This installment of Tax Help Desk features a recap of tax season 2018-some of the more common interesting questions and tax issues that were posted by the membership in their use of our service.
Q-1: With the change in the filing deadline for the partnership tax return, Form 1065—from its long-time tax due date of April 15th, or the 15th day of the fourth month—to its “new” due date of or March 15th, has generated a lot of requests about the ability to get a waiver of the late filing penalty from the IRS.
A-1: As a matter of fact, there is an administrative remedy for many of the late filed Form 1065’s. Given a set of facts and circumstances, and if the list of factors are satisfied the, IRS will automatically waive the late filing penalty for the partnership tax return.
The procedures are set out in IRS Revenue Procedure 84-35. The revenue procedure requires that the partnership must be a domestic entity, consist of 10 or fewer C-corporation or individual partners (other than nonresident aliens or estates), whom have properly reported their share of partnership income or loss on their timely filed income tax returns. (There can be no special allocations of any pass-thru partnership items.)
This waiver will be honored by the IRS if all the conditions listed above are satisfied and the taxpayer makes a formal request for the waiver.
Partnerships that file late and are assessed the late filing penalty, and do not satisfy the list of conditions within the Revenue Procedure, can still make a request for waiver under the normal reasonable cause provisions. Also keep in mind that this revenue procedure does NOT apply to the late filing of an S-corporation tax return or the Form 1120-S, as there is no equivalent revenue procedure for the S-corp entity.
Q-2: A new issue to the Tax Help Desk this year, but one that surfaced often during the tax season, involved the tax treatment of cryptocurrency, or more specifically, Bitcoin. The issues that were raised involved how this new form of monetary exchange is handled for income tax purposes? Is it ordinary income, is it a capital asset entitled to capital gain tax rates, or is it some form of income or loss due to currency fluctuations?
A-2: The IRS—a few years back in 2014—came out with a formal announcement in the form of IRS Notice 2014-21. This notice takes the form of a Q&A and basically tagged Bitcoin and other forms of cryptocurrency, such as Linden dollars, Litecoin, and Ethereum as property. This property would take the form of a capital gain or loss when bought and sold. However, the new form of internet money can be used to buy a cup of coffee, to buy products, or hire services, means that cryptocurrency can produce trade or business deductions, and even ordinary income subject to self-employment tax.
This new form of payment has generated a whole new world of unreported activity. In fact, one report from the Government Accountability Office claims that there are over 1,000 virtual currencies on the internet right now.
The quote below emphasizes the current lack of reporting and disclosure with this new form of barter and trading.
“The increasing likelihood each year that a taxpayer is mining, holding, using, or exchanging virtual currency mandates that preparers ask all taxpayers if they own or use any virtual currency. In an affidavit filed by the IRS seeking ownership information on the accounts of a popular conduit for handling virtual currency transactions, the IRS revealed that in 2015, out of almost 129 million e-filed 1040s, only 802 reported a Bitcoin transaction on Form 8949, Sales and Other Dispositions of Capital Assets. This lack of tax reporting occurred even though this virtual currency intermediary claims to serve 4.9 million customers in 190 countries and handles about $2.5 billion worth of Bitcoin exchanges”.24
The Tax Help Desk recommends that tax practitioners ask clients about this new medium of making money: whether it creates an expense or produces income for them. At a minimum take a minute to review the IRS Notice 2014-21 on the IRS website, irs.gov. It is well worth the gained knowledge and insight.
Some of the tracking and reporting agencies that handle this new form of currency will be issuing the IRS Form 1099-K. Brokers may be sending your clients the Form 1099-B for trading activity done thru their brokerages houses as well.
Q-3: Yet another issue that arose during tax season was the issue of “tax free” payments from government sources for the in-home care of an elderly parent or disabled dependent. IRS Notice 2014-7 deals with certain types of “Medicaid Waiver Payments” being tax-free to the recipient if they meet certain criteria.
A-3: The answer here lies within IRC Sec 131, under the difficulty of care rules of foster care payments. In this situation, a taxpayer, parent, or guardian is receiving payments from a government (State) based Medicaid home-based service program. Historically, they have been paid for services typically rendered by other medical professionals and now as parents, guardians or other individual care for dependents, or other related or unrelated individuals in their homes the payments help keep disabled or otherwise incapacitated individual out of facilities and in their homes.
In the past, the payments have been considered taxable and in most cases produced a Form W-2 from the governmental agency. Under this notice the IRS has finally given in on the taxability of these payments.
The determination in IRS Notice 2014-7 and its updated version—which can be found on the IRS website (irs.com)—classifies the Medicaid waiver payments as nontaxable under IRC Sec 131.
This tax season brought some new challenges for accountants and tax preparers everywhere, and we encourage you to take advantage of your NSA Member benefits and use the Tax Help Desk. We can help you keep up to date on changes that impact you and your clients, and remember You have 5 free questions every year that you can submit to us. We are here to help you. Drop us an e-mail anytime.
24 21st Century Taxation, “IRS Guidance and Government Reports on Taxation; IRS Petition to enforce ‘John Doe’ summons upon Coinbase, No. 3:17-cv-01431-JSC (ND CA, 3/16/17). Petitions and related documents, www.21stcenturytaxation.com/virtual-currency-and-tax.html.