Prior to the alternative simplified credit (ASC), many companies could not claim the R&D credit because they didn’t have the records establishing their qualified research expenses and gross receipts during the 1984 – 1988 tax years (now over 25 years ago). Therefore they couldn’t compute an appropriate base amount as required with the regular R&D credit computation. The ASC — established in 2007, enhanced in 2009, and now even rumored to increase again with the next extension – only looks back at the three previous years’ of qualified research expenses for this computational method. The ASC must, however, be claimed on a timely, originally filed return. Or in other words, if the ASC was not claimed on the prior tax year return, a taxpayer cannot amend those returns to claim the ASC.

Download our white paper, The R&D Credit: Qualifying Your Activities. Questions about the R&D credit? Contact Mark Dunning at 720-227-0420 or mdunning@taxops.com.

Williams Cos., an interstate gas-pipeline asset-holder, has become the latest poster child for what can go wrong if a company is not focused on its tax provision. Failure to properly account for deferred tax liabilities from its investment in a limited partnership due to material weakness in internal controls resulted in the public company restating its 2011 financial results. The misstatement slashed off nearly $500 million of its shareholder value overnight– all because of a misstatement in accounting for income taxes.

Find out the importance of and potential pitfalls related to accounting for income taxes by downloading our white paper on ASC 740, “A Closer Look at Accounting for Income Taxes”. By downloading our white paper, you will also receive our ASC 740 Fundamentals Series, a 10-part series offering a practical approach to meeting standard requirements. Download TaxOps ASC 740 white paper. Contact Dan DeLau at 720.227.0065 or delau@taxops.com with questions regarding ASC 740. See the CFO Report about the Williams Cos. at Provision Misstatement.

The Treasury Department and IRS have issued final regulations providing guidance on the deferral of losses on the sale or exchange of property between members of a controlled group. The final regulations retain the rules set out in the proposed regulations issued in April of last year, with some with small clarifying changes. T.D. 9583 was published April 16, 2012 in the Federal Register.
Contact us at info@taxops.com for questions about tax issues affecting your business.

On Wednesday, the U.S. Supreme Court affirmed the Fourth Circuit’s decision in Home Concrete & Supply, LLC, which had ruled that the extended six-year statute of limitation under Sec. 6501(e)(1)(A), which applies when a taxpayer “omits from gross income an amount properly includible” in excess of 25% of gross income does not apply when a taxpayer overstates its basis in property it has sold (Home Concrete & Supply, LLC). For details on the ruling, see the Journal of Accountancy.

Questions regarding overstated basis can be directed to Mike Abramovitz at 720-227-0423 or mabramovitz@taxops.com.

IRS is focusing greater resources on small- and mid-size businesses ($10 million to $250 million in assets). Pre-filing agreements with large business taxpayers account for some of the shift. According to Forbes Contributor Dean Zerbe:

• Audit coverage for corporations with asset size $10 – $50 million has gone up from 11.7% to 13.3%;

• Audit coverage for corporations with asset size $50 – $100 million has gone up from 11.7% to 18.9%;

• Audit coverage for corporations with asset size $100 – $250 million has gone up from 12.8% to 16.6%; and

• Audit coverage for corporations with assets over $250 million has gone up nominally from 27.4% to 27.6%.

At the same time, audits of S Corps and Partnerships have gone up in raw numbers. Mr. Zerbe notes that the IRS audit workforce is fat with young blood ready to cut their eyeteeth auditing smaller companies in an effort to collect billions of dollars in uncollected taxes. Small- to mid-size business should be on notice that the taxman cometh. Read Mr. Zerbe’s article at Forbes.

