Implementation of Financial Accounting Standards Board Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) is required for fiscal years beginning after December 15, 2019

Client letter FASB ASU 2016-2

FASB lease template

Implementation of Governmental Accounting Standards Board Statement No. 87, “Leases” (“GASB 87") is required for fiscal years beginning after December 15, 2019.

Client letter GASB 87

GASB lease template

Financial Reporting for Pension Plans - an amendment of GASB 25 

Click here for GASB 67

Accounting and Financial Reporting for Pensions - an amendment of GASB 27

Click here for GASB 68

The Regional CPA Firm: Your Trusted Business Adviser

Regional CPA firms are great business advisers to the companies in their communities.  CPAs have long been the trusted business advisers for their clients, providing services to meet a wide range of business needs. Their services might include not only audit, accounting and tax, but also information technology, strategic planning and business valuation, as well as personal financial planning, estate planning and general business consulting. For those reasons, companies have long turned to CPA firms to help them understand and address their most pressing business questions.  And regional CPA firms don't simply deliver services, they provide the kinds of customized, hands-on advice and insights that their clients need to achieve their business goals.

Would you would like to learn more about all a regional CPA firm has to offer?  If so, please contact:

McMahan and Associates, LLC

Committed A committed component of fund balance would have most likely been previously reported within unreserved, designated fund balance. They are resources whose use is constrained by a limitation that a government imposes upon itself at its highest decision making level (i.e., council/commissioners) and remains binding unless the constraint is removed in the same manner in which it was placed.  For these items, please have the ordinance/ resolution/ approval available during fieldwork to determine the proper amount.   As an example, previous unreserved designated fund balances that we feel would meet this category are “designated for housing loan programs”, “designated for encumbrances” (if governing approval required).

Assigned An assigned component of fund balance would have most likely been previously reported within unreserved, undesignated fund balance.  This amount would reflect a government’s “intended use of the resource”.  Therefore, remaining fund balances for capital projects and special revenue funds not constrained by the previous fund balance components would be reported here.

Unassigned If an amount does not fit any other component listed above, these amounts would be reported within this category but, usually only for the General Fund. This component may be reported in another governmental fund only if the fund is in a deficit situation.

We are asking each of our clients to review their current chart of accounts in order to update accounts used to currently track this information. Certain accounts may not be currently maintained within the chart of accounts (non-spendable); if this is the case, this data may only be captured within the drafted financial statements. For those instances, we will discuss during fieldwork whether it is necessary to add to the current chart of accounts or not.

As information, if any, arises that affects implementation, we will notify you as soon as possible.  Please feel free to contact us with any questions or concerns. During fieldwork, we will be spending some time to go over the specific needs of each of our clients.

Condominium associations, which may include property owner associations, and time-share or interval ownership associations, are responsible for maintaining and preserving the association’s common property.

Condominium associations, which may include property owner associations, and time-share or interval ownership associations, are responsible for maintaining and preserving the association’s common property.

Typically, associations are incorporated under state non-profit statutes, since these entities do not issue capital stock or have shareholders.  That is, the net income or losses of the association do not flow to the owner/members.  However, incorporation as a non-profit does not equate to exemption from income taxes, and all associations must file annual tax returns.  Most associations will be required to file either Form 1120 (U.S. Corporation Income Tax Return) or Form 1120-H (U.S. Income Tax Return for Homeowner Associations).

An association filing Form 1120 would be subject to regular graduated corporate tax rates (beginning at 15% of the first $50,000 of taxable income) on its net taxable income.  Taxable income is comprised of revenues earned from sources other than common assessments or from the provision of services for members/owners of the association (e.g., investment income, rentals, vending, or fees earned from parties other than the owner/members) reduced by expenses incurred in generating these revenues (e.g., investment account fees, management fees, professional fees, rental expenses, vending supplies, etc.).

Generally, time-share associations and associations which are considered “substantially residential” (based on IRS criteria) would file Form 1120-H.  Note that the IRS’ definition of “substantially residential” incorporates an evaluation of the percentage of units participating in short-term rentals.  Form 1120-H imposes a flat tax rate of 30% (32% for time-shares) on the association’s net taxable income, which is largely similar to the concept of taxable income discussed above.

