Money Matters: E-filed tax returns gaining in popularity

By James W. Rahmlow

The Daily Record Newswire

In an April 18 press release, the IRS announced that tax return e-filing had, for the first time, topped 100 million returns. With last year's total reaching 98.7 million returns for all of calendar 2010, the current increase is expected to put the final number well above the 100 million total.

The IRS projects the total increase at greater than 8 percent. While not quite meeting the announced e-file goals of the IRS a number of years ago, the program continues to grow in use and popularity.

Repeal of 1099 reporting signed into law

Somewhat lost in the passage of legislation to keep the federal government operating through the end of the current fiscal year was the repeal of two very important Form 1099 reporting provisions that had been passed in prior legislation and signed into law. The Patient Protection and Affordable Care Act of 2010 originally contained provisions significantly expanding informational return reporting requirements to be effective in future fiscal years.

Additionally, the Small Business Jobs Act of 2010 was set to impose additional reporting requirements for rental property owners. Both of these provisions were repealed on April 14 by President Obama when he signed H.R. 4.

Statistics of Income Bulletin shows drop in income

Almost certainly reflecting the economic downturn in 2008 and 2009, the latest Statistics of Income Bulletin issued for the winter of 2011 showed a fairly large decrease in 2009. In the general income categories for individual tax returns, adjusted gross income decreased 6.3 percent from the 2008 to the 2009 tax year and taxable income decreased 9.3 percent for the comparable period. Wages were the largest component of adjusted gross income and they fell 3.7 percent.

One of the few categories of adjusted gross income that increased was taxable pensions and annuities, which increased 3.1 percent. In what probably should have been expected, but nevertheless was surprising, income from the alternative minimum tax also fell between years, dropping 9.1 percent. This was the first AMT decrease since 2001.

Applicable interest rates for April 2011

In its monthly revenue ruling, the IRS issued short-term, mid-term and long-term applicable interest rates for the month of April 2011. Below is a summary of those rates:

Short-term Mid-term Long-term

Applicable Federal Rates (AFR) 0.55 % 2.46% 4.17%

Adjusted AFRs 0.87% 2.07% 4.21%

In addition to the above mentioned monthly rates, there also exist annual, semiannual and quarterly rates.

Filing deadline for Form 8939 is delayed

Originally due this April 18, the IRS has delayed the filing deadline for Form 8939, allocation of increase in basis for property acquired from a decedent that would have been due for individuals who died in 2010. The delay to a "later date" was expected, as the Form 8939 has not even been issued in final form.

While the Economic Growth and Tax Relief Reconciliation Act eliminated the estate tax for individuals dying in 2010, a modified carryover basis program was established for property passing through an estate. Subject to some limitations, the estate may allocate an increase in basis and report the allocation to the IRS on Form 8939. We will keep you posted in this column of the continuing important developments related to Form 8939 as they occur.

Venture capitalist's bad debt is an ordinary loss

In a recent tax court ruling, a taxpayer in the business of managing venture capital funds was allowed a fully deductible ordinary loss under Code Sec. 166(a) as opposed to nonbusiness bad debt treatment, which would have been limited to a capital loss. The court distinguished between investing on one's own behalf (investor status) and investing and providing investment services on behalf of others which was a trade or business qualifying for the ordinary loss.

The taxpayer was able to establish that he made money from the investing of other people's funds as opposed to solely from the success of the project. Another key component was the fact that the taxpayer received carried interest as compensation for managing the investment partnerships which further supported the status of being involved in a trade or business.

Registration of tax return preparers tops 700,000

According to the IRS, over 700,000 tax return preparers registered under the IRS' new preparer tax identification number initiative. The system was first established on Sept. 28, 2010 and has been used since, the busiest time being the period ending April 18.

Interestingly, the IRS had expected 800,000 to 1.2 million tax return preparers to register. At the current time, it is not known if preparers who did not register were unaware of the new registration requirement, have decided to discontinue the preparation of tax returns or have decided deliberately not to register. Competency testing for those individuals who have registered and are required to test will not start until the late summer or early fall of 2011.

Refunds may be offset by unpaid debts

In April, the IRS reminded taxpayers who are receiving refunds that all or a portion of their refunds may be withheld to offset the nonpayment of various other debt. The refund will be used to repay any outstanding federal or state tax debts and will also use refunds to pay other debt such as unpaid child support and send it to the agency authorized to collect the debt. Finally, unpaid education loans also may be paid from refund amounts. It is the choice of the IRS and not the taxpayer which unpaid balances are to be offset by the refund.

Involuntary conversion treatment can apply to inventory

Under Code Sec. 1033(h)(2), taxpayers have long been able to defer proceeds from the loss of certain business property following a qualified involuntary conversion. Specifically, proceeds received from insurance or salvage settlements do not have to be recognized as current income but rather reduce the basis of property that is replaced.

The key here is that the proceeds have to be reinvested in qualified business property. Questions have existed as to whether inventory was also eligible for this treatment. While the IRS announcement (TAM 201111004) discusses a situation in a federally-declared disaster area, it provides food for thought on other inventory involuntary conversions.

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James W. Rahmlow, CPA, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at jrahmlow@mmb-co.com.

Published: Thu, May 5, 2011