1. Fate of Bush-era tax cuts unresolved

2011 ended without any resolution of the fate of the Bush-era tax cuts. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) extended the Bush-era tax cuts through 2012. President Obama and House Speaker John Boehner, R-Ohio, reportedly came close to an agreement in August 2011 to extend some of the Bush-era tax cuts as part of a comprehensive deficit reduction package. When their agreement fell apart, many Washington observers predicted the Joint Select Committee on Deficit Reduction would address the Bush-era tax cuts in a deficit reduction package. The Deficit Reduction Committee announced in November that it failed to reach an agreement and disbanded.

Comment

The fate of the Bush-era tax cuts may ultimately be decided by the lame-duck Congress, which will meet after the November 2012 elections. The outcome of the presidential election and which party controls the House and Senate will undoubtedly influence whatever decision lawmakers take over the Bush-era tax cuts.

2. Rollback of tax legislation

Congress repealed three tax laws in 2011: expanded business information reporting, real property expense reporting and three percent government withholding.

Business information reporting. The Patient Protection and Affordable Care Act (PPACA) required businesses, charities and government entities to file information returns (Forms 1099) for all payments of $600 or more in a calendar year to a single vendor, other than a tax-exempt vendor. The PPACA also repealed the long-standing reporting exception for payments made to corporations. The PPACA’s expansion of business information reporting proved universally unpopular. Congress passed the Comprehensive 1099 Taxpayer Protection Act in April 2011. The Comprehensive 1099 Taxpayer Protection Act repeals the expanded business information reporting provisions in the PPACA as if they have never been enacted.

Rental property expense reporting. The Small Business Jobs Act of 2010 required landlords to file a Form 1099 to report certain rental property expense payments of $600 or more. The Comprehensive 1099 Taxpayer Protection Act also repealed rental expense reporting as if it had never been enacted.

Government withholding. The Tax Increase Prevention and Reconciliation Act of 2007 imposed three percent withholding on payments for goods or services to contractors made by federal, state and local governments. In November 2011, President Obama signed the 3% Withholding Repeal and Job Creation Act, which repeals three percent government withholding as if it had never been enacted.

3. Foreign accounts

The Treasury Department and the IRS continued to focus on foreign account reporting in 2011. Three developments were interconnected: implementation of the Foreign Account Tax Compliance Act (FATCA), FBAR filings and the 2011 Offshore Voluntary Disclosure Initiative (OVDI).

FATCA. The IRS continued to implement the Foreign Account Tax Compliance Act (FATCA) in 2011. FATCA generally requires certain U.S. taxpayers holding specified foreign financial assets to report information about these assets on a new form to be attached to the taxpayer’s return. Additionally, foreign financial institutions must report certain information about accounts held by U.S. taxpayers. In July 2011, the IRS announced it intended to provide for a phased implementation of the FATCA requirements for foreign financial institutions. In December 2011, the IRS issued guidance about new Form 8938, Statement of Specified Foreign Financial Assets.

FBAR. The Treasury Department issued final rules on Form TD-F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) in February 2011. The final rules retain and clarify the requirement to report signature or other authority over a foreign financial account. The final rules also reserved the treatment of investment companies other than mutual funds or similar pooled funds. In related news, the Treasury Department announced that taxpayers may electronically file the FBAR; previously, electronic filing was not an option for the FBAR.

OVDI. The IRS launched a campaign in 2011 to encourage taxpayers to voluntarily disclose unreported offshore accounts. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) rewarded taxpayers who came forward voluntarily with a reduced penalty framework (although not as generous as a similar program in 2009). The 2011 OVDI closed on September 9, 2011. In December, IRS Commissioner Douglas Shulman reported that the agency has received more than 33,000 voluntary disclosures since 2009.

4. IRS help for distressed taxpayers

The IRS announced in February 2011 a series of measures intended to help good-faith taxpayers who cannot meet their tax obligations. The IRS “Fresh Start” initiative generally allows lien withdrawals for taxpayers entering into direct debit installment agreements (and for taxpayers who convert from a regular installment agreement to a direct debit agreement). The IRS also announced it would make streamlined installment agreements available to more small businesses. Qualified small businesses with $25,000 or less in unpaid taxes can participate in the streamlined installment agreement program.

