IRS Opens 2016 Tax Season

In IR 2016-05, the IRS announced that tax season will open on January 19, 2016. Because April 15 is Emancipation Day, taxpayers may file until Monday, April 18. There are two exceptions – taxpayers in Maine and Massachusetts will observe Patriot’s Day on April 18 and may file until April 19.

IRS Commissioner John Koskinen expects this season to flow more smoothly than last year. He encourages taxpayers to use the IRS website. Koskinen stated, “IRS.gov is the best place for taxpayers to go for information about filing their income tax returns this year. Although we will have more people staffing our phone lines this year, we expect those lines to remain busy so we encourage people to visit the web first as the quickest and easiest way to get assistance.”

The IRS expects approximately 80% of all returns to be electronic. Over 70% of taxpayers are likely to receive refunds. The average refund last year was $2,797.

The Free File program is also expected to be very popular. Over 100 million taxpayers with incomes of $62,000 or less may use free commercial tax software from the IRS website.

Taxpayers with any amount of income may use the IRS fillable forms. Of course, these require the taxpayers to have a general understanding of the tax system to complete these forms.

If you need a return from a prior year, you should use the “get transcript” tool on IRS.gov. It often will take 10 days for you to receive the transcript by regular mail.

This is the second year for filing under the Affordable Care Act (ACA). Most taxpayers will simply check the box if each family member had qualifying healthcare coverage for the year. There are various exemptions from mandatory ACA coverage. The IRS has an online tool that may be helpful in determining if you qualify for an exemption.

If you have a healthcare premium tax credit, you will need to file IRS Form 8626 to reconcile the credit amount with your actual qualification number. The Healthcare Marketplace Form 1095-A will be needed to complete IRS Form 8626.

Healthcare providers may send out IRS Form 1095-B or Form 1095-C. A taxpayer may file early if the required healthcare information is available from other sources. You may check the “Questions and Answers” section on www.irs.gov/aca for assistance in completing your tax return medical forms.

IRS Cautions on Identity Theft

IRS Commissioner John Koskinen highlighted 2016 efforts to combat identity theft and tax refund fraud. He stated, “IRS employees have been working hard to get ready to help taxpayers this filing season. As part of our Security Summit Initiative, the IRS has been working closely with the tax industry and state revenue departments to provide taxpayers with stronger protections against identity theft during the tax filing season.”

The IRS has initiated a Security Awareness program. Publication 4524 covers many of the risks and protective actions. Taxpayers should consider three steps to protect themselves.

1. Security Software—Make sure that your security software is always turned on and has the appropriate updates.
2. Phishing Emails—If you receive a suspicious email, do not click on any links or documents. The email may claim to be from your bank, credit card company or even the IRS.
3. Personal Data—Protect your Social Security Number and do not carry it with you. Make sure your tax records are in a safe and secure location.

There are several warning signs that you have potentially been a victim of tax refund fraud.

1. Multiple Returns—If you receive a notice from the IRS that others have filed using your Social Security Number, you are probably a victim.
2. Added Tax—The IRS may ask for additional payment or offset your tax refund due to a prior payout.
3. Higher Wages—The IRS claims that you have more income than you actual earned in 2015.
4. State Benefits—Your state or federal benefits have been cancelled due to higher income reported to the IRS.

If you have reason to believe you are a victim of identity theft, there are several actions to take.

1. Report—Go to identitytheft.gov to file a complaint with the Federal Trade Commission.
2. Credit Bureaus—Contact a major credit bureau and place a “fraud alert” on your account. The credit bureaus may be contacted at Equifax.com, Experian.com or Transunion.com.
3. Close Accounts—Contact your bank or financial services company. Close the account with the tampering and open a new account.
4. If Social Security Number used—When your Social Security Number has been used by a tax fraudster, complete IRS Form 14039, Identity Theft Affidavit.
5. Tax Payments—You may need to file a paper tax return for this year. Your tax amounts are still due and must be paid.

AICPA Requests Estate Closing Letter Changes

In a January 11 letter to the IRS, the American Institute of CPAs (AICPA) requested changes to the IRS policy on estate closing letters.

Estates over $5,450,000 in 2016 are required to file IRS Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return. The return is due nine months after date of death, with a six month extension permitted. Prior to 2015, the IRS automatically issued a closing letter for estates that filed a Form 706.

On Nov. 2, 2015, the IRS notified estate advisors that they need to call 866-699-4083 four or more months after filing to obtain a closing letter. On Dec. 9, 2015, the IRS website indicated that an estate transcript may be requested four to six months after filing.

AICPA outlines five reasons for an executor to obtain an IRS closing letter.

1. Distributions—executors need assurance that appropriate taxes are paid and distributions to beneficiaries may commence.
2. State returns—those states with an inheritance tax require submission of the federal closing letter.
3. Property liens—the closing letter permits release of tax liens and clears the real estate title.
4. Financial Institutions—banks and financial services companies may require a closing letter before releasing funds.
5. Beneficiary basis—the “final determination” of IRS value will be used by the beneficiary to establish basis if the asset is sold.

AICPA proposes two changes for IRS consideration.

1. Check box—add a checkbox to IRS Form 706 to request a closing letter. Permit a handwritten request until the Form 706 is updated.
2. Delivery—use the transcript delivery service (TDS) to send the closing letters.

Applicable Federal Rate of 2.2% for January—Rev. Rul. 2016-1; 2016-2 IRB 1 (21 Dec 2015)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2016. The AFR under Section 7520 for the month of January will be 2.2%. The rates for December of 2.0% or November of 2.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.