As CPAs make ready for the 2018 tax filing season, many of the measures enacted in late 2016 and first effective for that tax year bear continuing attention in the 2017 tax year, such as the ongoing requirement to renew individual tax identification numbers (ITINs), described below, which can particularly cause problems if the need for renewal is not noticed until the return filing deadline.
The 2018 deadline for filing individual returns is April 17, since April 15 falls on a Sunday and the next day, Monday, April 16, is Emancipation Day, a legal holiday in the District of Columbia. The beginning date for e-filing returns had not yet been announced as of this writing. (Update: The IRS has announced that it will start accepting returns on Jan. 29, 2018.) Preparers might keep in mind the change, new for 2016 returns and subsequently, allowing refunds to be issued no sooner than Feb. 15 for returns claiming an earned income tax credit (EITC) or additional child tax credit (Sec. 6402(m)). For all returns, CPA preparers can print for reference the handy quick guide to key thresholds, limitations, and other amounts updated for the 2017 tax year that accompanies this article.
Download: Print the accompanying quick guide PDF to use through filing season.
REVIEWING FIRM PRACTICES AND PROCEDURES
With fewer new tax law requirements this time around, CPAs might find they have greater opportunity to focus on their own practices and procedures. Good resources in this respect include a recent column, "Tax Practice Management: Kicking Off Tax Season With Engagement Letters and Organizers," The Tax Adviser, Dec. 2017. Also, the AICPA Tax Section provides tax practice resources that many CPAs rely upon. See the AICPA Resources section in this article for the Tax Section and more.
One area of practice and procedures that has continued to be in the spotlight is cybersecurity for taxpayers and, increasingly, for firms as well. Last year saw new use of taxpayers' driver's licenses by states as taxpayer identifiers, including a few states that required entering a driver's license or state-issued identification number for filing state returns. Others recommended entering a number, saying it would expedite return processing (and leaving unclear whether its omission would slow it). Many preparers found the requirement or recommendation problematic, not having obtained the numbers in their organizers or other client correspondence and then had to contact clients again to get them. To address this, firms might include a request for driver's license numbers in their organizer questionnaire, perhaps with an explanation to clients who could well be shellshocked by this point by nearly continuous news of data breaches and be reluctant to put one more personal identifier on a form — even to their trusted adviser — unless persuaded of its necessity.
Speaking of data breaches, it remained to be seen at this writing what the impact may be on tax identity theft in the wake of credit reporting company Equifax's revelation in September 2017 that 145.5 million individuals' personal information may have been compromised by hacks of its databases. Equifax also was under contract (suspended in October) with the IRS to verify taxpayers' identities for the Service's Secure Access registration for online taxpayer access to transcripts (also hacked before this measure was in place) and tax accounts, and for obtaining identity protection personal identification numbers. The suspension of the Equifax contract has delayed the IRS's rollout of Secure Access registration as the Service works to find a new vendor.
The IRS has said no taxpayer data was involved in the Equifax breach, but the company acknowledged that stolen data included names, Social Security numbers, birthdates, addresses — and some driver's license numbers. The IRS appears to have made inroads in 2016 and 2017 in its ongoing campaign against tax ID theft fraud (see IRS News Releases IR-2016-144 and IR-2017-176, also "2017 Tax Software Survey" sidebar, "Fewer CPAs See Tax ID Theft," JofA, Aug. 2017). Former IRS Commissioner John Koskinen said in October that the Equifax breach wasn't expected to cause any major changes in filing during 2018, although he suggested that taxpayers should take steps to protect their personal information. An expanded pilot program of 16-digit verification codes on Forms W-2, Wage and Tax Statement, will feature for the first time in this, its third year, a dedicated field on the form for the number. News Release IR-2017-176 highlights this and other security measures for individual taxpayers, as well as some for businesses and trusts and estates. These include several "new questions" businesses, trusts, and estates and their return preparers may be required to answer when filing returns to authenticate them, such as their filing history of certain employment tax and other business-related returns.
For the security of their own practices, CPAs might review the IRS news releases directed toward them, on the "Protect Your Clients; Protect Yourself" webpages at irs.gov (www.irs.gov). For example, the Service warned that a phishing email scam impersonates a tax preparation software provider with a fake security alert or software update. Other scams impersonate new client inquiries and even the IRS itself, with a bogus e-services user agreement.