Common misconceptions frequently encountered when discussing association income taxes include the following:

• “Our association reported a net income (loss) on our financial statements; therefore we will report the same amount as taxable income (loss) for the year.”  Taxable income for an association is calculated differently than net income for financial statement purposes.
• “Income earned from investments held in the Replacement Fund isn’t taxable”.  All interest income is considered taxable regardless of the fund in which it is reported.
• “Transferring Operating Fund net income to the Replacement Fund will minimize our association’s taxable liability.”  Transfers between funds do not have a direct impact on the amount of income taxes paid by the association.

Recent IRS scrutiny of association income tax returns has resulted in numerous court rulings, revenue procedures, and amendments to the Internal Revenue Code.  The tax professionals at McMahan and Associates work to ensure that your association’s tax return complies with applicable tax guidance, while minimizing your tax liability.  If you have questions regarding your association’s specific tax situation, please don’t hesitate to contact us.

The Treasury and IRS have issued final regulations excepting certain partnership-related items from the centralized partnership audit regime created by the Bipartisan Budget Act of 2015 (BBA), providing alternative examination rules for the excepted items, conforming the existing centralized audit regime regulations to Internal Revenue Code changes, and clarifying the existing audit regime rules.

The Treasury and IRS have issued final regulations excepting certain partnership-related items from the centralized partnership audit regime created by the Bipartisan Budget Act of 2015 (BBA), providing alternative examination rules for the excepted items, conforming the existing centralized audit regime regulations to Internal Revenue Code changes, and clarifying the existing audit regime rules. The regulations finalize with revisions 2020 proposed regulations ( REG-123652-18).

Centralized Partnership Audit Regime

The Bipartisan Budget Act of 2015 (BBA, P.L. 114-74) replaced the Tax Equity and Fiscal Responsibility Act (TEFRA, P.L. 97-248) partnership procedures with a centralized partnership audit regime for making partnership adjustments and tax determinations, assessments, and collections at the partnership level. These changes were further amended by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act, P.L. 114-113) and the Tax Technical Corrections Act of 2018 (TTCA, P.L. 115-141). The centralized audit regime, as amended, generally applies to returns filed for partnership tax years beginning after December 31, 2017. A partnership with no more than 100 partners may generally elect out of the centralized audit regime if all the partners are eligible partners.

Under the post-2017 centralized partnership audit regime, the IRS examines “partnership-related items” of all domestic and foreign partnerships and their partners. A "partnership-related item" is any item relevant to the determination of the income tax liability of any person. However, Code Sec. 6241(11), added by the BBA, authorizes Treasury to except “special enforcement matters” from the centralized partnership audit regime and to issue regulations providing alternative assessment and collection rules for those matters. The 2020 proposed regulations and these final regulations implement Code Sec. 6241(11) and make changes to previously issued final regulations pertaining to the centralized partnership audit regime.

Special Enforcement Matters

Code Sec. 6241(11) sets forth six categories of "special enforcement matters":

• (1) failures to comply with the requirements for a partnership partner or S corporation partner to furnish statements or compute and pay an imputed underpayment;
• (2) assessments relating to termination assessments of income tax or jeopardy assessments of income, estate, gift, and certain excise taxes;
• (3) criminal investigations;
• (4) indirect methods of proof of income;
• (5) foreign partners or partnerships; and
• (6) other matters identified in IRS regulations.

The final regulations add three new types of special enforcement matters:

• partnership-related items underlying non-partnership-related items;
• relationship of a partner to the partnership under the Code Sec. 267(b) or Code Sec. 707(b) related-party rules and extensions of the partner’s period of limitations; and
• penalties and taxes imposed on the partnership under chapter 1.

The final regulations also require the IRS to provide written notice of most special enforcement matters to taxpayers to whom the adjustments are being made.

In addition, the final regulations clarify that the IRS may adjust partnership-level items for a partner or indirect partner without regard to the centralized audit regime if the adjustment relates to termination and jeopardy assessments, the partner is under criminal investigation, or the adjustment is based on an indirect method of proof of income.

However, the final regulations provide that a determination about partnership-related items made outside of the centralized partnership regime is not binding on any person who is not a party to that proceeding. The final regulations clarify that neither the partnership nor the other partners are bound by a determination regarding a partnership-related item from a partner-level examination and that neither the partnership nor the other partners need to adjust their returns.

