James W. Rahmlow, The Daily Record Newswire
In the frequently asked questions section on the www.irs.gov website, the IRS tells taxpayers that it will continue to follow the Defense of Marriage Act unless the law is struck down or repealed. Challenges to DOMA are making their way through the federal courts, with the possibility of a decision ultimately being made by the U.S. Supreme Court.
Currently, the option to file tax returns as married filing jointly or married filing separately is available only to opposite-sex married couples. Even if state law allows same-sex couples to marry, federal law does not treat them as married for federal tax purposes.
In the same line, a taxpayer cannot file as a head of household if the taxpayer’s only dependent is his or her same-sex partner since a same-sex partner is not one of the related individuals per the law that allow a taxpayer to file as head of household.
A new commissioner after the election
In a recent information release, the IRS announced that Douglas Shulman, commissioner of the Internal Revenue, will leave his post on Nov. 9, which is the last day of his five-year term. Shulman was originally nominated to the position by President George W. Bush in November 2007.
Shulman’s major initiatives have included two offshore voluntary disclosure programs and launching a return preparer initiative aimed at tightening up the world of tax preparation. Until the vacancy is filled, Steven Miller, deputy commissioner for Services and Enforcement will serve as acting commissioner.
Alternative to the installment method
In a private letter ruling, the IRS acknowledged that a taxpayer was entitled to use an alternative method to the installment method for recognizing revenue if the taxpayer is able to prove that it is appropriate in the circumstances. The normal installment method requires a taxpayer to recognize income as consideration is received (Code Sec. 453 [a]).
In the request at hand, the taxpayer requested that an alternative methodology be applied since a detailed analysis revealed that projected earnings would not in fact materialize in later years. Since the IRS agreed that the taxpayer would not receive any portion of projected amounts for later years, they allowed the taxpayer to use an alternative method of basis recovery for the sale of assets.
Supreme court denial makes Eighth Circuit’s decision final
On Oct. 1, the Supreme Court began a new term. In conjunction with that term, the court declined to review a widely watched S corporation compensation case (Watson, P.C., 2012-1, USTC ¶50,203). The case involved a taxpayer’s claim that no FICA taxes were required to be paid on the S corporation’s $200,000 of earnings since the taxpayer had received a $24,000 salary for its services as an owner-employee.
The IRS concluded that the taxpayer’s services were valued at $91,000 as an owner-employee and it was that amount that should be subject to FICA tax. The Eighth Circuit Court of Appeals essentially agreed with the IRS and held that the $24,000 compensation was well below an annual amount that would be paid to a comparable individual in this particular line of business and that a portion of the $200,000 in dividends was in fact subject to FICA taxes. The Eighth Circuit’s decision is final since the Supreme Court declined to hear the case.
Monthly applicable federal rates for November
In a recent revenue ruling, the IRS issued its Applicable Federal Rates and its Adjusted Applicable Federal Rates for November 2012. Below is a summary of those rates:
Short Mid Long
Term Term Term
Applicable
Federal Rates
0.22% 0.89% 2.38%
Adjusted Applicable
Federal Rates
0.24% 0.98% 2.80%
These rates are adjusted monthly.
PTIN database to be created for 2013
One of the accomplishments of outgoing Commissioner Shulman is the creation of a PTIN database. Expected to be available in May 2013, the database will allow taxpayers to research their preparer to make sure that the preparer meets the agency’s standards.
The database is expected to include all valid PTIN holders who have professional credentials, (CPAs, attorneys, enrolled agents and registered tax return preparers.) Additionally, taxpayers will be able to search for preparers by ZIP code.
Latest individual tax statistics
As we approach the election and future discussions of tax changes, it is interesting to look at the most recent data issued in the 2012 summer issue of the IRS Statistics of Income Bulletin. The information included a summary of the 2010 tax year and found that 142.86 million individual tax returns were filed in 2010, just over a 12 percent increase over a 10-year period.
Of those returns filed in 2010, approximately 1/3 of the filers itemized their deductions with the other approximately 2/3 of the taxpayers claiming the standard deduction. The itemized returns contained state and local tax deductions of $46.2 million, mortgage interest of $432.61 billion and $158.19 billion in the all-important discretionary category of charitable contributions. These significant amounts are drivers of the economy and their repeal or reduction could have serious economic effects.
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James W. Rahmlow, a certified public accountant, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at jrahmlow@mmb-co.com.
