The Consolidated Appropriations Act, H.R. 2029, was passed by Congress on Thursday and Friday and now goes to President Barack Obama for his signature. As has been widely reported, the bill extends an extensive list of expired tax provisions—some permanently, some for five years, and many for two years, through 2016. (See prior coverage here for a list of extended provisions.) Less widely noted is the large number of other tax provisions that the bill enacts.
The Joint Committee on Taxation estimates that the total cost of the tax provisions in the bill will be $622 billion over 10 years—the tax extenders are estimated to cost $629 billion, and the changes to tax administration and other items described here are estimated to bring the cost down to $622 billion (see Joint Committee on Taxation Rep’t JCX-143-15).
Health care provisions
The so-called Cadillac tax on high-cost health coverage, imposed by Sec. 4980I, is delayed for two years and is now effective for tax years beginning after Dec. 31, 2019. The provision imposes a 40% nondeductible excise tax on the amount by which the monthly cost of an employee’s “applicable employer-sponsored coverage” exceeds statutory dollar limits.
The act also delays the 2.3% medical device excise tax under Sec. 4191, which will now not apply to sales during 2016 and 2017.
The act also puts a one-year moratorium on the Patient Protection and Affordable Care Act’s annual fee on health insurance providers, which applies to any covered entity engaged in the business of providing health insurance for U.S. health risks.
Amount of penalty: The act amends the Sec. 6664(a) definition of “underpayment” to include the refundable portion of credits. This overrules the Tax Court’s decision in Rand, 141 T.C. 376 (2013), which held that the amount of tax shown on the taxpayers’ return was reduced by refundable credits, but not below zero, for purposes of calculating the Sec. 6662(a) accuracy-related penalty.
Erroneous refunds and credits: The act also repeals the Sec. 6676 exception from the penalty for erroneous refunds and credits that currently applies to the earned income tax credit (EITC) and provides reasonable-cause relief from the penalty. This provision generally applies to returns filed after date of enactment.
Paid tax return preparers: The penalty imposed on paid tax return preparers who engage in willful or reckless conduct is increased to the greater of $5,000 (as under current law) or 75% of the preparer’s income with respect to the return (increased from 50%). This provision is effective for tax years ending after the date of enactment.
Miscellaneous tax provisions
Information returns: The act modifies the due dates for certain information returns. Specifically, Forms W-2, Wage and Tax Statement, and W-3, Transmittal of Wage and Tax Statements, and returns or statements that report nonemployee compensation (such as Form 1099-MISC, Miscellaneous Income) must be filed by Jan. 31 of the year following the calendar year to which the return relates. The current due date for filing these forms with the IRS is Feb. 28 for paper copies and March 31 for e-filed copies. The new due dates are effective for returns and statements relating to calendar years after the date of enactment.
The IRS is given additional time in new Sec. 6402(m) to review refund claims based on the EITC and the refundable portion of the child tax credit, effective for credits or refunds made after Dec. 31, 2016.
The act also establishes a safe harbor from penalties for failure to file correct information statements and from failure to furnish correct payee statements (a provision advocated for by the AICPA). Under the safe harbor, if an error is $100 or less ($25 in the case of errors involving tax withholding) the issuer is not required to file a corrected return and no penalty will be imposed. The recipient, however, can elect to have a corrected return issued. This provision applies to returns and statements required to be filed after Dec. 31, 2016.
ITINs: The act also makes several changes to the individual tax identification number (ITIN) issuance procedures and requires ITINs issued before 2013 to be renewed between 2017 and 2020.
Due-diligence requirements: The act expands the due-diligence requirements for paid tax return preparers. The current due-diligence requirements for preparers under the EITC—and the $500 penalty—are expanded to include returns that claim the child tax credit and/or the American opportunity tax credit. This provision is effective for tax years beginning after Dec. 31, 2015.
Higher education information reporting: The act changes the Form 1098-T, Tuition Statement, reporting requirements, so that schools will be required to report only qualified tuition and related expenses actually paid. Currently, they must choose between amounts paid and amounts billed. This provision is effective for expenses paid after Dec. 31, 2015, for education furnished in academic periods starting after that date.
Work college programs: The act exempts from gross income payments from certain work-learning-service programs operated by work colleges for tax years beginning after the date of enactment.
Sec. 529 accounts: The act expands the definition of qualified higher education expenses that are eligible for tax-preferred distributions from Sec. 529 accounts to include computer technology and equipment. The Sec. 529 account rules are modified to eliminate the distribution aggregation requirements, so any distribution from a 529 account will be treated as coming only from that account, even if the individual making the distribution has more than one 529 account. The act also treats a refund of tuition that was paid with amounts distributed from a 529 account as a qualified expense if the amount is recontributed to a 529 account within 60 days. The provision is effective for distributions made or refunds after 2014, or, in the case of refunds after 2014 and before the date of enactment, for refunds recontributed not later than 60 days after the date of enactment.