In addition, the special-enforcement-matter rules do not apply to the extent a partner can demonstrate that adjustments to partnership-related items in the deficiency or an adjustment by the IRS were (i) previously taken into account under the centralized audit regime by the person being examined or (ii) included in an imputed underpayment paid by a partnership (or pass-through partner) for any tax year in which the partner was a reviewed-year partner (but only if the amount exceeds the amount reported by the partnership to the partner that was either reported by the partner or included in the deficiency or adjustment).

Imputed Underpayments

The IRS and Treasury believe that a mechanism must exist for including adjustments from a centralized-regime audit in the partnership’s imputed underpayment, even if the partnership elects to “push out” the adjustment to its partners.

Under existing regulations for calculating imputed underpayments, an adjustment to a non-income item (that is, an item that is not an item of income, gain, loss, deduction, or credit) that is related to, or results from, an adjustment to an item of income, gain, loss, deduction, or credit is generally treated as zero. The final regulations require a partnership to take into account an adjustment to a non-income item on its adjustment-year return by adjusting the item to be consistent with the adjustment, but only to the extent the item would appear on that return without regard to the adjustment. If the item already appeared on the partnership’s adjustment-year return as a non-income item or the item appeared as a non-income item on any return of the partnership for a tax year between the reviewed year and the adjustment year, the partnership does not create a new item on the partnership’s adjustment-year return.

The final regulations provide that if the partnership is required to adjust its basis in an asset, the partnership does so in the adjustment year; however, the partnership only recognizes income and gain as a result of the basis adjustment in situations in which income or gain would be recognized. The final regulations also demonstrate how adjustments to liabilities are taken into account when they do not result in an imputed underpayment, and how an amended return should reflect adjustments to non-income items.

The final regulations follow the proposed regulations in allowing either the IRS or the partnership to treat an adjustment to a non-income item as zero. The final regulations also permit a partnership to treat such an adjustment as zero if the adjustment is related to, or results from, another adjustment to a non-income item. The partnership may not, however, treat such an adjustment as zero if one adjustment is positive and the other is negative.

Partnership Ceasing to Exist

Code Sec. 6241 states that if a partnership ceases to exist before any partnership adjustments take effect, the former partners of the partnership must take the adjustments into account in the manner prescribed in regulations. The final regulations clarify that even if a partnership has ceased to exist, it may make the election to push out the adjustments, request modification of the imputed underpayment, or pay the imputed underpayment within ten days of notice and demand for payment.

A section of the proposed regulations that would define "former partners" is not included in the final regulations and remains proposed.

Effective and Applicability Dates

The final regulations, which are effective December 8, 2022, apply to tax years ending on or after November 20, 2020 (except that final Reg. § 301.6241-7(b) applies to tax years beginning after December 20, 2018).

An IRS Notice provides guidance on the prevailing wage and apprenticeship requirements that the Inflation Reduction Act of 2022 ( P.L. 117-169) added to several new and amended tax credits and deductions.

An IRS Notice provides guidance on the prevailing wage and apprenticeship requirements that the Inflation Reduction Act of 2022 ( P.L. 117-169) added to several new and amended tax credits and deductions. The IRS also anticipates issuing proposed regulations and other guidance with respect to the prevailing wage and apprenticeship requirements.

These requirements generally apply if construction of a qualified facility, or installation of qualified property in an energy efficient commercial building, begins on or after the date that is 60 days after the IRS publishes guidance. This notice serves as the guidance that starts the 60-day clock. Thus, these rules apply when a qualified facility begins construction or the installation of qualified property begins on or after January 29, 2023.

The notice also provides guidance for determining the beginning of construction of a facility for certain credits, and the beginning of installation of certain property with respect to the energy efficient commercial buildings deduction.

The notice includes examples to illustrate these rules.

Prevailing Wage Requirements

For purposes of the credits, a taxpayer must satisfy the prevailing wage requirements with respect to any laborer or mechanic employed in the construction, alteration, or repair of a facility, property, project, or equipment by the taxpayer and the taxpayer’s contractors and subcontractors. The taxpayer must also maintain and preserve sufficient records to establish compliance, including books of account or records for work performed by contractors or subcontractors.

The prevailing wage rate is generally the one published by the Secretary of Labor on www.sam.gov for the geographic area and type of construction applicable to the facility, including all labor classifications for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics.

If the Secretary has not published a prevailing wage rate for the geographic area or the particular type of work, the taxpayer may request a wage determination or wage rate from the Wage and Hour Division. The taxpayer must follow prescribed procedures in order to rely on the provided wage or rate.

