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The IRS May Put You on Hold

During the tax preparation season, business owners, individual taxpayers, and CPAs may have questions for the IRS. If you need to call the agency, be prepared for a long wait. Increased tax code complexity plus budget cuts have resulted in frustrating experiences for many callers.

Advocate’s assessment

In her latest report to Congress, National Taxpayer Advocate Nina E. Olson noted that the number of taxpayer calls routed to “telephone assistors” increased by 41% during last year’s filing season. Yet the number of calls answered by those phone assistors decreased by 26%.

The number of “courtesy disconnects” received by taxpayers calling the IRS skyrocketed from about 544,000 in 2014 to about 8.8 million in 2015. A courtesy disconnect occurs when the IRS essentially hangs up on a taxpayer because its switchboard is overloaded and cannot handle the call. For those callers fortunate enough to get through, hold time averaged 23 minutes last year.

Tax professionals ran into similar problems. The IRS has a Practitioner Priority Service line, to answer questions from CPAs and other tax preparers. In the 2015 filing season, the IRS answered only 45% of such calls, with hold times averaging 45 minutes.

More questions, more time

Why did incoming calls spike by 41% last year? Olson pointed out that the IRS “sharply restricted the availability of paper copies of forms and publications, imposing burden on taxpayers without Internet access or online literacy.” Without paper forms and publications, more people called in.

Olson’s report also mentions that the IRS had to implement large portions of the Affordable Care Act and the Foreign Account Tax Compliance Act. Both laws, passed in 2010, contain provisions that raise questions for taxpayers, and those questions apparently soared last year after delayed provisions went into effect.

Cost cutting

As demands on the IRS have risen, the agency’s budget has fallen. In 2015, the federal General Accountability Office (GAO) reported that IRS total appropriations declined from a high of $12.1 billion in fiscal year 2010 to $11.3 billion in fiscal year 2014, with an additional $346 million decrease from fiscal year 2014 to fiscal year 2015. As of this writing, still more funding cuts appear to be in store for the 2016 fiscal year.

According to the GAO, some IRS business units have responded to the budget reductions by reducing staff by 16% to 30%.

Grim outlook

For the 2016 filing season, neither a decline in complexity nor an increase in IRS funding can be expected. Therefore, callers to the IRS likely will once again face difficulty getting through to the agency. Rather than trying to deal with the IRS, you can call our office with your questions and concerns.

Ongoing Responsibility for Retirement Plans

Another May 2015 Supreme Court decision may affect business owners. In Tibble v. Edison International (No. 13-550), the Court unanimously held that there is no statute of limitation on fiduciary responsibility for 401(k) plans.

In this case, employees of a utility company filed suit, alleging that the company had added some relatively high-fee mutual funds to the 401(k) plan’s menu of investment choices. In 1999, the plan added three funds that were sold to ordinary investors; another three similar funds were added in 2002. According to the complaint from plan participants and beneficiaries, versions of the same funds, with lower fees, were available to institutional investors, yet these versions were not in the Edison 401(k) plan. Thus, the plaintiffs said they paid higher fees than necessary, reducing investment returns.

In the Supreme Court, the case revolved around the funds added in 1999. The company said that such disputes related to employer-sponsored retirement plans have a six-year statute of limitation based on when the funds were selected for the plan. As the action was begun in 2007, the employees’ complaint regarding the funds added 8 years earlier was untimely. A district court and the Ninth Circuit generally agreed with this argument.

The Supreme Court reversed, siding with the employees. The high court found that the fiduciary of an employer retirement plan has responsibilities similar to those of a trustee: not only to exercise prudence in selecting investment options but also to continually monitor those options, removing those now deemed to be imprudent. Fiduciaries should exercise “care, skill, prudence, and diligence,” as the Court put it.

