Passage of Tax Extenders Contains Key Tax Breaks


Congress’s long-awaited passage of tax extenders legislation provides a short-term extension through only the end of this year of dozens of familiar tax breaks for businesses and individuals, along with a new savings program for the disabled.

The Senate passed the Tax Increase Prevention Act on Tuesday evening and President Obama is expected to sign the bill into law (see Congress Passes Tax Extenders). The bill was combined with the Achieving a Better Life Experience Act, also known as the ABLE Act, to help those with disabilities and their caregivers to save and provide for education, housing, and medical expenses in the future.

“In short, the ABLE Act lets those with disabilities set up tax-free savings accounts to help them manage the costs of medical care, housing, transportation and continued education,” said House Ways and Means Committee chairman Dave Camp, R-Mich., in a statement. “This will allow those who are on Medicaid and SSI to work, earn, and save more while still receiving those important benefits. It is important to note that these savings accounts will be available to all individuals with disabilities and their caretakers, not just those on Medicaid or SSI.”

The Portland, Maine-based accounting firm Albin, Randall & Bennett provided a list of highlights of the tax extenders legislation, based on information currently available as of Wednesday:

Title I of the Act extends for one year nearly all of the provisions that expired in 2013. Along with two provisions that were set to expire in 2014. Title II is made up of corrections to current tax laws and repeals of provisions that are no longer applicable.

Some of the Act’s highlights include:

Business Tax Extenders
The Act extended the following business related tax credits and deductions through 2014:

•    Bonus depreciation has been extended through 2014, allowing an additional first year deduction of 50 percent of the cost of the equipment.

•    The Section 179 rules have been extended allowing for the expense of $500,000 on acquired property for business use.

•    The exclusion from capital gains tax of 100 percent of small business stock sold by an individual.

•    The practice of making a reduction in S corporation basis equal to the shareholders share of the adjusted basis of a charitable contribution.

•    Reduction in S corporation recognition period for built-in gains tax to five years rather than 10 years.

•    The Work Opportunity Tax Credit for hiring of military veterans and other qualified individuals

•    The Research Tax Credit

•    New Markets Tax Credit

•    Enhanced deduction for charitable contributions of food inventory

Energy Tax Extenders
The Act extends through 2014 a number of energy credits and provisions that expired at the end of 2013. Some of the items extended include:

•    Credit for nonbusiness energy efficiency property, extended one year.

•    Biodiesel and renewable diesel credits are extended.

•    The renewable electricity production credit. This includes the wind production tax credit.

•    The above the line deduction for Energy efficient commercial buildings has been extended.

Individual Tax Rates
•    All current individual marginal tax rates are retained (10, 15, 25, 28, 33 and 35 percent) including the recent increased top rate of 39.6 percent.

School Teacher Expenses Deduction
•    Elementary and Secondary teachers can take an above-the-line deduction of $250 in out-of-pocket expenses for educational items for their classroom.
Deduction for State and Local Sales Taxes:

•    Taxpayers are allowed an itemized deduction for state and local sales taxes.

•    Taxpayers have to choose between deducting state income taxes or deducting state and local sales taxes.

•    For the sales tax deduction, they can either keep track of their expenses or use the tables that the IRS provides.

Deduction for Qualified Tuition and Expenses
•    This above the line deduction is extended through 2014.

•    Taxpayers with income of up to $130,000 (joint) or $65,000 (single) can claim a deduction for up to $4,000 in expenses.

•    For taxpayers with income over $130,000 but under $160,000 (joint) and over $65,000 but under $80,000 (single) can take a deduction up to $2,000.

•    Taxpayers with income over those amounts are precluded from taking advantage of this deduction.

Mortgage Insurance Deductibility
Homeowners can deduct mortgage interest premiums as though they were mortgage interest payments.

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IRS Issues New Instructions for Obamacare


The Internal Revenue Service has issued new draft instructions, notices and a publication to help taxpayers and tax practitioners deal with the Affordable Care Act.

The draft instructions were released last week for Form 8962, “Premium Tax Credit,” and Form 8965, “Health Coverage Exemptions.” The IRS had previously released draft versions of the forms themselves, both 8962 and 8965, along with draft instructions for several other draft forms for the Affordable Care Act (see IRS Gears up for Impact of Health Care Reform on Tax Season).