Similarly, for purposes of the deduction for energy efficient commercial buildings, the prevailing wage rate for installation of energy efficient commercial building property, energy efficient building retrofit property, or property installed pursuant to a qualified retrofit plan, is determined with respect to the prevailing wage rate for construction, alteration, or repair of a similar character in the locality in which the property is located, as most recently determined by the Secretary of Labor.

Apprenticeship Requirements

A taxpayer satisfies the apprenticeship requirements if:

1. The taxpayer satisfies the Apprenticeship Labor Hour Requirements, subject to any applicable Apprenticeship Ratio Requirements;
2. The taxpayer satisfies the Apprenticeship Participation Requirements; and
3. The taxpayer maintains sufficient records.

Under the Good Faith Effort Exception, the taxpayer will be considered to have made a good faith effort in requesting qualified apprentices if the taxpayer requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry.

Beginning of Construction or Installation

The beginning of construction is determined under the Physical Work Test and the Five-Percent Safe Harbor established in Notice 2013-29. The Continuity Safe Harbor established by Notice 2016-31 also applies.

The IRS has notified taxpayers, above the age of 72 years, that they can delay the withdrawal of the required minimum distributions (RMD) from their retirement plans and Individual Retirement Accounts (IRA), until April 1, following the later of the calendar year that the taxpayer reaches age 72 or, in a workplace retirement plan, retires.

The IRS has notified taxpayers, above the age of 72 years, that they can delay the withdrawal of the required minimum distributions (RMD) from their retirement plans and Individual Retirement Accounts (IRA), until April 1, following the later of the calendar year that the taxpayer reaches age 72 or, in a workplace retirement plan, retires. The Service also reminded taxpayers that they must meet the deadlines to avoid penalties and that such RMDs may not be rolled over to another IRA or retirement plan. The Service also informed taxpayers that not taking a required distribution, or not withdrawing enough, could mean a 50% excise tax on the amount not distributed.

The deadlines for the different RMDs are as follows:

• Taxpayers holding traditional IRAs , and SEP, SARSEP, and SIMPLE IRA should take their first RMD, even if they’re still working, by April 1, 2023, and the second RMD by Dec. 31, 2023, and each year thereafter.
• For taxpayers with retirement plans, the first RMD is due by April 1 of the later of the year they reach age 72, or the participant is no longer employed. A 5% owner of the employer must begin taking RMDs at age 72.
• An IRA trustee, or plan administrator, must either report the amount of the RMD to the IRA owner or offer to calculate it. They may be able to withdraw the total amount from one or more of the IRAs. However, RMDs from workplace retirement plans must be taken separately from each plan.

An RMD may be required for an IRA, retirement plan account or Roth IRA inherited from the original owner. A 2020 RMD that qualified as a coronavirus-related distribution may be repaid over a 3-year period or the taxes due on the distribution may be spread over three years. A 2020 withdrawal from an inherited IRA could not be repaid to the inherited IRA but may be spread over three years for income inclusion.

The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) that would implement the beneficial ownership information provisions of the Corporate Transparency Act (CTA) that govern access to and protection of beneficial ownership information.

The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) that would implement the beneficial ownership information provisions of the Corporate Transparency Act (CTA) that govern access to and protection of beneficial ownership information. The proposed regulations address the circumstances under which beneficial ownership information may be disclosed to certain governmental authorities and financial institutions, and how that information must be protected.

The proposed regulations would—

• specify how government officials would access beneficial ownership information in support of law enforcement, national security, and intelligence activities;
• describe how certain financial institutions and their regulators would access that information to fulfill customer due diligence requirements and conduct supervision; and
• set high standards for protecting this sensitive information, consistent with CTA goals and requirements.

The NPRM also proposes amendments to the final reporting rule issued on September 30, 2022, effective January 1, 2024, to specify when reporting companies may report FinCEN identifiers associated with entities.

