Who has received the letters? The FAQs indicate that the IRS letters were sent to a pool of paid preparers who completed a large volume of tax returns with Form 1040 Schedules A (Itemized Deductions), C (Profit and Loss From Business (Sole Proprietorship)) or E (Supplemental Income and Loss) during the 2011 filing season. IRS says that the selection of return preparers who received the letters was based on the returns prepared for clients during the most recent filing season having a high percentage of attributes that typically indicate errors on these schedules (i.e., inaccuracies and misinterpretations of tax law).

The IRS letters include an enclosure that describes the current responsibilities of tax return preparers. The letters remind return preparers that taxpayers may not fully understand the tax laws and may incorrectly believe they are entitled to claim deductions for non-qualifying expenditures. The preparer may rely in good faith on information furnished by the client without verification, but can’t ignore the implications of information furnished to or actually known by him. He or she must make reasonable inquiries if the information, as furnished, appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete. The preparer must make appropriate inquiries to determine the existence of facts and circumstances required as a condition for claiming a deduction or credit. The enclosure also outlines common issues that they should be aware of on Schedules A, C, and E.

Schedule A letter. The letter indicates that the most common issues for Schedule A deal with:

… Unreimbursed employee business expenses claimed on Form 2106 (Employee Business Expenses). It reminds prepares that taxpayers may only claim allowable unreimbursed expenses.

… Mileage claimed on Form 2106. IRS’s letter reminds preparers that taxpayers should have documentation to support business miles claimed;

… Travel, meals and entertainment expense. The letter reminds the preparer that taxpayers must have documentation of business purpose, as well as receipts to support expenses claimed; and

… Charitable contributions. The letter reminds the preparer that taxpayers must have receipts for all cash contributions and adequate documentation for all non-cash contributions

Schedule C letter. The letter indicates that the most common issues with Schedule C deal with:

… Gross receipts not being fully reported. IRS’s letter reminds preparers that books and records should be available for review to substantiate amounts reported;

… Expenses claimed must be ordinary and necessary for the type of business reported; and

… All expenses claimed are to be paid or incurred during the tax year and the allowable amount of the expense must be correctly computed.

Schedule E letter. The letter dealing with Schedule E indicates that the most common issues are:

… Rental income and expenses not being properly reported;

… Rental depreciation not being correctly calculated; and

… Limitations surrounding passive activities, basis, and at-risk rules not properly considered or calculated.

The FAQs contain the following general pointers on a return preparer’s due diligence requirements:

• In general, return preparers should understand the underlying substantive law affecting an item of income or deduction. Return preparers must exercise due diligence in preparing or assisting in the preparation, approval, and filing of returns, documents, affidavits, or other papers relating to IRS matters.
• Return preparers also must exercise due diligence in determining (1) the correctness of oral and written representations made by the return preparer to IRS; and (2) the correctness of representations made by the return preparer to the client with reference to any matter administered by IRS.
• Return preparers who prepare returns for taxpayers who may be eligible for the earned income tax credit have additional due diligence requirements.
• Return preparers aren’t required to audit, examine or review books and records, business operations, documents or other evidence to independently verify information provided by a taxpayer, advisor, other tax return preparer or other party. However, the preparer can’t ignore implications of information furnished to him or actually known by him and must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete.
• A return preparers must make inquiries of a taxpayer to prepare an accurate tax return. For example, he must make general inquiries or have existing knowledge of the taxpayer’s sources of income (e.g., whether the taxpayer received alimony, a refund of state taxes in the previous year, or received interest or dividends), and for Schedule C taxpayers, have a more in-depth discussion including what accounting method the taxpayer uses. A tax return preparer also should ask for taxpayer records where appropriate (e.g., previous year’s tax return or copies of depreciation schedules for Schedule C or E taxpayers or stock basis for filers of Schedule D (Capital Gains And Losses)).

Visits from IRS. The FAQs also discuss the 2,100 compliance visits IRS revenue agents will make nationally with members of the return preparer community. These visit will take place at the return preparer’s place of business. IRS requests that the return preparer have available the tax forms that he prepared in 2011 and all relevant documents, including worksheets, interview notes, correspondence, and a copy of the returns prepared for clients. If the return preparer is an Electronic Return Originator, e-file transmission documents should also be made available.

The purpose of these visits is to confirm that return preparers are complying with current return preparer requirements, including the maintenance of records and signing and furnishing of preparer tax identification numbers (PTINs) on the tax returns that they prepare, and to provide information on new return preparer requirements effective for the 2012 filing season. If violations are found, the revenue agent may, with managerial approval, determine it is appropriate to propose penalties

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.