Comment

According to Commissioner Douglas Shulman and other top agency officials, IRS personnel have been instructed to be more flexible in helping distressed taxpayers.

5. Worker classification

The IRS launched a new program in September 2011 to enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of a reduced penalty framework. The Voluntary Classification System Program (VCSP) is open to employers currently treating their workers as independent contractors or other nonemployees and who want to prospectively treat the workers as employees. The employer must not be under audit and satisfy other requirements. The IRS has not announced an end-date to the VCSP.

6. Basis overstatement regs

The Supreme Court agreed in September 2011 to resolve a split among the federal courts of appeal over IRS regs (TD 9515) that impose a six-year limitations period on assessments due to overstated basis (Home Concrete & Supply, LLC, 2011-1 ustc ¶50,207). The government asked the Supreme Court to decide, among other questions, whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the six-year assessment period.

Comment

In March 2011, the Court of Appeals for the Federal Circuit upheld the basis overstatement regs under Chevron-deference (Grapevine Imports, Ltd., 2011-1 ustc ¶50,264).

7. Mid-year mileage rate increase

For the third time in six years, the IRS announced a mid-year adjustment to the business standard mileage rate because of rising gasoline prices. The business standard mileage rate increased from 51 cents-per-mile to 55.5 cents-per-mile for the second half of 2011. The medical/moving standard mileage rate increased from 19 cents-per-mile to 23.5 cents-per-mile for the second half of 2011. Congress did not make a mid-year adjustment to the charitable standard mileage rate, which remained at 14 cents-per-mile for the second half of 2011.

Comment

For 2012, the business standard mileage rate is 55.5 cents-per-mile and the medical/moving standard mileage rate is 23 cents-per-mile. The statutorily-determined charitable standard mileage rate remains at 14 cents-per-mile for 2012.

8. Return preparer oversight

The IRS moved forward with its return preparer oversight initiative in 2011, defining the new designation “registered tax return preparer” and launching the registered tax return preparer competency examination. In June, the IRS issued final Circular 230 regulations, which clarified professional standards for certified public accountants (CPAs), enrolled agents (EAs) and registered tax return preparers. The IRS also fine-tuned its online preparer tax identification number (PTIN) registration system. Additionally, the IRS announced it would revisit its proposal to fingerprint certain PTIN applicants; a proposal which many tax professionals criticized as duplicative of their own employee background checks and too costly.

9. Mandatory e-file for preparers

Beginning January 1, 2011, specified tax return preparers who reasonably expected to file 100 or more covered returns in calendar year 2011 were required to file those returns electronically. The e-filing requirement was put in place by Congress in 2009. The IRS phased-in the requirement over two years (2011 and 2012). For calendar year 2012 (and subsequent years), the threshold for mandatory e-filing by specified tax return preparers is 11 or more covered returns. Firms must compute the number of covered returns in the aggregate that they reasonably expect to file as a firm. If the number is 11 or more in calendar year 2012 and subsequent years, all members of the firm must electronically file covered returns.

10. Updated PAL rules

The IRS issued proposed regs in November 2011 updating the definition of an interest in a limited partnership as a limited partner for purposes of the Code Sec. 469 passive activity loss (PAL) rules. Under the proposed regs, an interest in a limited liability company is treated as a limited partnership interest for the PAL rules.

Comment

The proposed regs reflect the evolution of the rules for limited partners since passage of the Uniform Limited Partnership Act of 1916.

Honorable mention

• Congress bans tax strategy patents;
• IRS helps organizations regain tax-exempt status after automatic revocation;
• IRS responds to Hurricane Irene and many other natural disasters in 2011;
• FUTA surtax expires mid-year;
• Congress expands Work Opportunity Tax Credit (WOTC) for veterans;
• Supreme Court agrees to hear arguments on PPACA;
• IRS issues final regs on Code Sec. 6707A penalty.