Limiting Access to Beneficial Ownership Information

The NPRM follows the final reporting rule which requires most corporations, limited liability companies, and other similar entities created in or registered to do business in the United States, to report information about their beneficial owners to FinCEN. Per CTA requirements, the proposed regulations limit access to beneficial ownership information to—

• federal agencies engaged in national security, intelligence, or law enforcement activities;
• state, local, and Tribal law enforcement agencies, if authorized by a court of competent jurisdiction;
• financial institutions with customer due diligence requirements, and federal regulators supervising them for compliance with those requirements;
• foreign law enforcement agencies, judges, prosecutors, central authorities, and other agencies that meet specific criteria, and whose requests are made under an international treaty, agreement, or convention, or via law enforcement, judicial, or prosecutorial authorities in a trusted foreign country; and
• U.S. Treasury officers and employees whose official duties require beneficial ownership information inspection or disclosure, or for tax administration.

The proposed regulation would subject each authorized recipient category to unique security and confidentiality protocols that align with the scope of the access and use provisions.

Proposed Effective Date

FinCEN is proposing an effective date of January 1, 2024, to align with the date when the final beneficial ownership information reporting rule becomes effective.

Request for Comments

Interested parties can submit written comments on the NPRM by or before February 14, 2023 (60 days following publication in the Federal Register). Comments may be submitted by the Federal E-rulemaking Portal ( regulations.gov), or by mail to Policy Division, Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-2021-0005 and RIN 1506-AB49/AB59.

The IRS and the Treasury Department have released final regulations that provide some clarity and relief with regards to certain provisions of the Affordable Care Act ( P.L. 111-148), including the definition of minimum essential coverage under Code Sec. 5000A and reporting requirements for health insurance issuers and employers under Code Secs. 6055 and 6056. The final regulations finalize 2021 proposed regulations with some clarifications ( REG-109128-21).

The IRS and the Treasury Department have released final regulations that provide some clarity and relief with regards to certain provisions of the Affordable Care Act ( P.L. 111-148), including the definition of minimum essential coverage under Code Sec. 5000A and reporting requirements for health insurance issuers and employers under Code Secs. 6055 and 6056. The final regulations finalize 2021 proposed regulations with some clarifications ( REG-109128-21).

The final regulations provide that the term "minimum essential coverage" does not include Medicaid coverage limited to COVID-19 testing and diagnostic services provided under the Families First Coronavirus Response Act ( P.L. 116-127). If an individual qualifies solely for this coverage, then it does not prevent them from claiming the premium tax credit under Code Sec. 36B. This amendment to Reg.§ 1.5000A-2 applies for months beginning after September 28, 2020.

The final regulations also provide:

• An automatic 30-day extension of time under Code Sec. 6056 for "applicable large employers" (generally employers with 50 or more full-time employees, including full-time equivalent employees) to furnish statements relating to health insurance that the applicable large employers offer to their full-time employees; ·
• An automatic 30-day extension of time under Code Sec. 6055 for providers of minimum essential coverage (such as health insurance issuers) that would provide an automatic extension of time for furnishing statements to responsible individuals; and
• An alternative method for reporting entities to furnish statements to their insured members when their shared responsibility payment is zero. The regulations under Reg.§1.6055-1(g)(4)(ii)(B) provide sample language for furnishing these statements.

The regulations under Reg. §§1.6055-1 and 301.6056-1 apply for years beginning after December 31, 2021.

The final regulations affect some taxpayers who claim the premium tax credit; health insurance issuers, self-insured employers, government agencies, and other persons that provide minimum essential coverage to individuals; and applicable large employers.

A theme running through the recent Internal Revenue Service Independent Office of Appeals Focus Guide for fiscal year 2023 is moving on past the issues created by the COVID-19 pandemic and getting back to helping taxpayers through the appeals process.

A theme running through the recent Internal Revenue Service Independent Office of Appeals Focus Guide for fiscal year 2023 is moving on past the issues created by the COVID-19 pandemic and getting back to helping taxpayers through the appeals process.

"It's time, as we leave some of those pandemic issues behind us, to focus more on our core mission in appeals, which is the quality resolution of taxpayer cases," Independent Office of Appeals Chief Andy Keyso said in a recent interview with Federal Tax Daily. "I think that's the theme you see throughout the focus guide," which was issued November 4, 2022.

To that end, Keyso highlighted two key areas that will enable the office to meet that core mission – staffing and technology upgrades.

Rebuilding Staff

On the staffing side, Keyso noted that 10 years ago, the Appeals staff was at 2,100 employees, but in that window dropped to a low of about 1,100.

"We have made a big push to restack, using any kind of approval we could get here internally, and we currently are sitting at about 1,500 employees," he said, adding that the office currently has about 1,500 employees, with a goal in 2023 to get up to 1,725.