The Court further found that as long as the actions upon which the employees based their claim of a breach of this continuing duty was filed within six years of their occurrence, the employees’ claim was timely filed. Thus, the Court sent the case back to the U.S. 9th Circuit Court of Appeals to review whether the employer had breached its continuing duty of prudence within the relevant six-year period with respect to the 1999 funds. (Earlier, the district court had decided for the employees in regard to the 2002 funds, where the statute of limitation was not an issue.) Despite what may have been reported, the Supreme Court did not address the substance of the employees’ complaint about high plan fees and their impact on long-term investment returns.

Eternal vigilance

Apparently, based on the Supreme Court’s holding in this case, fiduciary responsibility for investment choices in employer sponsored retirement plans lasts as long as the investment choices are offered by the plan. If you offer your employees a defined contribution plan, such as a 401(k), investment choices should be well considered, and fees should be part of that consideration. Going forward, menu options that no longer pass muster should be replaced or dropped.

Employer responses

Business owners who sponsor retirement plans should take heed of the Supreme Court’s message. Meet with the advisers who help with your plan to make sure investments are chosen carefully and scrutinized regularly. Get formal reports supporting those efforts, review them to see if you’re comfortable with what you read, and maintain the reports in a secure location.

You also might want to meet with an attorney familiar with securities law to get a knowledgeable opinion. Would it make sense to limit plan choices to a few low-cost stock funds and high-quality bond funds? Are there ways to reduce fiduciary responsibility by outsourcing? Ultimately, the most important question might be whether all the benefits of sponsoring a retirement plan for employees are worth the time and expense involved in reducing perpetual liability for possible missteps.

Supreme Court Decision May Affect State Taxes

In May 2015, the Supreme Court decided a case involving Maryland state personal income taxes (Comptroller of the Treasury of Maryland v. Wynne [No. 13-485]). The narrow 5-4 outcome in favor of the taxpayers, in which the Court held that Maryland’s personal income tax system violates the Constitution, could have far-reaching effects.

Maryland’s state personal income tax has two components: a “state” income tax, imposed at graduated rates, and a “county” income tax, imposed at a single rate depending on an individual’s county of residence. At the time of the dispute, Maryland offered a credit against the state tax for taxes paid to other states but not against the county tax.

Brian Wynne, a Maryland resident, was a part-owner of a health care company that operated nationally, filing income tax returns in 39 states. Because the company is an S corporation, its income flowed through to Brian and his wife, Karen, on their joint tax return. For the year in question, the Wynnes paid thousands of dollars in income tax to other states where the company operated. The Wynnes claimed a credit for the taxes paid to other states against their state and county income taxes. (A tax credit is a dollar-for-dollar reduction in tax owed.)

Maryland allowed the tax credit against the 5.75% state income tax but not against the county income tax. The couple challenged this determination administratively and in the courts, with the case eventually going to the Supreme Court, which held for the Wynnes. The Supreme Court held that Maryland’s personal income tax system was invalid because it led to some income being taxed twice, by Maryland and the state in which it was earned. This favored intrastate over interstate commerce, which the Court found violated the dormant Commerce Clause of the U.S. Constitution.

Gauging the impact

The decision will affect many Maryland taxpayers. According to some reports, about 8,000 residents have filed “protective refund” claims relating to this issue. Such claims preserve taxpayers’ rights in case of a favorable turn of events. Based on these numbers, $200 million of refunds could be triggered. This could help the individuals and companies that paid tax to other states but strain revenues in Maryland going forward.

The issue may reach beyond the borders of Maryland as well. Across the United States, many cities, counties, and other local entities tax residents’ income. If there are situations where business or individual taxpayers do not receive an offsetting tax credit, such laws might be invalid, in light of the Supreme Court decision.

Example: Bob Reynolds resides in a city with an income tax. Bob sells investment property in another state and incurs a taxable gain, thus requiring tax payments to the out-of-state jurisdiction as well as to his hometown. Unless Bob is entitled to an offsetting tax credit under his home state’s law, he may want to pay both the out-of-state and the local income tax and then file a refund claim, mentioning the Wynne decision.