Background. Interest paid with respect to a mortgage on real estate is deductible interest on indebtedness. Itemizing taxpayers can deduct their mortgage interest on up to $1 million of qualifying acquisition debt on a qualified principal and, if applicable, secondary residence. A residence includes a house, condominium, cooperative, mobile home, house trailer, or boat. In effect, this deduction reduces the after-tax cost of financing a home. In contrast, taxpayers are not permitted to deduct the costs of renting a home.

Itemizing taxpayers can also deduct interest on up to $100,000 ($50,000 for married individuals filing separately) of home equity debt—i.e., debt secured by a taxpayer’s qualified residence up to the fair market value of the residence, as reduced by the amount of acquisition indebtedness on it.

Arguments for and against reforming the deduction. The mortgage interest deduction is often criticized as being an “upside-down” subsidy, in that it tends to provide greater benefit to taxpayers with higher incomes. The amount of interest paid by lower- and moderate-income taxpayers is less likely to be sufficiently high to make it worthwhile to forego the standard deduction, so they are less likely to claim any benefit from it.

Proponents of the deduction argue that it encourages home ownership and makes it affordable to taxpayers who would otherwise not be able to own a home. Critics claim in response that, rather than encouraging home ownership, the deduction actually encourages middle-class and wealthy taxpayers to take on more debt and buy larger homes than they otherwise would. Further, critics argue that the deduction tends to benefit taxpayers with larger incomes who likely would have purchased a home regardless of the deduction.

M&Q illustration : A married couple who takes out a $150,000 mortgage on January 1, 2011, payable over 30 years with 7% interest, pays $9,584.85 in interest in the first year. Unless the couple has other itemized deductions, they may simply opt for the $11,400 standard deduction.

If the same couple were to double their mortgage to $300,000, same interest and term, their interest payment in the first year is $19,169.71.

If the couple were to again double their mortgage to $600,000, the interest payment would be $38,339.42.

Critics of the deduction also claim that the deduction artificially drives up home prices. However, this same argument is cited by its proponents, who observe that eliminating the deduction could further impact home prices in an already depressed market.

M&Q observation: The effect of driving up prices may have contributed to the problem of “underwater” mortgages, where taxpayers owe more on their homes than the home is actually worth.

Proposals. A number of different proposals have been advanced regarding the mortgage interest deduction. In light of the popularity of the provision, and the strength of the real estate lobby, it appears unlikely that it would be repealed outright. In general, the proposals tend to focus on converting the deduction to a credit, capping the maximum mortgage amount, and limiting the credit to a primary residence.

The President’s Fiscal Commission proposed a 12% nonrefundable credit on up to a $500,000 mortgage, with no credit for a second residence or for home equity. The Debt Reduction Task Force would have a 15% refundable tax credit capped at $25,000. Other proposals suggest a 20% credit, whereas another proposal is to simply have a fixed credit for owning a home as opposed to having a mortgage.

President Obama’s 2012 budget proposal, as well as his 2011 proposal, suggested capping itemized deductions, including mortgage interest, for taxpayers in the top two tax brackets (33% and 35%). Under the proposal, these taxpayers would only be able to reduce their tax liability by a maximum of 28%.

M&Q illustration : The current structure of the mortgage interest deduction reduces the after-tax cost for each $100 borrowed by a taxpayer in the 35% bracket to $65. However, the after-tax cost for each $100 borrowed by a taxpayer in the 10% bracket is $90. In other words, the higher a taxpayer’s tax bracket, the greater relative benefit he will receive from the deduction. The Administration’s proposal would limit the benefit to higher-income taxpayers by five or seven percentage points, such that the after-tax cost for each $100 borrowed would rise to $72.

M&Q observation: The effect of this proposal on taxpayers who are subject to the alternative minimum tax (AMT) would depend on a number of factors, including the taxpayer’s particular mix of income and deductions and the taxpayer’s marginal statutory rate. Although AMT taxpayers are already effectively subject to a 28% limit on deductions, the President’s proposal has an AMT element that would nonetheless result in an increase in the tentative minimum tax liability of certain AMT taxpayers.