Keyso noted that the office is different from other parts of the IRS that have an exam or a collections function.

"If you don’t have the number of people you’d like to have, you just do fewer collection actions or you do fewer audits," Keyso said. "In Appeals, we have unique challenges. We’ve got to work every case that comes in the door. We can’t say, ‘We don’t have enough people, so we are not going to work your case.’ So for us, hiring is particularly an acute issue and recruiting and hiring will be one of our focus areas for this year."

He added that the staffing targets are based on the IRS’ set budget for 2023 and do not include potential increases that could come with the additional funding provided by the Inflation Reduction Act.

Improving Technology

Like the rest of the agency, the Office of Appeals is working through its own technology issues and is in need of upgrades.

In particular, Keyso highlighted the need to get away from paper.

"I think we learned during the pandemic a few things about technology and how paper can really be our Achilles heel when you have to move paper case files," he said. "That was a particular issue during the pandemic when you didn’t have all of your people in the office to ship case files around."

Moving to a more paperless environment is a "continuing challenge," Keyso said, not only for communicating between Appeals employees, but between staff and taxpayers. "Should we really be mailing things back and forth through the U.S. Postal Service? Or is there a better way to communicate with taxpayers that’s faster and maybe preferable to taxpayers?"

As part of the technology challenges, the Independent Office of Appeals also is looking to continue to use video conferencing, something that gained traction during the pandemic.

"With the service wide return to the office, we are again offering in person conferences, which is something Appeals is very excited about," Amy Giuliano, senior advisor to the Chief and Deputy Chief in the Office of Appeal, said. "But we want video conferences to remain a permanent option to alongside in person. We requested comments in August … for people to submit input on experiences they had with video conferences with appeals that should inform our longer term guidelines. And we've received a lot of positive feedback that video conferences, when they're managed effectively, are a great way for a taxpayer to present their case to appeals."

She applauded the fact that video conferences have the benefits of a face-to-face conference in that one can see the IRS agent they are dealing with, but they avoid the logistical issues with traveling to an IRS office to conduct the meeting. It makes things more accessible, especially if the taxpayer has medical or other mobility issues.

"That's why it's so important that it remain an option going forward alongside in person and alongside telephone," she said.

Improving Overall Access

Keyso also noted that a key area of focus going forward is improving the overall access to the Independent Office of Appeals now that access has been codified into law through the Taxpayer First Act of 2019. Treasury is currently working on regulations that will implement the law.

"Our position in the Appeals Office is, you know, we want the broadest access to appeals possible for us to hear controversies or disputes between IRS and taxpayer," Keyso said. "So we will continue to push for broad access to taxpayers to appeals."

Giuliano added that "enhancing the taxpayer experience is really what sort of animates and informs everything else that we're doing."

Keyso also mentioned that Appeals is planning on continuing convening practitioner panels, during which the office invites practitioners to talk about issues they are facing as they deal with the appeals process. He noted that it was through these panels that the office made changes to letters that went out to taxpayers and their representatives that included more contact information on managers so taxpayers and their representatives have it handy if they need to escalate a situation.

Audits by the Internal Revenue Service in 2017 and 2019 were not conducted to target specific individuals, according to a new report by the Treasury Inspector General for Tax Administration.

Audits by the Internal Revenue Service in 2017 and 2019 were not conducted to target specific individuals, according to a new report by the Treasury Inspector General for Tax Administration.

The report, dated November 29, 2022, but released December 1, found that "key decisions and information related to the tax return selection process for Tax Years 2017 and 2019 were determined prior to the start of each year’s respective filing season and prior to the selection of any returns," the Treasury watchdog said in a statement. "TIGTA also confirmed that the computer program used to select tax returns worked as designed and di not included any malicious code that would force the selection of specific taxpayers for an NRP [National Research Program] audit."

TIGTA conducted the analysis of the audit selection process following a July 2022 media report that suggested the selection for those tax years may not have been random. To answer the allegations, TIGTA hired a contractor that, according to the report, "replicated the process. Specifically, the contractor replicated each week’s original sample selection file through April 2018 and July 2020 for TYs 2017 and 2019, respectively."

Once replicated, a return-by-return comparison of the replicated files and the original sample selection was conducted to verify the files matched.