The Government Accountability Office (GAO) found that the Internal Revenue Service’s (IRS) Form 8938 and the Report of Foreign Bank and Financial Accounts, or FBAR, are “duplicative,” often asking for the same or similar information. The two forms ask for similar information about the individual filer, foreign financial accounts, and financial institutions where accounts are held. The report added that the duplication create potential confusion. While both forms aim to uncover income and assets held by U.S. taxpayers overseas, Form 8938 is part of the Foreign Account Tax Compliance Act of 2010 and is filed with the IRS as part of the tax return. The FBAR is part of the Bank Secrecy Act in 1970 and is filed with the United States Treasury Department (Treasury). The GAO recommended that the Treasury and the IRS revise the forms and instructions to clarify extent of duplication, and the circumstances in which filers are, or are not, expected to comply with both reporting requirements. It also recommended due diligence to determine how cost-effective it would be to reduce the duplication between the forms. Taxpayers that report different or inconsistent information on an FBAR and Form 8938 may raise red flags that prompt a review.

Tax business executives polled in the Tax Policy Forecast Survey predict a smaller agenda for tax reform this year. The survey by Miller & Chevalier Chartered indicates executives see politicos focusing on traditional extenders, such as the R&D credit, the AMT patch and expiring tax provisions, if tax policy reform is considered at all. Among the provisions set to expire by year-end 2012 unless extended are reduced individual income tax rates, and reduced capital gains and dividend rates. The pending Presidential and Congressional elections, however, are seen by executives as the most significant factor affecting the short-term tax legislative agenda. Respondents believe that the elections, coupled with the current split in Congressional control, mean a very real possibility for no additional tax legislation enacted this year, hence the expiration of a number of important items. Details can be found in the Report.

On March 15, the IRS issued a directive instructing field examiners to discontinue current exam activity relating to positions taken on original returns for the following issues:
1) Whether costs incurred to maintain, replace, or improve tangible property must be capitalized under 263(a);
2) Any correlative issues involving the disposition of structural components of a building or dispositions of tangible depreciable assets (other than a building or its structural components).
The suspension of current examinations is to permit taxpayers to file accounting method changes under just-issued revenue procedures. Certain taxpayers are subject to the new temporary rules in T.D. 9564 released in December and are required to file for automatic changes in accounting methods under Rev. Procs. 2012-19 and 2012-20 for tax years beginning after Dec. 31, 2011. Proposed regulations regarding tangible property were also released in December. In addition, the IRS released Revenue Procedures on March 7, which provide the transition rules taxpayers need to follow to come into compliance with the temporary regulations. For tax years beginning after Dec. 31, 2013, the IRS has instructed examiners to follow the regulations in effect and follow normal procedures. See the directive for details. See related blog content Temporary Regulations for treatment of repairs and capital improvements; accounting method changes may be required .

The IRS launched a new Voluntary Classification Settlement Program (VCSP) for taxpayers that agree to prospectively treat workers as employees. To be eligible, the employer must have consistently treated the workers as nonemployees and have filed all required Forms 1099 for the workers for the previous three years. Taxpayers accepted into the VCSP will pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year; the taxpayer will not be subject to additional interest and penalties, or a tax audit.

For more information, see www.irs.gov/irb/2011-41_IRB/ar14.html.

The IRS has issued a December 2011 version of Notice 1015, Have You Told Your Employees About the Earned Income Credit (EIC)? The EIC is a refundable tax credit for certain low-income workers. The credit is intended to offset living expenses and Social Security taxes paid. Eligible employees claim the credit on their personal income tax returns.

Employers must notify each employee who has worked for the company at any time during the year and from whom the company did not withhold income tax. However, employers do not have to notify any employee who claimed an exemption from withholding on Form W-4, Employee’s Withholding Allowance Certificate.

Generally, the IRS are encouraged to notify each employee whose wages for 2011 are less than $49,078 that he or she may be eligible for the EIC. Specifically, there are seven states that require IRS EIC notification, including:

California, Illinois, Louisiana, Maryland (eff. 1/1/2012), New Jersey, Texas, and Virginia.

IRS Notice 1015 is an available online IRS publications that answers the following questions:

• Which employees must be notified about the EIC?
• How to notify employees about the EIC?
• When further action is required or not required
• Hand-delivery or delivery of Notice 797 to employees by first-class mail

 Find out more about EIC notification by downloading the Notice 1015

(Rev. December 2011) at www.irs.gov/pub/irs-pdf/n1015.pdf or by calling 1-800-829-3676.