Our office can help you determine whether any out-of-state income is being taxed twice, and help you to file a refund claim, if appropriate.

Trusted Advice

 Protective Refunds  

  • State laws vary, but a protective refund claim usually is a formal claim or amended return for a tax credit or refund of tax already paid.
  • Often, such claims are based on current litigation or possible changes in tax law.
  • When you file a protective claim, your right to a tax refund is contingent on future events, so the result may not be determined when the statute of limitation on amended returns expires.
  • Typically, a valid protective claim does not have to list a specific dollar amount or request an immediate refund.
  • A valid protective claim must be in writing, signed, with your contact information.
  • The claim should identify and describe the contingencies affecting the claim, as well as identify the specific years for which a refund is sought.

Be credit card chip compliant or be responsible for fraud!

This document was created to provide more information on Europay, Mastercard® and Visa® (“EMV”) and the proposed October 2015 “Liability Shift” deadline.

What is EMV?

EMVTM chip technology is the global standard for credit card and debit card payments. Named after its original developers (Europay, Mastercard® and Visa®), this chip technology features payment instruments (cards, mobile phones, etc.) with embedded microprocessor chips that store and protect cardholder data. This standard has many names worldwide and may also be referred to as: “chip and PIN”, “chip and signature”, “chip and choice” or “chip technology”.

What is chip technology?

Chip technology is an evolution in our payment system that will help to increase cardholder security and reduce fraud and fraud-related chargebacks. Chip cards are standard bank cards embedded with a micro-computer chip. Some may require a Personal Identification Number (“PIN”) instead of a signature to complete the transaction process.

What is the pending liability shift?

The pending October 2015 liability shift states that if a chip card is presented to a merchant that has not adopted a chip enabled terminal, liability for counterfeit fraud may shift to the merchant acquirers, such as M&T Bank, instead of the card issuing bank. In accordance with the merchant agreement, this cost is the merchant’s responsibility. This liability shift encourages the adoption of chip enabled terminal since any chip- on-chip transaction (chip card read by a chip certified terminal) provides the dynamic authentication data that helps to protect all parties. If a counterfeit magnetic stripe card is presented at a chip certified terminal, the liability for the counterfeit fraud will be the responsibility of the card issuer.

How does EMV chip technology work?

Your EMV-enabled point-of-sale device will communicate with the chip inside the customer’s smart card to determine whether or not the card is authentic. The terminal will then prompt the customer to sign or enter a PIN to validate their identity. This process enhances the authentication of both the card and cardholder, effectively reducing the possibility that your business will accept a counterfeit card or be held liable for a fraud-related chargeback. It is important to note that the card will remain in your point-of-sale device for the length of the sale so your device should be put in a place that is easy for your customer to access.

What makes EMV different than the traditional magnetic stripe card payment?

EMV is a global initiative to combat fraud and protect sensitive payment data in the card-present environment. Card data from a traditional magnetic stripe cards can be copied (skimmed) with a simple and inexpensive card reading device – enabling criminals to reproduce counterfeit cards for use in both card present and card-not-present environments. Chip technology is effective in combating counterfeit fraud with its dynamic authentication capabilities (dynamic values existing within the chip itself that, when verified by the point-of-sale device, ensure the authenticity of the card).

Why should I invest in chip card acceptance now?

Preventing the growth of fraudulent activity is one of the main reasons the payment industry is moving toward EMV. Chip cards make it difficult for fraud organizations to target cardholders and businesses alike. As a result, more and more chip cards are being introduced by U.S. financial institutions in order to support and switch over to this technology.

How is a chip card different from a traditional payment card?

A chip payment card looks like a traditional card with an embedded chip (see image below), in addition to the standard magnetic stripe on the back of the card. What you see on the card is not the actual microchip but a protective overlay. The microchip provides an additional level of authenticity for the transaction.