"They concluded that the tax returns in the original samples were the same tax returns selected when the process was replicated using the respective seed numbers," the report states. "TIGTA also compared the contractor’s replicated weekly output files to the original weekly output files, and same as the IRS, TIGTA determined they matched."

The report noted that a line-by-line review of the original source code was conducted "to determine whether information (i.e., TIN) was improperly coded in the program that would result in a specific taxpayer being selected for an NRP audit. The contractor concluded that no specific taxpayer information was included in the original source code."

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

SHOP

The Affordable Care Act created two vehicles to deliver health insurance: Marketplaces for individuals and the SHOP for small businesses. Marketplaces launched as scheduled on October 1 in every state and the District of Columbia. Qualified individuals can enroll in a Marketplace to obtain health insurance. Coverage through a Marketplace will begin January 1, 2014.

The October 1 start of SHOP, however, was delayed. Small employers may start the application process on October 1, 2013 but all functions of SHOP will not be available until November, the U.S. Department of Health and Human Services (HHS) reported. If employers and employees enroll by December 15, 2013, coverage will begin January 1, 2014, HHS explained.

SHOP is closely related to the Code Sec. 45R small employer health insurance tax credit. This tax credit is designed to help small employers offset the cost of providing health insurance to their employees. After 2013, small employers must participate in SHOP to take advantage of the Code Sec. 45R tax credit. For tax years beginning during or after 2014, the maximum Code Sec. 45R credit for an eligible small employer (other than a tax-exempt employer) is 50 percent of the employer's premium payments made on behalf of its employees under a qualifying arrangement for QHPs offered through a SHOP Marketplace. The maximum credit for tax-exempt employers for those years is 35 percent. Maximum and minimum credits are based upon the level of employee wages. If you have any questions about SHOP and the Code Sec. 45R credit, please contact our office.

Code Sec. 36B tax credit

Effective January 1, 2014, qualified individuals may be eligible for the Code Sec. 36B premium assistance tax credit to help pay for health coverage through a Marketplace. The credit is linked to household income in relation to the federal poverty line (FPL). Generally, taxpayers whose household income for the year is between 100 percent and 400 percent of the federal poverty line for their family size may be eligible for the credit.

When taxpayers apply for coverage in a Marketplace, the Marketplace will estimate the amount of the Code Sec. 36B credit that the taxpayer may be able to claim for the tax year. Based upon the estimate made by the Marketplace, the individual can decide if he or she wants to have all, some, or none of the estimated credit paid in advance directly to the insurance company to be applied to monthly premiums. Taxpayers who do not opt for advance payment may claim the credit when they file their federal income tax return for the year.

The October 16 agreement to reopen the federal government directed HHS to certify to Congress that Marketplaces verify eligibility for the Code Sec. 36B credit. HHS must submit a report to Congress by January 1, 2014 on the procedures for verifying eligibility for the credit and follow-up with a report by July 1, 2014 on the effectiveness of its income verification procedures.

Employer mandate

The Affordable Care Act generally requires an applicable large employer to make an assessable payment (a penalty) if the employer fails to offer minimum essential health coverage and a number of other requirements are not met. The employer mandate was scheduled to take effect January 1, 2014. However, the Obama administration delayed it for an additional year, to 2015.

In October, the House Small Business Committee heard testimony on the definition of full-time employee status for purposes of the employer mandate. An applicable large employer for purposes of the employer mandate is an employer that employs at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. A full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.

Employers testifying before the GOP-chaired committee urged an increase in the 30-hour threshold. "Many small businesses simply cannot afford to provide coverage to employees who average 30 hours per week," the owner of a supermarket told the committee. "Business owners will have to make tough choices and many part-time employees will face reduced hours," he added. "Many franchise businesses are being turned upside down by the new costs, complexities and requirements of the law," another business owner told the committee.

Legislation (HR 2575) has been introduced in the House to repeal the 30-hour threshold for classification as a full-time equivalent employee for purposes of the employer mandate and to replace it with 40 hours. The bill has been referred to the House Ways and Means Committee.

HealthCare.gov

As has been widely reported, the individuals seeking to enroll in Marketplace coverage through HealthCare.gov experienced some online problems in October. The U.S. Department of Health and Human Services (HHS) has undertaken a comprehensive review of HealthCare.gov. In the meantime, HHS reminded individuals that in-person assistance centers are open as are customer call centers.

