours and services offered vary by location and should be checked before visiting.

More information on EITC and detailed eligibility rules are available at www.irs.gov/eitc. IRS partners should also visit EITC Central at www.eitc.irs.gov for helpful resources.

The Tax Year 2012 Business Rule Change page has been posted on IRS.gov.

You can access the site at Tax Year 2012 Schemas and Business Rules

We will continue to keep this file updated as changes occur.

WASHINGTON - The Internal Revenue Service today announced guidance to borrowers, mortgage loan holders and loan servicers who are participating in the Principal Reduction AlternativeSM offered through the Department of the Treasury’s and Department of Housing and Urban Development’s Home Affordable Modification Program® (HAMP-PRA®).

To help financially distressed homeowners lower their monthly mortgage payments, Treasury and HUD established HAMP, which is described at www.makinghomeaffordable.gov. Under HAMP-PRA, the principal of the borrower’s mortgage may be reduced by a predetermined amount called the PRA Forbearance Amount if the borrower satisfies certain conditions during a trial period. The principal reduction occurs over three years.

More specifically, if the loan is in good standing on the first, second and third annual anniversaries of the effective date of the trial period, the loan servicer reduces the unpaid principal balance of the loan by one-third of the initial PRA Forbearance Amount on each anniversary date. This means that if the borrower continues to make timely payments on the loan for three years, the entire PRA Forbearance Amount is forgiven. To encourage mortgage loan holders to participate in HAMP–PRA, the HAMP program administrator will make an incentive payment to the loan holder (called a PRA investor incentive payment) for each of the three years in which the loan principal balance is reduced.

Guidance on Tax Consequences to Borrowers

The guidance issued today provides that PRA investor incentive payments made by the HAMP program administrator to mortgage loan holders are treated as payments on the mortgage loans by the United States government on behalf of the borrowers. These payments are generally not taxable to the borrowers under the general welfare doctrine.

If the principal amount of a mortgage loan is reduced by an amount that exceeds the total amount of the PRA investor incentive payments made to the mortgage loan holder, the borrower may be required to include the excess amount in gross income as income from the discharge of indebtedness. However, many borrowers will qualify for an exclusion from gross income.

For example, a borrower may be eligible to exclude the discharge of indebtedness income from gross income if (1) the discharge of indebtedness occurs (in other words, the loan is modified) before Jan. 1, 2014, and the mortgage loan is qualified principal residence indebtedness, or (2) the discharge of indebtedness occurs when the borrower is insolvent. For additional exclusions that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).

Borrowers receiving aid under the HAMP–PRA program may report any discharge of indebtedness income undefined whether included in, or excluded from, gross income undefined either in the year of the permanent modification of the mortgage loan or ratably over the three years in which the mortgage loan principal is reduced on the servicer’s books. Borrowers who exclude the discharge of indebtedness income must report both the amount of the income and any resulting reduction in basis or tax attributes on Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Guidance on Tax Consequences to Mortgage Loan Holders

The guidance issued today explains that mortgage loan holders are required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness income of $600 or more for the year in which the permanent modification of the mortgage loan occurs. This rule applies regardless of when the borrower chooses to report the income (that is, in the year of the permanent modification or one-third each year as the mortgage loan principal is reduced) and regardless of whether the borrower excludes some or all of the amount from gross income.

Penalty relief is provided for mortgage loan holders that fail to timely file and furnish required Forms 1099-C, as long as certain requirements described in the guidance are satisfied.

Details are in Revenue Procedure 2013-16 available on IRS.gov.