Investigation shows gap in alimony reporting

 James W. Rahmlow, The Daily Record Newswire

According to the Treasury Inspector General for Tax Administration investigation, there is a significant gap between the amounts of alimony being reported as income by recipients versus the amount of alimony claimed as a deduction. Taxpayers who claim the deduction are required to report the Taxpayer Identification Number of the recipient on their return.

TIGTA selected 2010 as a test year and examined over 500,000 tax returns for review. On 47 percent of those selected returns, either the corresponding amount was not claimed as income on the recipient’s return or the amount that was claimed did not match the amount of the deduction.

TIGTA estimated that the gap in reporting was in excess of $2.3 billion in deductions claimed without the matching amount reported as income. Additionally, approximately 3.700 of the selected returns did not provide the recipient’s TIN, and on approximately 2,700 of the returns, the TIN was invalid.

Of the nonmatching returns, the IRS selected approximately 11,000 of the returns for examination and assumedly generated revenue. Prospectively, TIGTA has indicated that it will attempt to reconcile differences with mail notices (a very effective technique used on many of the 2010 returns) and at the same time will be more vigilant as to the use of penalties for noncompliance.

Tax extenders bill stalled in Senate

While it appeared last month that there was bipartisan support for the extension — possibly permanently — of the tax extenders legislation that is often passed at or after the end of the year end for many tax benefits such as the Research and Development Credit and the Work Opportunity Tax Credit, the legislation stalled on May 15 in the Senate after Republicans, dissatisfied with the refusal of Majority Leader Harry Reid, D-Nev., to allow any amendments to the bill blocked the continued advancement of the bill. New legislation is clearly not dead, but it obviously is being used as a tool in the larger political sphere.

Federal interest rates for June 2015

In Revenue Ruling 2014-16, the IRS promulgated both the Applicable Federal Rates and the Adjusted AFR for June of 2014. Below is a summary of those rates (monthly compounding):

Short Mid Long

Term Term Term

Applicable Federal Rate

0.32% 1.89% 3.10%

Adjusted AFR

0.32% 1.37% 3.10%

Final regs issued relative to expenses not subject to 2 percent floor and a clarification on bundled expenses

In TD 9664, the IRS issued final regulations for determining which estate and trust expenses may escape the two percent floor on miscellaneous itemized deductions and also described the treatment of bundled expenses between fully deductible and those subject to the two percent floor. In general, expenses incurred in connection with trust and estate administration are fully deductible if they would not have been incurred if the property had not been held by the estate or trust. Some of the clarifications from the final regulations include:

Investment advisory fees — In general, investment advisory fees are subject to the two percent floor unless they exceed the fee generally charged to the individual, such as from unusual investment objective of the trust or estate.

Ownership costs — The final regs clarify that real estate taxes and trade or business expenses are fully deductible and are not itemized deduction subject to the two percent floor.

Tax return preparation costs — The following is a list of costs that are not subject to the two percent floor: costs of estate and generation-skipping transfer tax returns; costs of the fiduciary income tax returns and the decedent’s final income tax return.

Appraisal fees — Appraisals to determine the value at the decedent’s date of death either for purposes of making distributions or to properly prepare the estate or trust’s tax returns are fully deductible.

Fiduciary Expenses — The following costs are fully deductible: probate court fees and costs, fiduciary bonds, publishing notices, certified copies of the death certificate, and other costs related to fiduciary accounts.

In relation to bundled fees which typically cover both fully deductible fees and costs subject to the two percent floor, the IRS continued the exception to unbundling of fees that was spelled out in the proposed regulations. Specifically, a fee that is not computed on an hourly basis is fully deductible, except for the portion attributable to investment advice. Additionally, specific payments made out of the bundled fee to a third party, and expenses separately assessed that are customary to an individual will be subject to the two percent floor.

2015 HSA inflation adjusted amounts

In Rev. Proc. 2014-30, the Internal Revenue Service has issued the 2015 limits for deductible contributions to health savings accounts as adjusted for inflation under a high-deductible health plan. For 2015, the annual limits for an individual with self-only coverage under an HDHP are $3,350, up from $3,300 in 2014. If an individual has family coverage, the annual limit is $6,650 in 2015, up from $6,550 in the prior year.

IRS Developing Form 1023-EZ to assist small charities in the application process

For small organizations who seek tax-exempt charitable status under Code Sec. 501(c)(3), the IRS has announced that it is developing a draft of a simplified application which will be Form 1023-EZ. Additionally, draft instructions are also being prepared.

Normally, an organization who wishes to apply for tax exempt status under Code Sec. 501(c)(3) must apply using the IRS’s 25 page Form 1023, which the IRS estimates would take over 100 hours for an organization to complete. In late 2013, the IRS developed and tested a draft Form 1023-EZ, which drastically reduced the information burden on both the IRS and on applying taxpayers.

The IRS concluded that the process using the form was simplified and announced in the March 31 Federal Register that it was submitting the form to the Office of Management and Budget. The proposed simplified Form 1023-EZ would be available to organizations with projected receipts of less than $200,000 for the first three years and with total assets that do not exceed $500,000. The draft instructions provide a 22 question eligibility worksheet. If an organization answers “yes” to any question, it cannot use Form 1023-EZ.

No announcement as yet has been made about the new form or the instructions.


James W. Rahmlow, CPA, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at