Economic effect. Given the amount of foregone revenue from the deduction, the effects of reforming or repealing the provision could be significant.

If the deduction was repealed flat out, the Urban-Brookings Tax Policy Center (TPC) estimates that the average tax bill of those who claim the mortgage interest deduction would increase by $710. However, this increase would vary widely among taxpayers—those with $30,000 to $40,000 incomes would face an average increase of $70, whereas taxpayers making over $1 million would face an average increase of $4,000. However, given the popularity of the deduction, its outright repeal seems unlikely.

According to the TPC, replacing the current mortgage interest deduction with a 20% nonrefundable credit, limiting mortgages eligible for the credit to $500,000, and limiting the credit to primary residences would only have a nominal or positive effect on the majority of the tax bills of those who claim the deduction. Again, those who would face the largest increase are taxpayers in the top tax brackets with the largest mortgages.

The economic effect of replacing the deduction with a flat credit for home owners, regardless of whether their home debt-financed, would obviously depend on the amount of the credit. In general, credits are considered more progressive than deductions, and the benefit of a flat credit to higher-income taxpayers would presumably be less than that under the current regime. However, the incentive towards home ownership would remain intact.

The Joint Committee on Taxation estimates that President Obama’s proposal to limit upper-income taxpayers’ itemized deductions to 28% would yield $293,261 million over the 2011 through 2021 period.  This increased revenue would be largely attributable to the limits on mortgage interest and charitable contribution deductions.

Conclusion. While it seems unlikely that the deduction will be repealed outright, it is nonetheless possible that this popular tax expenditure could be somehow reformed or curtailed. The context of the looming debt crisis may well provide the necessary push for lawmakers to take action on this issue. What choices will be made and when remains to be seen—stay tuned.

Here are highlights of the tax changes in the Act.

Original information reporting rules. Before amendment by the Small Business Jobs Act of 2010 (P.L. 111-240) and the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), Code Sec. 6041 generally required payments totaling at least $600 in a single calendar year to a single recipient to be reported to IRS. Reporting on Form 1099 was required only when the payor was considered to be engaged in a trade or business and has made the payment in connection with that trade or business. The type of payment that most commonly triggered the reporting requirement was payment for services.

There were a number of exemptions from Code Sec. 6041 ‘s reporting requirements under prior law, notably including payments to corporations (which were exempt under Reg. § 1.6041-3(p)(1)).

Pre-Act law—changes made by 2010 legislation. Beginning in 2012, Sec. 9006 of PPACA added payments of amounts in consideration for any type of property and gross proceeds—i.e., it added payments for goods or other property—to the list of payments subject to information reporting.

Sec. 9006 of PPACA further provided that, beginning in 2012, payments to non-tax-exempt corporations—which had previously been exempt from the reporting requirement—would be subject to information reporting.

Additionally, for payments made after 2010, the Small Business Jobs Act of 2010 provided that, subject to limited exceptions, a person receiving rental income from real estate would be treated as engaged in the trade or business of renting property for information reporting purposes. In particular, rental income recipients making payments of $600 or more to a service provider (for example, a painter or plumber) in the course of earning rental income would have to provide an information return to the service provider and IRS.

New law. For payments made after December 31, 2011, the Act repeals the provisions in Sec. 9006 that impose a reporting requirement for payments to corporations and payments for goods or other property. (Code Sec. 6041(a), Code Sec. 6041(i), and Code Sec. 6041(j), as amended by Act Sec. 2) And for payments made after December 31, 2010, the Act also repeals application of the information reporting requirements to recipients of rental income from real estate who are not otherwise considered to be engaged in the trade or business of renting property. (Code Sec. 6041(h), as repealed by Act Sec. 3)

In other words, under the Act, the information reporting rules effectively revert to the way they read before enactment of PPACA and the Small Business Jobs Act of 2010.

