This will be a short post that touches on some temporary and final regulations that were issued in the last quarter of last year that impact tax procedure, specifically information reporting and the preparer due diligence rules, which we have previously covered. The second portion of the post will deal with a state law statute of limitations issue from a tax shelter participant suing the promoter.
What is Keno?
Back in March of 2015, I wrote about the temporary regulations dealing with reporting of winnings from bingo, keno, and slot machines. The Service has finalized those regulations, which can be found here. I believe the final regulations are similar to the temporary regulations (although aspects regarding electronic slot machines were not included in the final regs). These rules peg the required reported winnings at $1,200 for bingo and slot machines (but $1,500 for keno). Anyone have any idea why those amounts are different (or what keno is, I don’t go to casinos much)? The information on the information reporting must include the name, address, and EIN of the payee, along with a description of the two types of ID used to verify the payee’s address.
Discharge Reporting- Buy Now, Three Years, No Payments!
I thought I had written up the proposed regulations from 2014 relating to the rules on discharge of indebtedness reporting when a borrower had not paid for more than three years, but I cannot find the post (very possible I just read about it and found it interesting). Under Section 6050P, prior regulations treated nonpayment of debt for 36 months as an “identifiable event”, which indicated formal discharge of indebtedness and required the issuance of a Form 1099-C. This caused many borrowers to believe the debt had been discharged, but it was simply an IRS reporting requirement. Tax professionals, lenders and borrowers did not like the rule. The final regulations can be found here. The regulations eliminate the passage of that time frame as a reportable event, which is a good result. This change may have come from discussions started in the ABA Tax Section, Low Income Taxpayer Committee.
Preparer Due Diligence Regs Updated.
The Government has issued temporary/proposed regulations regarding the preparer due diligence rules, which can be found here. We’ve talked about preparer due diligence repeatedly on the blog, including one of our first posts (and most popular), where Les extensively discussed peeing in pools. That was re-posted earlier this year, and can be found here. In both 2014 and 2015, Section 6695 dealing with preparer due diligence was amended. The penalty was indexed for inflation, and the due diligence requirements were expanded to include the Child Tax Credit, the Additional Child Tax Credit, and the American Opportunity Tax Credit. The proposed regulations update the provisions to take into account these changes.
In late December 2016, the Service issued guidance (Notice 2017-9) regarding the new de minimis safe harbor provisions enacted under the PATH act. In general, failure to include all required information on an information return or payee statement will result in a penalty being imposed on the issuer. The penalty is dependent on various factors, including the amount incorrectly reported, when it was not reported, how quickly it is rectified, and potentially other factors.
The penalty under Section 6721 can be reduced or eliminated in certain circumstances. There is a de minimis exception to Section 6721, which allows the penalties to be waived if the error is corrected on or before August 1st in the year it is filed. This is limited to the greater of ten returns or .5 percent of the information returns filed. For returns required to be filed after December 31, 2016, there is a safe harbor that applies, where, if the information return has an error of $100 or less, or involves less than $25 of withholding, then the safe harbor applies, and no corrected return is required. The notice is clear that this does not apply for intentional acts or intentional disregard. It also indicates that regulations will be forthcoming regarding the safe harbor.
The de minimis safe harbor will not apply, however, if the payee elects out of the safe harbor. Under Section 6721(c)(3)(B) and Section 6722(c)(3)(B), the payee can make an election and the payor has thirty days to furnish a corrected payee statement to the payee and the IRS. If it is not done within thirty days the penalties will apply (it is possible for additional time in limited circumstances).
The payor must provide the manner for making such an election, which can be any reasonable manner including by writing, electronically or by telephone. The payee must be told in writing the fashion in which the election can be made. The notice goes on to indicate the timing of when the election must be made, and indicates the election must: 1) clearly state the election is being made; 2) the payee’s name, address, and TIN; 3) the type of statements and account numbers; and 4) the years in which the election should apply.
So, if you are super angry that Gigantor Bank and Lack of Trust Company misstated your 1099 by $4.37, you now have your avenue for redress.
Shelter Participant SOL Against Promotor Runs From Final Tax Court Ruling, Not Notice of Tax Deficiency
I initially saw this suit, and thought some aspect pertained to federal law claims against the tax shelter promoter, but the claims were state law based. It is, however, still an interesting statute of limitations issue, that could impact future rulings based on state law.
In Kipnis v. Bayerische Hypo-Und Vereinsbank, AG, the Eleventh Circuit, following direction from the Florida Supreme Court, has reversed the district court in holding the statute of limitation on state based claims against a tax shelter promoter by a participant were not time barred.
The particular holding is for a relatively straightforward issue. After the defendant admitted fault, the IRS issued a notice of deficiency to the plaintiff for his involvement in the shelter. This occurred in October of 2007. On November 1, 2012, there was a final tax court order disposing of the case (90 days thereafter appeal rights expired). On November 4, 2013, plaintiff filed suit against the defendant alleging various state law claims including fraud from the promoting and selling of the transaction.
The defendants moved to have the case thrown out as being outside of Florida’s four and five year statute of limitations for the claims made. The issue was appealed to the Eleventh Circuit, which sought guidance from the Florida Supreme Court on the issue, specifically:
Under Florida law and the facts in this case, do the claims of the plaintiff taxpayers relating to the CARDS tax shelter accrue at the time the IRS issues a notice of deficiency or when the taxpayer’s underlying dispute with the IRS is concluded or final.
The Florida Supreme Court, which the Eleventh Circuit followed, determined that the claims accrued at the time the tax court order became final, which was ninety days after the order was issued when the appeals period had passed. See Kipnis v. Bayerische Hypo-Und Vereinsbank, AG 202 So. 3d 859 (Fla. 2016). I think this is inline generally with what the federal law would be in most analogous situations, but would invite others to comment on this aspect if they have thoughts.