ABLE accounts: The act allows individuals to establish ABLE accounts (tax-deferred accounts for individuals with disabilities) in any state. Previously, individuals could set up accounts only in their state of residence. This change is effective for tax years beginning after Dec. 31, 2014.
Wrongful incarceration: The act allows individuals who were wrongfully incarcerated (as defined in new Sec. 139F) to exclude from gross income civil damages, restitution, and other monetary awards received as compensation for the wrongful incarceration.
Special rule for governmental plans: The act extends the special rule in Sec. 105(j) for certain benefits paid by accident or health plans of a public retirement system to benefits paid by plans established by or on behalf of a state or political subdivision of a state, for payments made after date of enactment.
Rollovers into SIMPLE IRAs: The act allows taxpayers to roll over amounts from employer-sponsored retirement plans to a SIMPLE IRA, for contributions after the date of enactment.
Airline employee IRA contributions: The act clarifies the effective date of the FAA Modernization and Reform Act, P.L. 113-243, which allows certain airline employees to contribute amounts received in certain bankruptcies to an IRA without being subject to the annual contribution limit.
Early retirement distribution exception for certain public safety officers: The act extends the current relief in Sec. 72(t)(10)(B)(ii) from the 10% penalty on early withdrawals from retirement accounts for qualified public safety employees to include nuclear materials couriers, U.S. Capitol Police, Supreme Court Police, and diplomatic security special agents of the State Department.
Tax collection period for members of Armed Forces: The act amends Sec. 7508(e) to not allow the collection period for members of the Armed Forces who are hospitalized for combat zone injuries to be extended by reason of their hospitalization.
Agricultural research organizations: The act provides that charitable contributions to an agricultural research organization are subject the higher individual limits (up to 50% of the taxpayer’s contribution base) if the organization commits to use the contribution for agricultural research within certain time limits.
Taxpayers with limited alcohol excise tax liability: The act allows producers of alcohol that reasonably expect to be liable for not more than $50,000 per year in alcohol excise taxes to pay those taxes on a quarterly basis instead of monthly. Those that reasonably expect to not be liable for more than $1,000 per year can pay those taxes annually, rather than quarterly. The act also exempts those producers from bonding requirements with the IRS.
Alternative tax for small insurance companies: The act increases the maximum amount of annual premiums that small property and casualty insurance companies can receive and still elect to be exempt from tax on their underwriting income. The maximum amount is increased from $1.2 million to $2.2 million and indexed for inflation for calendar years beginning after 2015. The increased premium applies to tax years beginning after Dec. 31, 2016.
Timber gains: The act provides that C corporations’ timber gains are subject to tax at a 23.8% rate.
Hard cider: The act defines hard cider for purposes of the alcohol excise taxes.
Church plans: The act prevents the IRS from aggregating certain church plans for purposes of the nondiscrimination rules and allows church plans to decide which other church plans they will associate with.
The act makes a number of changes to the rules regarding real estate investment trusts (REITs). Specifically, the act:
- Amends Sec. 355 to restrict tax-free spinoffs by REITs and Sec. 856 to prevent a REIT election for 10 years following a tax-free spinoff.
- Reduces from 25% to 20% the percentage limitation on REIT assets that can be taxable REIT subsidiaries, effective for tax years beginning after 2017.
- Introduces prohibited transaction safe harbors for REITs that provide an alternative three-year averaging test for the percentage of assets that can be sold annually.
- Repeals the application of the preferential dividend rule to publicly offered REITs.
- Gives the IRS authority to provide appropriate alternative remedies to cure failures of a REIT distribution to comply with the preferential dividend requirements of Sec. 562(c).
- Limits the designation of dividends by REITs. The aggregate amount of dividends designated by a REIT cannot exceed the dividends actually paid by the REIT.
- Treats debt instruments issued by publicly offered REITs and mortgages as real estate assets.
- Clarifies the asset and income tests regarding ancillary personal property.
- Permits the termination of REIT hedging transactions using additional hedging instruments.
- Modifies the REIT earnings and profits calculation to avoid duplicate taxation.
- Treats services by taxable REIT subsidiaries as services by independent contractors for certain purposes.
- Provides an exception from FIRPTA for certain REIT stock.
- Excepts interests held by foreign retirement or pension funds from the Sec. 897 rules regarding dispositions of investments in U.S. property.
- Increases the rate of tax withholding on dispositions of U.S. real property interests.
- Provides that interests in regulated investment companies (RICs) and REITs are not excluded from the definition of U.S. real property interests.
- Makes dividends derived from RICs or REITs ineligible for deduction for the U.S.-source portion of dividends from certain foreign corporations.
