New methodology for protective estate tax claims

By James W. Rahmlow The Daily Record Newswire In Rev. Proc. 2011-48, the IRS announced the methodology for filing protective claims for a refund of estate taxes. A protective claim is used to notify the IRS of an amount of an unpaid claim or expense that can be deductible when the amount of the claim is established or paid. The claim filing allows for amounts that might not generally be deductible as they are outside of the Code Sec. 6511(a) period of limitations. Generally, amounts that are deductible are claimed on Form 706. However, by filing the protective claim, which is due on the latter of three years after the estate tax return is filed, or two years after the tax is paid, there is no time limit on the protective claim. In order for a claim to be valid, it must describe in detail the exact basis of the claim, the applicable justification for the refund to be claimed and the rationale for the original delay of payment of the claim. Previously, protective claims were filed on Form 843 Claim for Refund if a Form 706 was filed. For decedents dying after Dec. 31, 2011, a new Form 706-Schedule PC will be available for preparers to use as part of the filing of the 2012 Form 706. Alternatively, preparers may file Form 843 if a Form 706 was previously filed. Low interest rates can be a boon to tax planning In conjunction with year end tax planning, please keep in mind the continued low Applicable Federal Rates (AFR) and Adjusted AFR issued monthly by the IRS. Below is a summary of the rates to be used for November 2011. The rates provided are the monthly rates. Short-term Mid-term Long-term Applicable AFR 0.19% 1.20% 2.64% Adjusted AFR 0.41% 1.38% 3.36% Tax Planning: Section 179 Expensing For business owners who are considering the purchase of equipment and other specified property, keep in mind that the liberal direct expensing provisions that exist in 2011 are scheduled to fall dramatically for assets placed in service in 2012. The current maximum amount that can be deducted in 2011 is $500,000 as long as total 2011 investment does not exceed $2 million. And this immediate deduction is allowed for off-the-shelf computer software that is placed in service before 2012. Based upon current legislation, the dollar limit is scheduled to fall to an inflation adjusted $139,000 in 2012 with maximum 2012 investment not exceeding $500,000 ($560,000 indexed for inflation). Thus the timing of when an asset is placed in service is crucial to the opportunity for immediate expensing. Earned Income Credit due diligence heightened Continuing to ratchet up the due diligence required of paid tax return preparers who file returns claiming the earned income credit (EIC), the IRS has announced that a due diligence checklist must now be actually filed with the tax return. Previously, paid preparers were required to complete the checklist, or otherwise document in the file, certain information relative to the claim. Now, Form 8867, Paid Preparer's Earned Income Credit Checklist, must be completed by the paid preparer and included with the return claiming the credit. This change is effective for any returns filed after Jan. 1, 2012. Updated employer provided aircraft rates As it does twice per year, the IRS has updated its applicable terminal charge and the Standard Industry Fare Level (SIFL) mileage rates for the second half of 2011. The rates are designed to determine the value of noncommercial flights on employer-provided aircraft, for purposes of inclusion in taxpayer income as a taxable fringe benefit. The basic terminal charge is $43.79 and the rates per mile (SIFL) are $.2395 for the first 500 miles, $.1826 for 501 through 1,500 miles and $.1756 for any miles over 1,500. IRS offers reasonable worker classification settlement program Dealing head-on with the controversy surrounding the classification of workers as employees or independent contractors, the IRS has announced the Voluntary Classification Settlement Program (VCSP) to allow taxpayers to voluntarily reclassify workers as employees who previously were reported as independent contractors. The workers will subsequently be subject to federal employment taxes, the IRS will extract a reduced penalty and very importantly, the taxpayer will be provided audit protection on those workers for prior years. The program requires the taxpayer to give up the fight that the individuals are truly independent contractors, but substantially lowers the taxpayer exposure both at the IRS and the Department of Labor level. In order to take advantage of the program, taxpayers must consistently have treated the workers as nonemployees and must have filed all required Forms 1099 for the three preceding calendar years (less if the business has been in existence less than three years). Taxpayers must file Form 8952, Application for Voluntary Classification Settlement Program. Requesting the VCSP at least 60 days in advance of the date the taxpayer wants to treat the workers as employees is required. If the IRS determines from the VCSP application that the taxpayer is eligible to be accepted, the IRS will enter into a closing agreement with the taxpayer. The closing agreement has a little pain. In return for having the IRS agree to treat the workers prospectively as employees, taxpayers must pay a percentage (based upon reduced rates) of the employment tax liability that may have been due for compensation paid to workers in the most recent tax year. Taxpayers will not be liable for any interest and penalties on the amount. Very importantly, the prior years will not be open to reclassification for the individuals involved. The program does require a "coming clean" approach. Taxpayers who feel that their individuals meet the independent contractor guidelines can pass on joining the VCSP, acknowledging that they may be at risk. For taxpayers who feel that they have a weak case in defending the independent contractor status, or have been concerned about the cost of complying, this may be an excellent time to meet with a professional and file an application with the VCSP. ---------- James W. Rahmlow, CPA, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at jrahmlow@mmb-co.com. Published: Tue, Nov 1, 2011