Income taxes. Combined reporting study: As part of its tax return for a taxable year beginning after December 31, 2010 but before January 1, 2013, each corporation which is part of a unitary business must file a report, in a manner prescribed by the Tax Administrator, for the combined group containing the combined net income of the combined group. The use of a combined report does not disregard the separate identities for the members of the combined group. The combined report must include, at minimum, for each taxable year the following: the difference in tax owed as a result of filing a combined report compared to the tax owed under the current filing requirement; the difference in tax owed as a result of using the single sale factor apportionment method as compared to the tax owed using the current 3-factor apportionment method; volume of sales in the state and worldwide; and taxable income in the state and worldwide. Any corporation that fails to file a timely report or files a false report will be assessed a penalty not exceeding $10,000. The penalty may be waived for good cause shown for failure to timely file. Based on the information provided in the income tax returns and the data submitted, the Tax Administrator must submit a report on or before March 15, 2014, to the chairpersons of the house finance committee and senate finance committee, and the house fiscal advisor and the senate fiscal advisor analyzing the policy and fiscal ramifications of changing the business corporation tax statute to a combined method of reporting.

Taxpayer accountability: On or before September 1, 2011, and every September 1 thereafter, the project lessee of the following tax incentives must file an annual report with the Tax Administrator containing the name, Social Security number, date of hire, and hourly wage of each full-time equivalent, part-time or seasonal employee: project status through the Rhode Island Economic Development Corporation; the incentives for innovation and growth credit; enterprise zone tax credits; and motion picture production tax credits.

Lottery setoff for unpaid taxes: Effective June 30, 2011, if a taxpayer wins a lottery prize valued at more than $600 and is delinquent on state taxes owed to the Tax Administrator, the Lottery Director is authorized to setoff against the amount due to that person, after state and federal tax withholding, an amount up to the balance of the unpaid taxes owed. The Lottery Director will make payment of such amount directly to the Tax Administrator. Offsets are made based on a schedule of priorities.

Letter of good standing fee. Effective June 30, 2011, the fee for obtaining a letter of good standing from the Division of Taxation is increased from $25 to $50.

LLC annual charge. Effective June 30, 2011, any LLC that is not taxed as a corporation for federal tax purposes must pay a fee equal to the corporate minimum tax, which is currently $500; and the due date is the 15th day of the fourth month following the close of the fiscal year. Previously, a LLC that was not treated as a partnership for federal tax purposes had to pay a fee equal to the corporate minimum tax.

LLP annual charge. For tax years beginning on or after January 1, 2012, LLPs must pay an annual charge equal to the corporate minimum tax, which is currently $500. The charge is due upon the filing of the LLP’s return: on or before the April 15 for calendar year filers or the 15th day of the fourth month following the close of the fiscal year for fiscal year filers. If the annual charge is not paid by the due date, a delinquency charge of $100 is added to the annual charge.

Sales tax. Rate and base: If federal law is enacted that requires remote sellers to collect and remit taxes, the sales tax rate is decreased from 7% to 6.5%, the 1% local meals and beverage tax would increase to 1.5%, and the 1% local hotel tax would increase to 1.5%. Such rate changes would be effective the first day of the first state fiscal quarter following the change. In addition, effective October 1, 2011, the 7% sales and use tax is broadened to include the following: nonprescription drugs, also known as over-the-counter drugs; prewritten computer software delivered electronically or by “load and leave,” including applications for smartphones and similar devices; furnishing package tour and scenic and sightseeing transportation services as set forth in the 2007 North American Industrial Classification System (NAICS) codes 56120 and 487; and marijuana for medical use.

Rhode Island Economic Development Corporation: The sales tax exemption applicable to firms that use bond financing programs offered through the Rhode Island Economic Development Corporation or which are given project status by the Rhode Island Economic Development Corporation will no longer be allowed after June 30, 2011. The incentives will only apply to projects approved before July 1, 2011.

Rhode Island Industrial Facilities Corporation. Sales tax incentives related to projects involving the Rhode Island Industrial Facilities Corporation will no longer be allowed after June 30, 2011. The incentives will only apply to projects approved prior to July 1, 2011.

Hospital licensing fee. Applicable to hospitals that are duly licensed on July 1, 2011, the amount of the hospital licensing fee imposed on the net patient services revenue of every hospital for the hospital’s first fiscal year ending on or after January 1, 2010 is 5.43%. Every hospital must file a return and pay the licensing fee by electronic transfer to the Tax Administrator on or before July 16, 2012. Each hospital must file a return with the Tax Administrator on or before June 18, 2012, containing the correct computation of net patient services revenue for the hospital fiscal year ending September 30, 2010, and the licensing fee due on that amount.

Compassion Center Surcharge. Effective June 30, 2011, a 4% monthly surcharge is imposed on the net patient revenue received each month by every compassion center. Each center must file a return to the Tax Administrator and make payment by electronic transfer to the General Treasurer no later than the 20th day of the month following the month that the net patient revenue was received. Such surcharge is in addition to any other authorized fees that have been assessed on a compassion center. A “compassion center” means a registered not-for-profit entity that acquires, possesses, cultivates, manufactures, delivers, transfers, transports, supplies, or dispenses marijuana, or related supplies and educational materials, to registered qualifying patients and their registered primary caregivers who have designated it as one of their primary caregivers.