Revenue offset. The Act provides an offset for the lost revenue from repealing the new information reporting provisions, estimated at $21.9 billion. It increases the amount of “excess advance payments” of the premium assistance credit (enacted as part of the 2010 health care reform legislation to help lower-income individuals acquire affordable health insurance coverage) that a taxpayer must repay under Code Sec. 36B(f)(2) for tax years ending after December 31, 2013. The credit is available for a taxpayer who does not receive health insurance through his employer (or his spouse’s employer) and whose income falls between 100% and 400% of the federal poverty line (FPL), based on the most recently filed tax return.

Under pre-Act law, if the taxpayer’s income increases such that the credit exceeds that to which his current income level actually entitles him to, but his income is still under 500% of FPL, he had to repay some credit amounts. The limit on amounts he had to repay were capped and ranged from $600 to $3,500.

New law. Under the Act, for tax years ending after December 31, 2013, the repayment caps are increased for taxpayers with household income of at least 200% but less than 400% of FPL, and full repayment is required for taxpayers whose incomes exceed 400% of FPL. (Code Sec. 36B(f)(2)(B)(i), as amended by Act Sec. 4)

Background. A taxpayer generally recognizes gain or loss upon the sale or exchange of property. However, neither gain nor loss is recognized under Code Sec. 1031 on an exchange of property if:

… the taxpayer exchanges property held for productive use in a trade or business or for investment for other property to be held for productive use in a trade or business or for investment;

… the relinquished property and the replacement property are of “like kind”; and

… the replacement property is identified and the exchange is completed within statutory time limits.

If a two-party like-kind exchange is impractical or undesirable, a taxpayer may still be able to get the benefits of Code Sec. 1031 by arranging a multi-party deferred exchange. In a deferred exchange, the replacement property must be (i) identified within 45 days after the taxpayer transfers the relinquished property, and (ii) received by the earlier date of 180 days after the taxpayer transfers the old property or the due date of the taxpayer’s return for the year (including extensions).

To qualify as a deferred exchange, the transaction must be an exchange of property, not a transfer of property for money. The reinvestment of the proceeds from a cash sale of one property into a second property of like-kind will not qualify as a Code Sec. 1031 exchange.

The taxpayer isn’t treated as actually or constructively receiving money or other property before he receives like-kind replacement property solely because the obligation of the transferee to transfer replacement property to the taxpayer is secured by cash or its equivalent, provided the security is held in a qualified escrow account or qualified trust.  An escrow account is “qualified” if the escrow holder is not the taxpayer (or a disqualified person) and the escrow agreement expressly limits the taxpayer’s rights to receive, pledge, borrow or otherwise obtain the cash or its equivalent held in the account.

Facts. Ralph E. Crandall, Jr. and Dene D. Dulin owned an undeveloped parcel of property in Arizona. The property was held for investment purposes and had a basis of $8,500. They wanted to own investment property closer to their California residence, so they decided to sell the Arizona property and purchase new property with the intention of executing a tax-free exchange.

On March 4, 2005, the taxpayers sold the Arizona property for $76,000. The buyers of the property paid petitioners $10,000, and the remaining $66,000 was placed in an escrow account with Capital Title Agency, Inc. (Capital Title). At the taxpayers’ direction, $61,743.25 was held in the escrow account, and $4,256.75 was released to the taxpayers.

The taxpayers made a series of payments to an escrow account with Chicago Title Co. (Chicago Title) from January–March of 2005. Neither the Capital Title nor the Chicago Title escrow agreements mentioned a like-kind exchange under Code Sec. 1031 or expressly limited the taxpayers’ right to receive, pledge, borrow, or otherwise obtain the benefits of the funds.

Parties’ arguments. IRS contended that, since the Capital Title escrow agreement didn’t restrict the taxpayers’ access to and use of the funds held in the escrow account, it wasn’t a “qualified escrow account.” Thus, the taxpayers were in constructive receipt of the proceeds from the sale of the Arizona property. The disposition of the Arizona property was a taxable sale, and recognized gain should have been reported on the taxpayers’ 2005 return.

