Keeping on top of regulatory and legislative changes and other developments that could affect you is an important part of financial and business planning. While most financial professionals keep an eye on most of these changes, not all have the time and resources to review each change and determine how it affects all of their clients. Consequently, your own due diligence could help you reduce costs and/or increase your savings and income. In this article, we look at the effects of some of the laws and tax-court decisions that could affect your finances.
Delivering Tax Documents Via Regular Mail May Not be Sufficient
Under Internal Revenue Code 7502 (a), if you mail your tax return and payment to the IRS via United States Postal Service (USPS) by the tax-filing due date, the filing and payment are considered timely, even if they arrive at the IRS after the due date. Consequently, many U.S. taxpayers mail tax documents and payments to the IRS through USPS first-class mail service.
However, a recent ruling by the U.S. Court of Appeals for the Tenth Circuit demonstrates the importance of using some other acceptable traceable mail, or mail that provides you with proof of receipt, such as registered mail. The case in point is Sorrentino versus Commissioner. In this case, the IRS claimed that it did not receive the taxpayers' (a married couple's) tax return, and refused to pay them the refund of $8,551 for which they filed claim. The matter was taken to court, and the district court ruled in favor of the taxpayers, but that ruling was reversed by U.S. Court of Appeals for the Tenth Circuit on September 14, 2004, (see the brief of the resulting petition here). After the publication of the Sorrentino opinion, the treasury department of the IRS issued a proposed amendment to Treasury Regulation §301.7502-1; the amendment is to specify that, other than direct proof of actual delivery, a registered or certified mail receipt is the only authentic evidence of delivery of federal tax documents mailed by taxpayers to the IRS or the United States Tax Court. (The final regulations are yet to be issued.)
In light of this ruling and the proposed change to the Treasury Regulation §301.7502-1, you are wise to send your tax documents by registered mail, or by one of the approved private delivery services listed in IRS Notice 2002-62.
RMD for Year of Death Does Not Invalidate Disclaimer
Individuals who disclaim (decline) inherited assets do so for a variety of reasons, including tax planning, estate planning and allowing someone else to inherit the assets. One of the requirements of a valid disclaimer is that the disclaimant must not have taken possession of, or accepted, any of the inherited assets prior to the disclaimer. Distributing any of the amounts inherited under a retirement plan qualifies as an acceptance. (To learn more, see Disclaiming Inherited Plan Assets.)
This rule appeared to create a quandary when the decedent had died before taking the required minimum distribution (RMD) for the year of death. In such a case, the beneficiary was required to distribute that amount by Dec 31 of the year of death. Retirement plan practitioners had opposing opinions on whether such a mandatory distribution should count as acceptance of inherited assets and thereby make the beneficiary ineligible to disclaim the assets.
On June 27, 2005, the IRS issued Revenue Ruling 2005-36, which explains that if a beneficiary distributes the decedent's RMD for the year of the decedent's death, that distribution does not constitute acceptance. Consequently, a beneficiary who receives the RMD for the year of the retirement account owner's death may still disclaim the inherited assets.
The Deduction for a Donated Vehicle Is Not Necessarily the Fair Market Value
The American Jobs Creation Act of 2004, which was signed into law in Oct 2004, includes changes for determining the value of vehicles that individuals donate to charities. Prior to 2005, taxpayers could deduct the fair market value of vehicles they donated to charities.
However, effective for tax years beginning January 1, 2005, the tax deduction for a donation of a car, boat, aircraft or any vehicle manufactured mainly for use on public streets, roads and highways valued at more than $500 is limited to gross proceeds the charity receives from selling the vehicle. When claiming the deduction, the taxpayer must obtain a written acknowledgment of the donation from the charity and attach a copy to his or her tax return. The written acknowledgment - which must also be provided to the IRS by the charity - must include the following information:
- the name of the person donating the vehicle and his or her taxpayer identification number.
- the vehicle identification number or similar identifying number.
- a statement certifying the car was sold in an arm's length transaction between the charity and an unrelated party.
- the gross proceeds from the sale.
- a statement that the taxpayer's deduction may not be more than the gross proceeds from the sale.
- the date the taxpayer made the donation.
An exception applies to the requirements listed in No.3 and 5 above if the charity makes significant improvements to the vehicle, or if the vehicle is used considerably by the charity before it is sold. For this exception to apply, the charity must provide written certification of the intended use of the vehicle or the improvements made to the vehicle.
However, if the vehicle is given to someone needy by the charity instead of sold by the charity, you can deduct the fair market value.
The IRS provides guidance on deducting donated vehicles in IRS Publication 4303 A Donors Guide to Car Donations. However, as of Aug 2005, the IRS was still in the process of revising this publication. In the interim, you may refer to IRS Notice 2005-44 for information.
IRS to Accept Facsimile Signatures on Employment Tax Returns
If you own and operate a business, the IRS has made it easier for you to file certain returns, as explained in Revenue Procedure 2005-39. In Revenue Procedure 2005-39, the IRS announced that it will allow corporate officers or duly authorized agents to sign employment tax forms by facsimile, as well as by alternative signature methods such as rubber stamps, computer software programs or mechanical devices. This new procedure applies to the following forms:
- Any form in the 940 series, including Form 940 Employer's Annual Federal Unemployment Tax Return (FUTA); Form 941 Employer's Quarterly Federal Tax Return; Form 943 Employer's Annual Federal Tax Return for Agricultural Employees; and Form 945 Annual Return of Withholding Federal Income Tax.
- Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
- Form 8027 Employer's Annual Information Return of Tip Income and Allocated Tips.
- Form CT-1 Employer's Annual Railroad Retirement Tax Return.
- Any variant of these forms, such as Form 941c Statement to Correct Information, Form 941-SS Employer's Quarterly Federal Tax Return.
The goal of this new procedure is to reduce the number of returns rejected for signature-related issues, and is effective for any of the designated forms filed with the IRS on or after July 1, 2005.
When meeting with your financial professional, be sure to ask whether there are any recent changes that may affect you. In some cases, changes are announced in advance, giving you the opportunity to take advantages of benefits that may be repealed, or to wait until more advantageous rules become effective.