Estate tax filing fees. Effective June 30, 2011, the estate filing fee is increased from $25 to $50. The filing fee applies to the statement that executors, administrators and heirs-at-law must file with the Tax Administrator within nine months of a decedent’s death showing the value of the decedent’s estate and certain other items.

The partners and employees of McLaughlin & Quinn, LLC wish all of you a happy and safe 4th of July, and Happy Birthday America.

Moore, Tom, Michaela, Priscilla, Jill, Stefanie, Frank and Rebecca.

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 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.

Stay tuned to our Blog, or contact Partner Moore McLaughlin, Esq. for more information at mmclaughlin@mclaughlinquinn.com or by phone at 401-421-5115 ext 212.

Background. In January 2010, the IRS released a study on the U.S. return preparer industry carrying detailed recommendations on new standards for preparers other than attorneys, certified public accountants (CPAs), and enrolled agents (EAs). Subsequently, the IRS rolled out a new set of rules subjecting tax return preparers who are not attorneys, CPAs or EAs to new registration requirements, including mandatory use of PTINs for tax returns or refund claims filed after December 31, 2010, competency testing, continuing education (CE) rules, and ethical standards (i.e., Circular 230). Under the rules, all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax must have a PTIN.

In early January 2011, the IRS issued Notice 2011-6, which dialed back some of the most controversial aspects of the new tax return preparer initiative. It provides guidance on the implementation of the new regulations requiring tax return preparers to obtain a PTIN for tax returns or refund claims filed after December 31, 2010. It also softened key aspects of earlier guidance. For example, it provides that properly supervised nonsigning preparers are not required to undergo a competency exam and are not subject to the CE requirements.

Notice 2011-6, states that, unless otherwise provided in it or other guidance, the IRS expects tax return preparers to comply with the new requirement to obtain a PTIN as soon as possible. Tax return preparers who used the new online application system available through IRS’s website at http://www.irs.gov/taxpros generally will receive their PTIN number when the application process has been completed. Preparers who apply for a PTIN using the paper Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application, generally will receive their PTIN four to six weeks after the application and payment are received.

However, the IRS recognizes that some tax return preparers are experiencing or may experience difficulty in obtaining a PTIN. If preparers using the online system are unsuccessful in obtaining a PTIN, the IRS system will notify them that their application was not processed and provide appropriate instructions. Complying with these instructions before the preparation of a tax return or refund claim for compensation will establish that these individuals were making a good faith effort to comply with the new PTIN requirement.

Preparer relief. In Notice 2011-11, the IRS provides that any tax return preparer receiving: (1) notice from the IRS that it was unable to process their online PTIN application, or (2) an acknowledgment of receipt of the paper PTIN application, will be allowed to prepare and file tax returns or claims for refund for compensation after the tax return preparer complies with all instructions provided in the notification or acknowledgment letter. This relief only applies during the 2011 filing season (i.e., 2010 returns) and does not apply to individuals who engage in conduct that constitutes a willful violation of the applicable duties and restrictions set out in, or disreputable conduct under §10.51 of, Circular 230.

A tax return preparer may use a PTIN issued before September 28, 2010 (or his Social Security number if he does not have a previously issued PTIN) as his PTIN during the 2011 filing season or until they receive a new PTIN, whichever is earlier. Once a new PTIN is obtained, the new PTIN must be used.

Preparers who rely on the relief provision of Notice 2011-6 to prepare returns or refund claims for compensation must pay the $64.25 PTIN application fee for the 2011 filing season, even though the processing of their application may be delayed. Payment must be submitted as instructed by IRS. Preparers who rely on this relief must keep a copy of the notification or acknowledgment letter as documentation of their good faith effort in the event that the preparer is contacted by IRS during the 2011 filing season or in the future.

IRS notes that tax return preparers who applied for a PTIN using paper Form W-12 before Notice 2011-11 is published in the Internal Revenue Bulletin (February 14, 2011) and have not received a PTIN generally will receive a PTIN or an acknowledgment of receipt of the PTIN application within six weeks of IRS’s receipt of the PTIN application or within six weeks of Notice 2011-11 ‘s date of publication, whichever is later. Preparers who apply for a PTIN using paper Form W-12 after Notice 2011-11 ‘s date of publication generally will receive a PTIN or an acknowledgment of receipt of the PTIN application within six weeks from the date the application is submitted. For individuals who do not attempt to submit a PTIN application via the online system, the submission of a processible paper Form W-12 and payment generally constitutes a good faith attempt to comply with the requirement to obtain a PTIN.