PROVISIONS AFFECTING INDIVIDUALS
ITINs and other numbers
One ongoing change is the expiration of ITINs issued after Dec. 31, 2012, that have not been used on a return for three consecutive tax years. Also, all ITINs issued before Jan. 1, 2013, must be renewed on a rotating schedule. ITINs with the middle two digits 70, 71, 72, or 80 expired at the end of 2017 and must be renewed. Affected clients may have already taken care of the matter; the IRS said it would mail notices to taxpayers beginning in August 2017 advising them to submit Form W-7, Application for IRS Individual Taxpayer Identification Number.
This requirement was enacted as part of the Protecting Americans From Tax Hikes (PATH) Act of 2015, part of the Consolidated Appropriations Act, 2016, P.L. 114-113; another is that an ITIN, Social Security number, or other taxpayer identification number (TIN) must have been issued on or before the due date of filing a return for a valid claim of a child tax credit or American opportunity tax credit for qualified higher education expenses. The IRS advised in News Release IR-2017-128 that a return filed in 2018 with an expired ITIN will be processed, but exemptions and credits for which a TIN is required will be disallowed. Taxpayers will be notified by mail of the disallowance, and once they renew their ITIN, any applicable exemptions and credits will be restored and any refunds will be issued.
Higher medical expense deduction threshold for seniors
This law change made by the Patient Protection and Affordable Care Act of 2010 (PPACA), P.L. 111-148, affects older taxpayers who itemize deductions and is evident for the first time on returns for 2017. Sec. 213(f), as amended by PPACA, retained the longtime threshold for deductibility of medical expenses of 7.5% of adjusted gross income (AGI) if taxpayers or their spouses were 65 years old or older at the end of the tax year; all other individuals have had to meet a 10% threshold (starting in 2013). However, this retention of the 7.5% threshold for seniors was temporary through 2016. Thus, on 2017 returns, the 10% threshold applies to all taxpayers, regardless of age. (Update: Section 11027 of the Tax Cuts and Jobs Act, P.L. 115-97, restored the 7.5% threshold for all taxpayers for tax years beginning after Dec. 31, 2016, and ending before Jan. 1, 2019.)
Speaking of PPACA, the IRS announced in October that it will not accept electronically filed 2017 individual income tax returns unless taxpayers indicate that they and everyone on their return had health care coverage, qualified for an exemption from coverage, or will make a shared-responsibility payment (under Sec. 5000A). Any returns filed on paper that do not address the health coverage requirements may be suspended until the Service receives additional information, and any refund due may be delayed. This filing season will be the first time the IRS has not accepted returns that are "silent" on the requirement; in previous years, it has accepted them and subsequently sent follow-up compliance notices.
In late summer and early fall of 2017, damage to areas of Texas, Florida, Georgia, Puerto Rico, and the U.S. Virgin Islands from Hurricanes Harvey, Irma, and Maria prompted a flurry of IRS relief measures for affected taxpayers. Some relief provided an extension to Jan. 31, 2018, for tax filings and payments due during periods beginning from the designated date of arrival of those storms at each of the disaster zone areas. The IRS also waived the 10% additional tax on early distributions from certain employee retirement plans under the "hardship distribution" rules of Secs. 401(k)(2)(B)(i) and 403(b)(11). For a short summary, see "Tax Matters/Line Items: Hurricane Victims Get Extension, Other Tax Relief," JofA, Nov. 2017.
Congress enacted hurricane relief legislation that expands the administrative relief and potentially figures in 2017 returns for taxpayers in the affected areas in other ways, with the Disaster Tax Relief and Airport and Airway Extension Act of 2017, P.L. 115-63. The qualified plan distribution relief is widened under the act's provisions for "qualified hurricane distributions" (with a $100,000 lifetime limit), covering more types of plans and including individual retirement accounts, with longer relief periods (generally, until Dec. 31, 2018), allowing three-year spreading of income inclusion of such distributions, exempting them from withholding and certain trustee-to-trustee transfer rules, and allowing a three-year repayment period in which they may qualify as an eligible rollover distribution.
The Disaster Tax Relief Act also allows affected taxpayers to claim a "net disaster loss," calculated as the excess of "qualified disaster-related personal casualty losses" over personal casualty gains. The act also waives in such instances the 10%-of-AGI threshold otherwise applicable to a net personal casualty loss taken as an itemized deduction (but increases the $100-per-casualty floor to $500). It allows nonitemizers to increase their standard deduction by the amount of their net disaster loss and allows them to claim that portion of their standard deduction for alternative minimum tax purposes if applicable.
