Tax Season 2013

Tax season for many tax professionals is already in full swing.

Tax season for the IRS begins this year on Wednesday, January 30, 2013. This is the date that the IRS will accept paper or e-filed income tax returns (except for returns with certain forms attached, as these forms are not quite ready for processing by the IRS).

The IRS generally begins accepting returns around January22 each year. However, the late passage of the American Taxpayer Relief Act (ATRA) of 2012 caused delays. The ATRA passed the Senate around 2 a.m. on January 1, 2013, passed the House around 11 p.m. on January 1, 2013, and was signed by the President on January 2, 2013. The ATRA retroactively made changes to 2012 income tax law, such as ATM exemption amounts.


See: IRS Announcement


Investment Interest Expense Election Correction

Taxes (Photo credit: Tax Credits)

The deduction for Investment Interest Expense is limited by IRC §163(d) to the amount of a taxpayer’s net investment income. Net investment income does not include qualified dividends and long-term capital gains because this type of income is subject to preferentially low tax rates.

Taxpayers may elect to treat this preferential income as investment income; this election will subject such income to ordinary rates, and the additional investment income should allow additional investment interest expense. When done correctly, the election should reduce the taxpayer’s tax liability; when done incorrectly, the election could increase the taxpayer’s tax liability.

The IRS recently addressed in PLR 201217004 an incorrect election: a trust elected to treat too much income as ordinary, and this election resulted in excess income tax. The election was made by the accountants who prepared the trust’s tax return; basically the accountants blamed their computer software for the error.

For two years, the accountants entered some amount into their tax software which resulted in too much income being treated as ordinary. The software for individual income tax returns would have adjusted the amount subject to the election to an ideal amount: the amount that results in a reduction in the taxpayer’s income tax, but no more. However, the tax software did not have a similar control built into the module for fiduciary income tax returns. Whatever amount was entered by the accountants was used, even though it resulted in an increase in the trust’s tax.

The PLR mentions that the tax returns were reviewed “in accordance with the Firm’s quality control policies and procedures.” The reviewer noted at all of the investment interest expense was allowed and deducted, but did not notice that the amount of income subject to ordinary tax rates was in excess of the ideal amount.

The PLR was filed to request permission from the IRS Commissioner to change the election. Permission from the Commissioner for this change is required by Reg. §1.163(d)-1(c):

(c) Revocability of elections. — The elections described in this section are revocable with the consent of the Commissioner.

Fortunately for the taxpayer, the Commissioner granted the request.

See also PLR 201003006, in which case a taxpayers requested permission to revoke an election. The facts here are similar and the excess election resulted from an accountant entering an amount into tax software above what was ideal. The Commissioner granted the request.

Lessons learned:

  • The IRS can be reasonable in allowing a taxpayer to correct an excess election;
  • Tis a poor workman who blames his tools. – A good accountant should review a tax return and be comfortable with all the amounts; don’t assume that the software is smart enough to make elections for you.

Tax Filing Deadline – September 15th

September 15

Fiduciary income tax returns for trusts and calendar year estates were due on April 15th (well, actually April 18th this year…). If you requested an extension of time to file your return, then those returns are coming due.

Federal (and most states) extensions for fiduciary income tax returns are for 5 months. (See this article regarding the final federal regulations on five month extensions.) Therefore, these extended fiduciary income tax returns are due to the IRS (and most states) by Thursday, September 15th.

Note: the extension is based on the original due date of the tax returns (that is, 5 months from April 15th) and not based on the “extra” days caused by Emancipation Day and the weekend last April. [See Reg. §1.6081-6(a)(1), which reads in part “automatic 5-month extension of time to file the return after the date prescribed for filing the return” (emphasis added).]

Federal Fiduciary Five-Month Extension

The IRS has issued Final regulations regarding the length of time a federal fiduciary income tax return may be extended. These regulations make permanent the five-month extension period in place since temporary regulations were issued in 2008. Ordinary calendar year trust, whose tax returns are due 4/15, can now be extended to 9/15. The extension is automatic, but it must be requested on a timely filed Form 7004.

The early deadline means that individuals who need trust K-1s will receive those K-1s well before their extended 10/15 tax deadline. However, some trusts may have difficulty meeting their filing deadline if they are waiting for partnerships (or S-corps) to issue K-1s since their filing deadline is also 9/15.

T.D. 9531, 06/23/2011 ; Reg. §1.6081-2 , Reg. §1.6081-6 , Reg. §54.6081-1

2008 regulations: TD 9407 and REG-1115457-08

See also: Journal of Accountancy article
See also: Rubin on Tax

Federal Filing Due Date

April 18

The IRS has announced that the Federal filing deadline for items due Friday April 15, 2011 has been pushed back to Monday April 18, 2011. These items include income tax returns (including fiduciary income tax returns) or extension requests, and estimated tax payments.

The IRS national offices are located in Washington, D.C. The District recognizes Emancipation Day (April 16, but observed this year on April 15) as a legal holiday.  The IRS Bulletin explains that D.C. holiday effect tax deadline just as federal holidays do. With the IRS offices closed on Friday, Saturday and Sunday, returns are therefore due Monday April 18.

Citation: IR-2011-1 – IRS New Bulletin

Citation: IRC §7503 -Time for Performance of Acts where Last Day Falls on Saturday, Sunday, or Legal Holiday.

Looking ahead to 2012, April 15 is a Sunday, which would normally mean that returns are due Monday April 16. However, since Emancipation Day is April 16, then returns will probably be due Tuesday April 17, 2012. You read it here first …

IRS eliminating deposits with paper coupons

The IRS has issued proposed regulations that will eliminate the use of paper deposit coupons (Form 8109-B), and migrate payments to the existing EFTPS system.

These rules DO NOT apply to individuals and trusts which make quarterly estimated income tax payments or extension payments via check and paper payment vouchers.

These rules do apply to corporations, private foundations, or employers making corporate income tax payments, unincorporated business tax payments, excise tax payments and payroll tax deposits. For a summary of the entities and taxes affected by these proposed regulations, see this article from