Here are some common subjects and issues that members asked the Tax Help Desk to research during this past tax season.
Forms 1099-A and 1099-C
One of the most common questions or inquiries were those involving Form(s) 1099-A and 1099-C—forms that taxpayers receive when they lose a property in foreclosure, repossession, deed in lieu, a walk away, short sale, or any loss of the underlying ownership or title to a piece of property.
The key with all of these particular situations is to recognize that there is always a sale, or a disposition with these events. The taxpayer has lost the property; they no longer own it,and we as practitioners need to record the disposition or sale on the Form 4797 and/or Form 8949/Schedule D. This is the first step; there may or may not be cancellation of indebtedness income (COD). The second part generally depends on the existence of “recourse debt” or the “is the borrower/debtor personally liable” box being checked. This is Box 5 on Form 1099-A and Form 1099-C. You generally need “recourse” indebtedness to have COD income. IRS Publication 4681 is a good resource for the variety of tax situations that can result of the receipt of either, or both of the forms, just mentioned.
Sale of Business Assets
The Tax Help Desk had to do with the sale of the business assets of a corporation or sole proprietorship, the sale of the assets of a “Going Concern”. This involves the allocation of the sales / purchase price. The computation of gain or loss on those assets and the disclosure required when a buyer and seller of an active trade or business get together to exchange funds for the business’ assets.
The key issue in this particular tax situation is the use of Form 8594 and the allocation of the sale/ purchase price agreed upon by the buyer and seller. IRC Sec. 1060 of the code governs this allocation and provides the buyer and seller with seven (7) different “Classes”, or categories to divide up the sales/purchase price. This division controls the type and amount of the seller’s gain or loss on the sale/disposition of their business. It also controls the buyer’s subsequent depreciation and amortization of the assets and intangibles they just purchased.
The IRS provides good information right in the instructions of Form 8594 as well as in Publications 334, 551 and 535. A good review of IRC Sec 1060 is very helpful.
Roth IRS Rollover
There were quite a few inquiries dealing with Roth rollovers and the high income taxpayer skirting the Roth IRA contribution AGI limits by using what has been commonly referred to as the “back door” Roth. In this situation, one often recommended by brokers and financial planners, the taxpayer with an AGI too high to contribute the traditional way through a direct deposit into a Roth IRA will instead contribute to a traditional non-deductible IRA. This IRA contribution has no AGI limits at all. So this traditional non-deductible IRA contribution is made and Form 8606 is filed with the tax return. The non-deductible traditional IRA contribution is rolled-over to the Roth IRA – effectively avoiding the Roth IRA AGI limitations.
This tactic works all well and good as long as the taxpayer does not have any regular “deductible” IRA accounts from prior years. The taxpayer just has this one (1) non-deductible IRA then the subsequent roll-over to the Roth IRA is non-taxable! If, however, the taxpayer has any other traditional IRAs funded with deductible IRA contribution then the rollover of the contributed non-deductible IRA contribution has to be aggregated with all of the taxpayers’ other IRAs and the roll to the Roth IRA becomes taxable. The key to all of this working is asking the right questions about a taxpayer’s “other” traditional “deductible” IRA accounts.
More information can be found at irs.gov and in Publications 590-A and 590-B
Non-cash Charitable Contributions
Another very common inquiry involved the documentation of charitable contributions of non-cash property and the use or need for IRS Form 8283. These queries seemed to either be the requirement and need for appraisal and all of the reporting and substantiation that goes along with a qualified appraiser, the timing of the appraisal, and the signature requirements on page 2 of Form 8283. Other charitable issues that were common, included travel for charitable purposes, the “mission” trip, deducting out-of-pocket expenses, and the underlying need for “supporting documentation” and the absolute necessity of that substantiation.
There were a couple of inquiries where taxpayers were being audited and were losing the audit based on the lack of an appraisal were groups of “similar items” were donated at various times throughout the year and totaled more than $5,000. The trap: “similar” items are aggregated for this appraisal requirement at the $5,000 + level of non-cash donations.
Information regarding the appraisal and substantiation rules for charitable contributions can be found in IRS Notice 2006-96 (appraisals) and IRS Publication 561 and for your clients, IRS Publication 1771.
Foreign Income Issues
Foreign issues surfaced on a regular basis, with issues like the “foreign earned income exclusion” under IRC Sec. 911 and Form 2555. Specifically, the meeting of the physical presence test and the 330 day rule, the rule about testing for eligibility using prior years’ days or subsequent years’ days to meet the test and be eligible in the current year. The surprising fact that the exclusion does not eliminate or reduce the income that is subject to S.E tax, and that this exclusion is for income tax purposes only.
Other key issues included:
- “foreign tax credit” or Form 1116 under IRC Sec. 901 and its availability when Form 2555 does not work,
- the many situations when the foreign tax credit information appears on the Schedule K-1, Line 16 from a partnership.
- Also when the foreign tax credit can be taken without the need for the Form 1116.
All of these issues and more where addressed during tax season through inquiries to the NSA Tax Help Desk.
There were the dozens of queries that had to do with foreign sourced pensions and Social Security benefits paid from foreign countries, all of which need to be referenced against the U.S. based “tax treaties” that the United States has with dozens of foreign countries. Other questions involved the reporting by the recipient of an “inbound” foreign gift and the use of Form 3520 instead of Form 709.
There were so many foreign questions that were answered and many different answers, and results, depending on the different facts and circumstances that were posed throughout the tax season. Many of these issues have some basic information contained in IRS Publication 54, but so many other require the additional resources that Members can access by contacting the NSA Tax Help Desk.
Estate and Trust Taxation
Estate and trust taxation was not left unrepresented during the months of January through April.
The inherited personal residence, its basis and how that is determined and the subsequent sale at a loss, either by the beneficiaries or the decedents’ estate, and the use of the Form 1041, were frequent issues and tax dilemmas posed in inquiries sent to the Tax Help Desk during tax season.
Other questions included topics like:
- transfer of the property to the “decedents’ estate”, its EIN
- ability to claim a loss on the sale due to the “stepped-up” basis rules of “IRC Sec. 1041”.
These all become issues or problems because often not much is done post-death and the beneficiaries come to us, the tax practitioners, with this combination of “information returns” (1099’s) in the decedents’ Social Security number (SSN), the decedents’ estate’s EIN and Form 1041 return partially filled out by the aunt or uncle who said they knew how to handle everything
The rules of the decedents’ estate can get complicated quickly with the “stepped-up” basis rules, the tax concept of “distributable net income” (DNI), accounting income in the fiduciary tax return and the mix of K-1s to the beneficiaries.
The actual instructions to Form 1041 are rather good, as well as information in IRS Publication 559. The problem with the decedents’ estate is that the issues are so varied that the answers, and solutions are located in several places of the IRS Code, Regulations and Rulings.
If the decedents’ principal residence sale at a loss is of interest simply search “SCA 1998-012” in quotes, just like that on the internet and then check with us at the Tax Help Desk and we can help clarify issues like this, as well as the others listed above in this summary. Or you can submit any other tax issue that you may have, on your desk at this very moment. We have helped with hundreds of tax issues this tax season. We are just an e-mail away.