In addition, the act provides an option for qualified taxpayers claiming a child tax credit or EITC to base the credit amounts on their prior-year income, if greater than in the current year, thereby perhaps yielding a higher credit or credits.
CPAs with clients in the affected areas will have been advising those taxpayers on the relief available and will need to train staff and institute procedures accordingly. Practices that were themselves affected may also want to take advantage of a business provision of the act, described in the next section.
For qualified charitable contributions, the act temporarily suspends the percentage limitations in Sec. 170(b) and provides that those contributions will not be taken into account for purposes of applying Sec. 170(b) or the Sec. 170(d) carryover rules to other contributions. Qualified charitable contributions generally are contributions made in cash between Aug. 23, 2017, and Dec. 31, 2017, to a Sec. 170 charitable organization for relief efforts in the hurricanes Harvey, Irma, and Maria disaster areas, for which the taxpayer obtains from the organization contemporaneous written acknowledgment (as defined in Sec. 170(f)(8)) that the contribution was used (or will be used) for relief efforts in a disaster area and has elected to apply these rules to the contributions. Qualified contributions exceeding (for individuals) the taxpayer's contribution base less other allowable charitable contributions are subject to the five-year carryforward under Sec. 170(d)(1)(A). The act also makes an exception to the overall limitation on itemized deductions under which qualified contributions will not be treated as itemized deductions for purposes of the limitation.
PROVISIONS AFFECTING BUSINESSES
Employee retention credit
Eligible employers that conducted an active trade or business in the hurricane disaster areas on the specified date each of those storms struck (Harvey, Aug. 23; Irma, Sept. 4; and Maria, Sept. 16) may claim a credit of 40% of qualified wages paid to an eligible employee. Generally, qualified wages are wages paid by an eligible employer with respect to an eligible employee on any day after the designated disaster beginning date and before Jan. 1, 2018, while the eligible employer's business was inoperable on any day after the date the hurricane struck and before Jan. 1, 2018, as a result of damage sustained by reason of the respective hurricane. Eligible employees are employees of an eligible employer whose principal place of employment was in one of the respective hurricane disaster zones on the designated date the hurricane struck.
By now, business clients should be used to the due dates for partnership and corporate returns, as changed beginning with the 2016 tax year (see "Next Filing Season Will Be Better: Due Dates Have a New Logical Order," The Tax Adviser, Aug. 2016). Last filing season, enough partnerships were caught by surprise by the new March 15 due date for partnership returns, which previously had been April 15 for calendar-year filers, that the IRS provided relief in Notice 2017-47 from late-filing penalties for taxpayers complying with the terms of the notice. Some partnerships may miss the earlier date again this year; chances are, however, they will not receive the same relief again as was provided in the notice.
Research credit for small business startups
The Sec. 41(h) election by qualified small businesses to use their research credit amount against their payroll tax liability also was effective with the 2016 tax year, but the IRS provided interim guidance during the past year (Notice 2017-23) defining qualified small businesses and specifying the time and manner of making the election.
A qualified small business for this purpose includes a corporation, including an S corporation, that has less than $5 million in gross receipts in the tax year in which it claims the credit and did not have any gross receipts in any tax year before the five-tax-year period ending with the tax year in which it claims the credit. Any other person can be a qualified small business if the person meets the same tests, taking into account aggregate gross receipts from all the person's trades or businesses.
GOING THE DISTANCE
One development that has not been covered here is the possibility of major tax reform and its implications for tax planning; as of this writing, that effort was underway in Congress but with features still malleable enough for any observations or predictions to be premature. Of course, CPAs should also advise their clients on any tax planning opportunities or hazards arising from legislation as it moves through the congressional pipeline. (Update: The Tax Cuts and Jobs Act, P.L. 115-97, was signed into law on Dec. 22.) To keep up to date on tax reform, readers can visit the AICPA's Tax Reform Resource Center (available at www.aicpa.org). Also, as tax developments happen, the JofA, as always, will post articles and updates on journalofaccountancy.com. In the meantime, as tax season unfolds over the coming months, CPA tax preparers will likely find new challenges — and the resourcefulness to meet them.
About the author
Paul Bonner is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at Paul.Bonner@aicpa-cima.com or 919-402-4434.
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