Enrollment

The Affordable Care Act generally requires individuals to carry health insurance after 2013 or make a shared responsibility payment (also known as a penalty). For 2014, the penalty is $95 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

Open enrollment in the Affordable Care Act's Marketplaces began October 1, 2013 and runs through March 31, 2014. The enrollment period overlaps with the January 1, 2014 requirement to carry health insurance or make a shared responsibility payment. On social media, the Obama administration clarified that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

If you have any questions about these developments or the Affordable Care Act in general, please contact our office.

No, taxpayers may destroy the original hardcopy of books and records and the original computerized records detailing the expenses of a business if they use an electronic storage system.

Business often maintain their books and records by scanning hardcopies of their documents onto a computer hard drive, burning them onto compact disc, or saving them to a portable storage device. The IRS classifies records stored in this manner as an "electronic storage system." Businesses using an electronic storage system are considered to have fulfilled IRS records requirements for all taxpayers, should they meet certain requirements. And, they have the freedom to reduce the amount of paperwork their enterprise must manage.

Record-keeping requirements

Code Sec. 6001 requires all persons liable for tax to keep records as the IRS requires. In addition to persons liable for tax, those who file informational returns must file such returns and make use of their records to prove their gross income, deductions, credits, and other matters. For example, businesses must substantiate deductions for business expenses with appropriate records and they must file informational returns showing salaries and benefits paid to employees.

It is possible for businesses using an electronic storage system to satisfy these requirements under Code Sec. 6001. However, they must fulfill certain obligations.

Paperwork reduction

In addition, using an electronic storage system may allow businesses to destroy the original hardcopy of their books and records, as well as the original computerized records used to fulfill the record-keeping requirements of code Sec. 6001. To take advantage of this option, taxpayers must:

(1) Test their electronic storage system to establish that hardcopy and computerized books and records are being reproduced according to certain requirements, and

(2) Implement procedures to assure that its electronic storage system is compliant with IRS requirements into the future.

Our firm would be glad to work with you to meet the IRS's specifications, should you want to establish a computerized recordkeeping system for your business. The time spent now can be worth considerable time and money saved by a streamlined and organized system of receipts and records.

Q. I use my computer for both business and pleasure and I am confused about how much I can deduct. Also, how are PDAs such as Palm Pilots, etc. deducted for tax purposes?

A. Because computers and peripheral equipment are viewed as more susceptible than other business property to unwarranted deductions for personal use, they are subject to special scrutiny under the tax law. This scrutiny comes from their classification as "listed property," which limits the amount that may be deducted each year.

A computer as listed property only becomes an issue if it is not used exclusively in business. If a computer is used exclusively at the taxpayer's regular business establishment or in the taxpayer's principal trade or business, the listed property limitations don't apply at all.

Any computer that you use predominately for pleasure may not be written-off over its life nearly as quickly as exclusive-use computers. If your business usage does not meet the predominant use test, you are relegated to using a much slower depreciation method (the ADS, straight-line method) over the longer-ADS recovery period.

Your computer will meet the predominant use test for any tax year if its qualified business use is more than 50% of its total use. You must review your computer's usage and determine the percentage usage for each of its various uses (business, investment, and personal). When computing the predominant use test, any investment use of your computer cannot be considered as part of the percentage of qualified business use. However, you do use the combined total of business and investment use to figure your depreciation deduction for the property. It's up to you to prove business use to the IRS; the IRS does not need to prove personal use to reject your deductions.

In order to claim your computer expenses, you must meet the adequate records requirements by maintaining a "log" or other documentary evidence that sufficiently establishes the business/investment percentage claimed. The log should be similar to a log you would keep to track your auto expenses, indicating date, time of usage, business or nonbusiness, and business reason. Good documentation is always the key to success if your return is ever audited.

Finally, what about application of these rules to PDA's? The shorter the designated "life" of the property, the faster you can write-off its cost. Cell phones are generally considered 7-year property (the cost is depreciated over seven years). Computers are generally considered 5-year property, and computer-software normally is 3-year property. PDA's are generally classified as 5-year property, being considered wireless computers. If a PDA includes a cell phone feature, as long as that feature is not predominant and removable, it continues to fall under the 5-year property rule. Software that you may download to your PDA is 3-year property. Software that you buy already loaded into the PDA, however, is 5-year property. Monthly charges for a wireless service provider are deductible as paid each month, just as your business would deduct any phone or internet service bill.