The taxpayers claimed that the funds in the Capital Title escrow account were held solely for the purchase of the California property and that they received no proceeds from the sale of the Arizona property.

Conclusion. The Tax Court agreed with IRS that the disposition of the Arizona property was a sale, the proceeds of which were constructively received by the taxpayers upon deposit into the Capital Title escrow account. Although the taxpayers in fact used the funds in the Capital Title escrow account to purchase the California property, they failed to comply with the Code Sec. 1031 requirements for nonrecognition. The Capital Title escrow account wasn’t a “qualified escrow account” within the meaning of the Regulations due to the lack of express limitations on the taxpayers’ use of the funds.  As a result, the taxpayers had taxable gain in 2005 from the sale of the Arizona property.

For more information about this case or 1031 exchanges in general, contact Partner F. Moore McLaughlin, IV, Esq., CPA at 401-421-5115 ext. 212 or by e-mail at mmclaughlin@mclaughlinquinn.com.

Background on liens. When a taxpayer fails to pay a tax liability after notice and demand, a lien arises that attaches to all the taxpayer’s property and rights to property. The IRS is authorized to seize and sell the taxpayer’s property and rights to property subject to a federal tax lien. Thus, IRS may seize any property or property right (unless it’s exempt) of a delinquent taxpayer (whether held by him or someone else), sell it, and apply the proceeds to pay the unpaid taxes. Seized property may be real, personal, tangible, or intangible, including receivables, bank accounts, evidences of debt, securities, and salaries, wages, commissions or compensation.

Background on installment agreements. The IRS may enter into written agreements with any taxpayer. IRS must enter into an installment agreement requested by an individual whose aggregate tax liability (without interest, penalties, additions to tax, and additional amounts) is not more than $10,000, and who has not failed to file or to pay income tax, or entered into another installment agreement, during any of the preceding five tax years, if IRS determines that the taxpayer is financially unable to pay the liability in full when due (and the taxpayer submits information that IRS may require to make this determination). The agreement must require full payment within three years, and the taxpayer must agree to comply with all Code provisions while it’s in effect.

Background on OICs. The IRS will consider an offer in compromise (OIC)—i.e., an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed—where: (1) the taxpayer is unable to pay the tax; (2) there is doubt as to the taxpayer’s liability for the tax; or (3) a compromise would promote effective tax administration because collection of the full amount of tax would cause economic hardship for the taxpayer, or compelling public policy or equity considerations provide a sufficient basis for compromising the liability. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

New procedures. After a review of collection operations which IRS Commissioner Shulman launched last year, as well as input from the Internal Revenue Service Advisory Council and the National Taxpayer Advocate, IRS has determined that the following changes will lessen the negative impact on taxpayers:

• Higher dollar threshold for issuing liens. IRS will significantly increase the dollar thresholds at which liens are generally filed to take account of inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances. IRS expects to review the results and impact of the lien threshold change in about a year.
• Easier lien withdrawals after payment. IRS will modify procedures so as to make it easier for taxpayers to obtain lien withdrawals. Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. IRS will streamline its internal procedures to better allow collection personnel to withdraw the liens.
• Withdrawing liens after DDIA. IRS will now allow lien withdrawals for taxpayers with unpaid assessments of $25,000 or less where: (1) a taxpayer enters into a Direct Debit Installment Agreement (DDIA); (2) a taxpayer on a regular Installment Agreement converts to a DDIA; and (3) a taxpayer on an existing DDIA requests the withdrawal. Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored. IRS notes that this lowers user fees and saves the government money from mailing monthly payment notices. Taxpayers can use the Online Payment Agreement application on IRS.gov to set up a DDIA.
• Easier access to Installment Agreements for small businesses. IRS will make streamlined Installment Agreements available to more small businesses by raising the dollar limit to allow small businesses with $25,000 or less in unpaid tax to participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses that file either as an individual or as a business will have 24 months to pay. Small businesses with an unpaid assessment balance greater than $25,000 can qualify for a streamlined Installment Agreement if they pay down their balance to $25,000 or less. Small businesses will need to enroll in a DDIA to participate.
• Expanding streamlined OIC program. IRS will expand a new streamlined OIC program to cover a larger group of struggling taxpayers. The streamlined OIC will allow taxpayers with annual incomes up to $100,000 to participate. Participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.

