Late last year, the IRS issued final regulations under which an understated amount of gross income reported on a return resulting from an overstatement of unrecovered cost or other basis is an omission of gross income for purposes of the six-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items. The six-year limitations period applies when a taxpayer omits from gross income an amount that’s greater than 25% of the amount of gross income stated in the return. Several courts had held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued the new regulations to clarify that an omission can arise in that fashion. However, some courts have upheld the regulations and others have rejected them. As a result, the Supreme Court has now decided to resolve the dispute.

Married joint return filers are jointly and severally liable for the tax arising from their returns. Innocent spouses may request relief from this liability in certain circumstances. Previously, the IRS took the position that a request for equitable innocent spouse relief had to be made no later than two years from the first collection activity against the spouse. After being pressured by legislators and the National Taxpayer Advocate, the IRS has now eliminated the two-year period for equitable relief. Elimination of the two-year period is reflected on Form 8857, which is used to request innocent spouse relief.

For tax years beginning after March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 provides that individuals with an interest in a “specified foreign financial asset” during the tax year must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 (or a dollar amount higher than $50,000 as the IRS may prescribe). “Specified foreign financial assets” are: (1) depository or custodial accounts at foreign financial institutions, and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. Disclosure is made by filing Form 8938 (Statement of Specified Foreign Financial Assets) with the taxpayer’s appropriate return (e.g., with Form 1040 in the case of an individual). In September, the IRS released a draft version of the 2011 Instructions to Form 8938. The instructions indicate that under a transitional rule, most taxpayers won’t have to file the form until 2012.

In a new notice and accompanying news release, the IRS reminded executors of the estates of married decedents dying after 2010 that they must file an estate tax return in order to pass along the unused estate and gift tax exclusion amount, available for the first time this year, to their surviving spouse. The first estate tax returns for estates eligible to make the portability election started becoming due on Oct. 3, 2011 (i.e., nine months after a post-2010 date of death). Because the IRS believes that most married couples will want the surviving spouse to be able to take advantage of the unused exclusion amount of the first spouse to die, the election is deemed made if a Form 706 (estate tax return) is properly and timely filed. No affirmative statement or other indication is necessary. Even if the estate isn’t required to file a Form 706 (e.g., because the value of the gross estate is less than the exclusion amount), the Form 706 must be filed in ordered to make the election. For estates that choose not to make a portability election, if that estate is otherwise required to file a Form 706, the executor must follow the instructions for Form 706 describing the necessary steps to avoid making the election. For estates that aren’t required to file a Form 706, simply not filing the form will effectively prevent the making of the election.

Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, estates of decedents who died in 2010 can choose zero estate tax, but at the price of beneficiaries being limited to the decedents’ basis plus certain increases under Code Sec. 1022. In early August, the IRS issued detailed guidance on how this election is made. The guidance revealed that the election is made by filing a Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. Specifically, Form 8939 is an information return used by the executor of a decedent who died in 2010: (1) to make the Section 1022 Election; (2) to report information about property acquired from a decedent; and (3) to allocate Basis Increase to certain property acquired from a decedent. In general, Form 8939 is due by Jan. 17, 2012.

An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn’t exceed IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn’t subject to income- or payroll-tax withholding and isn’t reported on the employee’s Form W-2. In general, the IRS-approved per-diem maximum is the GSA per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. Instead of using actual per-diems, employers may use a simplified “high-low” per-diem, under which there is one uniform per-diem rate for all “high-cost” areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS. The IRS has issued a new notice carrying the “high-low” simplified per-diem rates for post-Sept. 30, 2011 travel. The high-cost area per-diem increases by $9 to $242, and the low-cost area per-diem increases by $3 to $163. The IRS also has issued a revenue procedure providing rules for using per diem rates to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

There’s not much time left to lower your 2011 tax bill.

Some actions you might consider before year-end:

* Prepay college tuition you’ll owe for the first semester of 2012. This year you can deduct up to $4,000 for higher education expenses. Income limits apply.

* Max out your retirement plan contributions. You can set aside $5,000 in an IRA ($6,000 if you’re 50 or older), $11,500 in a SIMPLE ($14,000 if you’re 50 or older), or $16,500 in a 401(k) plan ($22,000 if you’re
50 or older).

* Planning to buy a new car? Buy before year-end if you’re going to choose to deduct sales taxes instead
of local and state income taxes.

* Install energy-saving improvements in your home (such as insulation, doors, and windows), and you might
qualify for a tax credit of up to $500.

* Estimate your tax liability for 2011. If necessary, adjust your final quarterly voucher or your withholding to avoid underpayment penalties.

* Establish a pension plan for your small business. You may qualify for a tax credit of up to $500 in each of
the plan’s first three years.

* Buy equipment needed in your business to qualify for 100% bonus depreciation or up to $500,000 of first-year expensing.

Contact our office to review these and other tax-savings moves you should consider before year-end.

As year-end approaches, take a closer look at your investment portfolio. There may be some tax-saving
strategies worth considering.

For example:

* Wash sales- Thinking of selling a security before December 31 to take advantage of a capital loss? To
make sure the loss is deductible, refrain from buying a substantially identical security during the 61-day period that begins 30 days before you sell and ends 30 days after.

* Worthless stocks- For capital loss purposes, securities with no value are treated as if you sold them on the last day of the year. Your loss is generally the same as your cost. If you want to deduct worthless securities on your 2011 return, you’ll need to prove the security became worthless during the year and that it truly has no value. Not sure you can meet those requirements? Selling before year-end may be a better option.

* Stock donations- Giving appreciated stock to charity lets you avoid capital gains tax and claim a charitable deduction. In order to deduct the donation on your 2011 return, the gift must be complete. For certificates you endorse and present directly, the date of mailing or other delivery is considered the date of the gift. When your broker or the issuing company handles the transaction, the gift is complete when the stock is titled to the charity.

Please call us if you would like more guidance in your year-end tax review.

RAISING A BUSINESS:
Launch. Growth. Succession.

Presented by

Whether you are just starting out or have been in business for years,
this seminar is a MUST for every business owner!

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Thursday, December 1, 7:30-9:30 a.m.
Registration & Breakfast 7:30-8:00 a.m.
Seminar and Q&A 8:00-9:30 a.m.
Staub & Associates/1600 Sixth Ave./York, PA 17403
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Learn about the different types of business entities and employees,
proper contracting and documentation, succession planning and
how these can HELP or HINDER your bottom line.

*Bonus* RSVP by 11/25/11 to receive the
Top Ten Tax and Legal Mistakes Made by Businesses
717-812-1040 or sarah@graffincpa.com