Will I still be able to accept traditional credit and debit cards?

Terminals will still have a magnetic stripe swipe reader and you can continue to accept payment cards that are not chip-enabled. Chip cards will still have a magnetic stripe during the U.S. migration to EMV, to ensure that customers can continue to pay until all merchants have been given the time to upgrade their equipment.

How will chip cards impact the checkout experience?

To process a chip card transaction, follow these four simple steps:

1. Identify whether the card is a chip card.
2. If it’s a chip card, the customer should then insert it into the chip card reader (slot on the bottom-front of the terminal) and leave it there until the transaction is complete.

3. Follow the prompts displayed on the terminal.

4. Let the customer complete the transaction by keying in a PIN or signing the receipt.

How do I know if I need a PIN pad or not?

The card issuing bank sets the requirement for PIN entry at each individual card level. It is in your best interest to use a PIN entry device at your place of business to ensure that protective measures are taken; however, it is not a requirement that you have a PIN entry device. You can still accept the card using the magnetic stripe reader.

Of importance, if you opted to swipe the card because you could not support PIN entry, you may be subject to chargebacks for counterfeit cards or fraudulent activity beginning in October 2015.

Am I required to support EMV?

No, you are not required to support EMV in the U.S. at this time. However, the pending October 2015 liability shift is an item you should consider and the ramifications to your business.

FAQ’s

What does EMV migration mean for card-not-present (“CNP”) merchants?

As EMV is adopted in the card present space, it is expected that fraud will also shift to the least secure channels, including card-not-present environments. It’s important that CNP businesses be prepared for this anticipated shift, as experienced in other regions that have already migrated toward chip card technology.

As fraud migrates online and fraudsters continue to get more sophisticated, the tools you have in place now may no longer be advanced enough to protect you and your customers. Strategy is key, and it’s imperative to take the extra measures to know good customers and good customer behavior (beyond just Address Verification and Cardholder Verification Value checking). It is recommended that you avoid the use of Address Verification and card validation values (security code) checks as your sole fraud detector since the false positive exposure can be high with these tools alone. You should consider strengthening the value of these tools by supporting additional technology to confirm and mitigate fraudulent activity.

Is this technology unique to the United States?

No. Chip technology standard for payments was first used in France in 1992. Today, there are more than 1 billion chip cards used around the world. The U.S. is one of the few industrialized nations that have not fully transitioned to this technology standard.

Source: M&T Bank EMV FAQ-Customer-Facing.pdf

New Due Dates to Take Effect for 2017 Filing Season

On July 31, President Obama signed into a law a bill that included changes to due dates for certain returns; these changes had been proposed by AICPA members who wanted a more logical chronology so that information taxpayers needed to file 1040s or 1120s would be available on time. The law also provides several new extension dates. Use the chart as a handy reference to keep track of what is changing and when.

Capture
The most significant changes is that partnerships are required to file by March 15th (instead of April 15th) C Corporations must file by April 15th (instead of March 15th) and tax exempt organizations may apply for an automatic six month extension.

  • Partnership returns (1065 form – GPs, LPs, LLCs) will be due March 15 instead of April 15. The extension changes from 5-month to 6-month, keeping it at September 15.
  • C-corporation returns (1120 form) will be due April 15 instead of March 15. The extension changes from 6-month to 5-month, keeping it at September 15.
  • Trust and estate returns (1041 form) are still due April 15, but the extension is now an extra 1/2 month, meaning September 30.
  • The foreign reporting form FinCen 114 is now due April 15 instead of June 30, but gets a brand new six-month extension, mirroring the 1040 schedule.
  • Tax-exempt entities (990 form) finally get a full automatic 6-month extension, removing the 3-month automatic extended due date of August 15.
  • Finally, benefit plans (5500 form) get a longer extension, from September 15 to November 15.