“They are still draft, but in the world of today’s technology and computer-based tax preparation, early drafts—and even more important—the instructions to the drafts, are very important and pretty much the way it will ultimately shake out,” said Jackson Hewitt chief tax officer and senior vice president Mark Steber.

The IRS also released last month a one-page publication to help taxpayers find out if they qualify for an exemption from the individual mandate for health coverage or from paying a penalty.Publication 5172, Health Coverage Exemptions includes information about how you get an exemption (see IRS Publishes Guide to Health Coverage Exemptions). The Affordable Care Act calls for each individual to have qualifying health insurance coverage for each month of the year, have an exemption, or make an individual shared responsibility payment when filing their federal income tax return, the IRS said Tuesday.

Taxpayers may be exempt if they have no affordable coverage options because the minimum amount you must pay for the annual premiums is more than eight percent of your household income, have a gap in coverage for less than three consecutive months, or qualify for an exemption for one of several other reasons, including having a hardship that prevents you from obtaining coverage or belonging to a group explicitly exempt from the requirement.

On, taxpayers and practitioners can find a comprehensive list of the coverage exemptions. The IRS noted that taxpayers can obtain some exemptions only from the health insurance marketplace in the area where they live, others only from the IRS when you file your income tax return, and others from either the marketplace or the IRS.

Additional information about exemptions is available on the Individual Shared Responsibility Provision web pageon The page includes a link to a chart that shows the types of exemptions available and how to claim them. For additional information about how to get exemptions that may be granted by the marketplace,

Last week, the IRS also issued several notices related to the Affordable Care Act,  Notice 2014-49 describes a proposed approach to the application of the look-back measurement method, which may be used to determine if an employee is a full-time employee for purposes of Section 4980H of the Tax Code, in situations in which the measurement period applicable to an employee changes.

Notice 2014-55 expands the permitted election rules for health coverage under a Section 125 cafeteria plan and addresses two specific situations in which a cafeteria plan participant is permitted to revoke his or her election under the cafeteria plan during a period of coverage.  The first situation involves a participating employee whose hours of service are reduced so that the employee is expected to average less than 30 hours of service per week but for whom the reduction does not affect the eligibility for coverage under the employer’s group health plan.  The second situation involves an employee participating in an employer’s group health plan who would like to cease coverage under the group health plan and purchase coverage through a competitive health insurance marketplace established under the Affordable Care Act.

Notice 2014-56 provides the applicable dollar amount that applies for determining the Patient-Centered Outcomes Research Institute fee for policy years and plan years ending on or after October 1, 2014 and before September 30, 2015. This notice applies to health insurance providers.

Jackson Hewitt is already finding the draft forms and instructions useful in training its preparers for what to expect next tax season, according to Steber.

“The IRS was not historically prone to releasing draft documents, but they recognized the sooner that they get that information into the hands of the tax industry, the software development industry and public media at large, the better people are able to understand it and communicate open issues,” said Steber. “For example, we’ve noted a mistake in the instructions already. It’s a period of refinement, but the IRS is very careful to say, ‘Draft—Not for Filing.’ There will be some period of correction and towards the end of the year they’ll issue the finals. But they do tell a great story of how the new Affordable Care Act rules will work, some of the nuances in terms of what the shared responsibility payment computation will look like, the Premium Tax Credit reconcilement and those things. The drafts, even though they say ‘draft,’ cannot be overemphasized in terms of their importance to tax preparers to understand what it all really means when tax time comes.”

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House Approves Bills to Restrict IRS Authority in Wake of Targeting Controversy

House Approves Bills to Restrict IRS Authority in Wake of Targeting Controversy

By Stephen K. Cooper, CCH News Staff

Dissatisfaction over the IRS’s mishandling of applications for tax-exempt status led to passage on September 16 of five bills designed to rein in the Service’s authority over taxpayers. House Oversight and Government Reform Committee Chairman Darrell Issa, R-Calif., said conservative groups seeking Code Sec. 501(c)(4) status faced inappropriate scrutiny from the IRS, thereby dictating the need for legislation to end the Service’s pattern of abuses.