McLaughlin & Quinn, LLC partner Thomas P. Quinn, Esq. says “These changes are significant and will help many of our clients immediately.  We welcome this practical improvement to the collection system.  We represent clients on a daily basis who face these thresholds.  Those clients will now be able to better manage their affairs and settle their outstanding tax obligations.”

For more information on these changes, and IRS collections matters generally, contact Tom Quinn, Esq. at 401-421-5115 ext. 218 or by e-mail at TQuinn@McLaughlinQuinn.com.

Background. Under Code Sec. 6072(a), income tax returns must be filed on April 15. When April 15 falls on a Saturday, Sunday, or legal holiday, a return is considered timely filed if filed on the next succeeding day that is not a Saturday, Sunday, or legal holiday, defined as legal holiday in DC.

Under DC law, Emancipation Day, April 16, is a legal holiday. The twists and turns in DC law regarding this holiday produce the following results for filing deadlines for all tax forms and payments that must be filed or completed on or before April 15, including the Form 1040 series tax returns:

• When April 16 falls on Saturday, then Friday, April 15, is the observed date for Emancipation Day and the filing deadline for all tax forms and payments required to be filed or completed on or before April 15, is Monday, April 18.

That’s the situation this year, when April 16 falls on a Saturday, which means Emancipation Day will be observed on Friday, Apr. 15, 2011. Thus, the filing deadline for all tax forms and payments required to be filed or completed on or before April 15 will be Monday, April 18, 2011.

• When April 16 falls on Sunday, then Monday, April 17, is the observed date for Emancipation Day, and the filing deadline for all tax forms and payments required to be filed or completed on or before April 15 is Tuesday, April 18.
• When April 16 falls on Monday, then that day is the observed date for Emancipation Day, and the filing deadline for all forms and payments required to be filed or completed on or before April 15 is Tuesday, April 17.

The last time this happened was in 2007.

IRS said it will widely publicize the Emancipation Day rules in affected years to remind the public that the filing deadline is extended.

In all likelihood, the new Notice was issued in response to a flood of questions about why the filing deadline was deferred to April 18, even though April 15 will fall on a Friday this year.

The deadline deferral to April 18, 2011, applies to a host of deadlines for filing and paying, including:

… Requests for an automatic six-month tax-filing extension on an individual return for calendar-year 2010.

… Tax-year 2010 balance-due payments.

… For calendar-year taxpayers, individual estimated tax payments for the first quarter of 2011.

… For calendar-year taxpayers, tax-year 2010 contributions to a Roth or traditional IRA.

… Corporation income tax returns, including S corporations, for a fiscal year ending on January 31, 2011, and any balance due.

… For calendar-year corporations, the estimated tax payment for the first quarter of 2011.

… Calendar-year estate and trust income tax returns (Form 1041) and any balance due.

… Calendar-year 2010 partnership returns (Form 1065).

Both bills seek to modify or repeal the new requirements imposed by Sec. 9006 of the Patient Protection and Affordable Care Act (PPACA), which provides that payments for goods and payments made to corporations (that are not tax-exempt) will be subject to information reporting beginning in 2012. H.R. 705 also seeks to repeal Code Sec. 6041(h), which was added by the Small Business Jobs Act of 2010 and which treats recipients of rental income from real estate as engaged in the trade or business of renting property for information reporting purposes beginning in 2011. However, H.R. 705 provides an offset for the estimated $21.9 billion cost of repeal, whereas H.R. 4 does not.

Also on February 17, the Senate by a vote of 92-2 invoked cloture (i.e. voted to cut off debate) on S. 223, the FAA Air Transportation Modernization and Safety Improvement Act, which includes a provision to repeal the Sec. 9006 reporting requirements.  Unless time is yielded back, there remains 30 hours of debate on the bill before a vote on final passage of the measure.