Taxpayer rights: The act requires the IRS to ensure that its employees are familiar with and act in accord with certain taxpayer rights:
- The right to be informed;
- The right to quality services;
- The right to pay no more than the correct amount of tax;
- The right to challenge the IRS’s position and be heard;
- The right to appeal the IRS’s decisions in an independent forum;
- The right to finality;
- The right to privacy;
- The right to confidentiality;
- The right to retain representation; and
- The right to a fair and just tax system.
Email accounts: The act also prohibits IRS employees from using personal email accounts to conduct official business.
Whistleblowers: The act allows the IRS to disclose to whistleblowers who have reported unauthorized disclosure or inspection of return information or offenses by officers and employees of the United States whether an investigation based on the information provided by the person has been initiated and whether it is open or closed; whether the investigation substantiated a violation by any individual; and whether any action has been taken with respect to that individual (including whether a referral has been made for prosecution).
Exempt status appeals: The act requires the IRS to provide procedures under which an organization may request an administrative appeal of an adverse determination of tax-exempt status.
Sec. 501(c)(4) status: New Sec. 506 requires organizations that intend to operate as social welfare organizations under Sec. 501(c)(4) to notify the IRS within 60 days of the organization’s establishment. The notice must include a statement of purpose for the organization. The IRS must then provide an acknowledgment of receipt within 60 days of receiving the notice. Such organizations may also request a tax-exempt determination from the IRS. The IRS can also require certain information from the organization on its first return. Failure to submit the notice can result in a fine of up to $5,000.
Exempt status declaratory judgments: Exempt organizations are added to the list of entities in Sec. 7428 that can file in Tax Court, the Court of Federal Claims, or a U.S. district court for a declaratory judgment regarding their initial or continuing qualification as a tax-exempt organization.
Political actions by IRS employees: The act requires the termination of any IRS employee who performs, delays, or fails to perform official actions for political purposes.
Gift tax exemption: The act provides that gift tax will not apply to donations of money or property to Sec. 501(c)(4) (social welfare), (c)(5) (labor, agricultural, or horticultural), or (c)(6) (business leagues) tax-exempt organizations for those organizations’ use.
Truncated Social Security numbers: The act requires employers to include an “identifying number” for each employee, rather than the employee’s Social Security number on Form W-2. This will allow Treasury to issue regulations permitting use of a truncated Social Security number on Form W-2. The AICPA has long advocated for this measure to help prevent identity theft.
Enrolled agent credentials: The act amends 31 U.S.C. Section 330 to allow properly licensed enrolled agents to use the designation “enrolled agent,” “EA,” or “E.A.”
Partnership audit rules: The act makes corrections and clarifications to the partnership audit rules that were recently enacted as part of the Bipartisan Budget Act of 2015, P.L. 114-74, including adding new rules regarding passive losses of publicly traded partnerships.
Tax Court rules
The act changes the filing period for interest abatement cases filed in the Tax Court and makes them eligible to be heard under the small tax case procedures if the abatement sought does not exceed $50,000.
The act changes the venue for appeals of spousal relief and collection cases. It also suspends the running of the period for filing a petition for spousal relief or for filing a petition in a collection case where there is a pending bankruptcy case.
The act requires the Federal Rules of Evidence to be used in Tax Court cases, rather than the rules of evidence applicable in trials without a jury in the U.S. District Court of the District of Columbia.
The act adds a new Sec. 7466, requiring the Tax Court to publish procedures for filing complaints about judicial conduct and for investigating and resolving those complaints.
The act adds new Secs. 7470 and 7470A to specify that the Tax Court can “exercise, for purposes of management, administration, and expenditure of funds of the Court, the authorities . . . applicable to a court of the United States” and that the chief judge of the tax court can hold annual judicial conferences.
The act also clarifies in Sec. 7441 that “The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.” (The Tax Court was established as an Article I (legislative) court by the Tax Reform Act of 1969, P.L. 91-172, which amended Sec. 7441; before that it was an independent agency of the executive branch performing a judicial function (Revenue Act of 1924, ch. 234, §900(k)).)
The act makes a number of changes designed to generate revenue. These include:
- The Sec. 179D energy-efficient commercial building deduction is amended to provide for the use of updated standards from the American Society of Heating, Refrigerating, and Air-Conditioning Engineers and Illuminating Engineering Society of North America.
- Sec. 6426 is amended to provide excise tax equivalency for liquefied petroleum gas and liquefied natural gas.
- Noncorporate taxpayers are allowed to exclude from gross income clean coal power grant payments received under the Energy Policy Act of 2005 (but are required to reduce basis as a result).
- Charitable remainder unitrusts that terminate early will be required to value interests in the trust in the same way they would be valued for purposes of a charitable contribution under Sec. 664(e).
- Sec. 267 is amended to prevent the transfer of certain losses from tax indifferent parties.
- A new Sec. 3512 is added to treat certain taxpayers as employers with respect to motion picture projects.
–Alistair M. Nevius (firstname.lastname@example.org) is The Tax Adviser’s editor-in-chief.