The legislation passed the Oversight panel and the House Ways and Means Committee after former IRS Exempt Organizations Director Lois Lerner refused to testify before Congress (TAXDAY, 2014/03/06, C.2). In addition, the Service was unable to provide a complete set of Lerner’s emails in order for congressional investigators to determine her role in targeting conservative groups (TAXDAY, 2014/06/16, C.1).

Ways and Means Oversight Subcommittee Chairman Charles Boustany, Jr., R-La., said the bills are intended to hold IRS employees to the high standards that the American people deserve. “As our investigation continues to expose the rot at the core of the IRS’ culture, we must put safeguards in place to ensure this breach of the public trust is never repeated,” he said.

The House passed a bill offered by Boustany that would allow victims to learn the status of federal investigations into leaks of their personal taxpayer information (HR 5420). IRS employees would not be allowed to use personal email accounts to conduct official business, under another House passed bill (HR 5418) offered by Boustany. Another bill that passed would allow administrative appeals relating to adverse determinations of tax-exempt status of certain organizations (HR 5419).

The House also passed the Senior Executive Service (SES) Accountability Bill (HR 5169), authored by Rep. Tim Walberg, R-Mich., which would give agencies greater authority to take action against SES members who are underperforming or who engage in misconduct. Federal Records Accountability Bill (HR 5170), introduced by Rep. Mark Meadows, R-N.C., was also approved by the House. The bill would create an expedited process to fire employees who intentionally destroy federal records.

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Tax Payments with New IRS Direct Pay

Tax Payments Top the One Million Mark with New IRS Direct Pay; Free Online System Makes it Easy for People to Pay Their Federal Taxes

IR-2014-89, Sept. 10, 2014

Washington — With more than one million tax payments already processed this year through IRSDirect Pay, the Internal Revenue Service today encouraged anyone facing upcoming tax payment deadlines to consider choosing this free online system to quickly and easily pay what they owe.

“Direct Pay is the latest addition to our growing array of online tools designed to serve taxpayers better,” said IRS Commissioner John Koskinen. “Direct Pay simplifies the payment process, enabling people to quickly and easily make a secure payment from the convenience of a home computer.”

More than one million tax payments totaling over $1.7 billion have been received from individual taxpayers since Direct Pay debuted earlier this year. Available through the Pay Your Tax Bill  icon on, Direct Pay allows individuals to e-pay their tax bills or make quarterly estimated tax payments directly from checking or savings accounts without any fees or pre-registration.

With tax correspondence season now in full swing, many taxpayers recently received notices for unpaid taxes from the IRS. Direct Pay offers these taxpayers an easy way to quickly pay these tax bills without having to write a check, buy a stamp or find a mailbox.

Because Direct Pay allows taxpayers to schedule payments up to 30 days in advance, now is also a good time for those who are making estimated tax payments for 2014 to set up their third quarter payment due Sept. 15. In addition, anyone who received an extension until Oct. 15 to file their 2013 federal return and now finds they owe additional tax can also use Direct Pay to e-pay the additional amount due.

Direct Pay is available 24 hours a day, seven days a week. Any taxpayer who uses the system receives instant confirmation that their payment was submitted. More information about Direct Pay can be found on

Direct Pay cannot be used to pay business taxes. Taxpayers who wish to e-pay their federal business taxes should enroll in the Electronic Federal Tax Payment System (EFTPS), or click on the Pay Your Tax Bill icon to check out other payment options.

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The realities about the IRS offer in compromise program

OIC acceptance is rare. Here’s why.

April 28, 2014
by Jim Buttonow, CPA/CITP

Television and radio are filled with ads claiming that taxpayers can settle their tax balances owed to the IRS. This settlement program is known as the IRS offer in compromise (OIC). Clients who can’t pay their taxes may inquire about this overhyped settlement option; however, according to IRS statistics, it is highly unlikely that most taxpayers who have outstanding balances will have an OIC accepted.

The Government Accountability Office reported that in 2010 more than 16 million taxpayers owed taxes to the IRS, and these numbers have continued to increase. In 2013, despite the millions of taxpayers with debt, the IRS approved only 31,000 OIC applications. In contrast, the IRS had almost 4 million installment agreements in effect in 2013 for taxpayers to repay their balances.

OIC acceptance is rare for two main reasons: Either the taxpayer does not qualify for an OIC or, if the taxpayer does qualify, he or she can’t pay the offer amount.

Does your client qualify for an OIC?
The reality is, OIC qualification is based on a computation of the taxpayer’s ability to pay his or her tax debt before the IRS runs out of time to collect the debt (called the collection statute expiration date). Contrary to popular perception, the IRS decision is not largely subjective and is instead based on computational formulas. That is why features an OIC Pre-qualifier tool.

To qualify for an OIC, your client must prove that he or she can’t pay the total balances owed before the collection statute expires, using net equity in assets plus any future income. The IRS calculates future income as the amount it can collect on a monthly basis (monthly disposable income) before the collection statute expires.

Although the qualification formula is objective, the components of the computation of net equity in assets and monthly disposable income are often the subject of much debate and confusion. However, once the ability to pay amount is determined, the computation results are clear:  Either your client cannot pay the taxes owed and qualifies for an OIC, or your client can pay the taxes owed and does not qualify.

However, qualifying for an OIC does not mean your client will obtain an OIC. To obtain an OIC, your client must be able to pay the offer amount, which is the computed amount required to be paid to the IRS to settle the debt.

Can your client pay the OIC offer amount?
The formula used to compute the offer amount differs from the formula used to determine qualification. The qualification formula and offer amount formulas use the same computation for net equity in assets. However, the offer amount formula requires only 12 or 24 months of future income, rather than the full amount that the IRS could collect before the collection statute expires.

When calculating the offer amount, it is imperative to conduct complete due diligence. In taxpayers’ initial calculations, they often find that the offer amount is too high to consider an OIC as a viable option. In addition, during the IRS’s OIC investigation process, taxpayers may discover that they incorrectly computed net equity in assets and monthly disposable income, resulting in an offer amount that is much larger than expected and too much to pay to settle the taxes owed. Tax professionals should exercise great care and diligence in properly computing the OIC’s financial components to avoid a potentially costly, long investigation process when there might be a better alternative, such as currently not collectible status or an installment agreement.

Qualification and offer amount illustrated
To illustrate how the OIC qualification and offer amounts are computed, let’s assume the following facts:

  • The taxpayer owes $50,000 on April 15, 2014, and submits an OIC application on that date.
  • The collection statute expiration date is April 15, 2020 (six years, or 72 months, remain on the collection statute).
  • The taxpayer has net equity in assets amounting to $5,000 and monthly disposable income of $500.

In this example, the taxpayer chooses the lump-sum OIC payment option, which uses a future income multiplier of 12 months. (There is also a periodic payment option that uses a future income multiplier of 24 months.) For this example, the qualification and offer amount are computed as follows:

In this example, the taxpayer qualifies for an OIC, because the amount that the taxpayer can pay before the collection statute expires ($41,000) is less than the tax owed ($50,000). The offer amount that would be required to be paid to settle all liabilities is $11,000. This example illustrates the benefits of the OIC program for taxpayers who qualify. To provide the taxpayer with a fresh start, the Treasury Department would accept $30,000 less in payments than it could otherwise receive.

2011 IRS Fresh Start Initiative
While the number of OICs accepted is small compared with the number of taxpayers who have outstanding balances, more taxpayers are qualifying for and obtaining OICs due to the 2011 IRS Fresh Start Initiative, which softened qualification criteria and allowed for lower offer amounts.

Prior to Fresh Start, the offer amount calculation generally produced a larger settlement payment because the future income multiplier was significantly larger. In our example above, the taxpayer’s offer amount was $11,000 under Fresh Start rules. Under pre-Fresh Start rules, the same taxpayer would have had an offer amount of $29,000 – $18,000 more – because the future income multiplier would have been 48 months, instead of 12 months.

IRS data show much of the impact of Fresh Start changes: In 2013, the IRS received 30% more OIC applications compared with 2010, and the acceptance rate for OICs increased to 42%, up from 25% in 2010.

Do your due diligence first
An OIC should be considered when your client clearly has a financial hardship and there is no possibility that he or she will be able to pay the taxes in full before the collection statute expires. The qualification and offer amount computations are fairly straightforward and can easily answer your client’s questions about whether he or she should pursue an OIC.

However, determining your clients’ net equity in assets and ability to pay can be complicated. Closely examine your client’s financial situation before you conclude that he or she qualifies and can obtain an OIC.  Your client may be better off with a more suitable collection alternative, such as currently not collectible status or an installment agreement.

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