Inflation-adjusted 2018 figures for various civil penalties

Failure to file tax return. For 2018, the minimum penalty under Code Sec. 6651(a) for failure to timely file a tax return is $215 (up from $210 for 2017).

Failure to file certain information returns, registration statements, etc. For 2018, the following penalty amounts under Code Sec. 6652 apply.

(1) For failure to file an annual return required under Code Sec. 6033(a)(1) (for exempt organizations) or Code Sec. 6012(a)(6) (for political organizations):

(a) for an organization under Code Sec. 6652(c)(1)(A), $20 per day (same as for 2017), subject to a $10,000 maximum (same as for 2017);

(b) for an organization with gross receipts exceeding $1,048,500 (up from $1,028,500 for 2017): $100 per day (same as for 2017) subject to a $52,000 maximum (same as for 2017); for managers under Code Sec. 6652(c)(1)(B), $10 per day (same as for 2017) subject to a $5,000 maximum (same as for 2017); for public inspection of annual returns and reports under Code Sec. 6652(c)(1)(C), $20 per day (same as for 2017) subject to a $10,000 maximum (same as for 2017); and for public inspection of applications for exemption and notice of status under Code Sec. 6652(c)(1)(D), $20 per day (same as for 2017) with no maximum (same as for 2017).

(2) For failure to file a return required under Code Sec. 6034 (for certain trusts) or Code Sec. 6043(b) (relating to terminations, etc., of exempt organizations):

(a) for an organization or trust under Code Sec. 6652(c)(2)(A), $10 per day (same as for 2017) subject to a $5,000 maximum (same as for 2017);

(b) for managers under Code Sec. 6652(c)(2)(B), $10 per day (same as for 2017) subject to a $5,000 maximum (same as for 2017);

(c) for split-interest trusts under Code Sec. 6652(c)(2)(C)(ii), $20 per day (same as for 2017) subject to a $10,000 maximum (same as for 2017); and

(d) for any trust with gross receipts exceeding $262,000 (up from $257,000 for 2017) under Code Sec. 6652(c)(2)(C)(ii), $100 per day (same as for 2017) subject to a $52,000 maximum (up from $51,000 for 2017).

(3) For failure to file a disclosure required under Code Sec. 6033(a)(2):

(a) for a tax-exempt entity under Code Sec. 6652(c)(3)(A), $100 per day (same as for 2017) subject to a $52,000 maximum (up from $51,000 for 2017); and

(b) for failure to comply with written demand under Code Sec. 6652(c)(3)(B)(ii), $100 per day (same as for 2017) subject to a $10,000 maximum (same as for 2017).

Other assessable penalties with respect to the preparation of tax returns for other persons For 2018, the following penalty amounts under Code Sec. 6695 apply:

(1) For failure to furnish a copy to taxpayer under Code Sec. 6695(a), failure to sign return under Code Sec. 6695(b), failure to furnish identifying number under Code Sec. 6695(c), failure to retain a copy or list under Code Sec. 6695(d), $50 per return or claim for refund (same as for 2017) subject to a maximum penalty of $26,000 (up from $25,500 for 2017).

(2) For failure to file correct information returns under Code Sec. 6695(e), $50 per return or item in return (same as for 2017) subject to a $26,000 maximum (up from $25,500 for 2017).

(3) For negotiation of check under Code Sec. 6695(f), $520 per check with no limit (up from $510 for 2017).

(4) For failure to be diligent in determining eligibility for earned income credit under Code Sec. 6695(g), $520 per return or claim for refund with no limit (up from $510 for 2017).

Failure to file partnership return. For 2018, the dollar amount used to determine the amount of the penalty under Code Sec. 6698(b)(1) is $200 (same as for 2017).

Failure to file S corporation return. The dollar amount used to determine the amount of the penalty under Code Sec. 6699(b)(1) is $200 (same as for 2017).

Failure to file correct information returns. For 2018, the penalty amounts under Code Sec. 6721 are:

(1) For persons with average annual gross receipts for the most recent three tax years of more than $5 million, for failure to file correct information returns:

(a) under Code Sec. 6721(a)(1)’s general rule, $270 per return (up from $260 for 2017) subject to a $3,282,000 calendar year maximum (up from $3,218,500 for 2017);

(b) if corrected on or before 30 days after the required filing date under Code Sec. 6721(b)(1), $50 per return (same as for 2017) subject to a $547,000 calendar year maximum (up from $536,000 for 2017); and

(c) if corrected after the 30th day but on or before August 1 under Code Sec. 6721(b)(2), $100 per return (same as for 2017) subject to a $1,641,000 calendar year maximum (up from $1,609,000 for 2017).

(2) For persons with average gross receipts for the most recent three tax years of $5 million or less, for failure to file correct information returns:

(a) under Code Sec. 6721(d)(1)(A)’s general rule, $270 per return (up from $260 for 2017) subject to a $1,094,000 calendar year maximum (up from $1,072,000 for 2017);

(b) if corrected on or before 30 days after the required filing date under Code Sec. 6721(d)(1)(B), $50 per return (same as for 2017) subject to a $191,000 calendar year maximum (up from $187,500 for 2017); and

(c) if corrected after the 30th day but on or before August 1 under Code Sec. 6721(d)(1)(C), $100 per return (same as for 2017) subject to a $547,000 calendar year maximum (up from $536,000 for 2017).

(3) For failure to file correct information returns due to intentional disregard of the filing requirement (or the correct information reporting requirement):

(a) under Code Sec. 6721(e)(2)(A), for a return other than a return required to be filed under Code Sec. 6045(a), Code Sec. 6041A(b), Code Sec. 6050H , Code Sec. 6050I, Code Sec. 6050J, Code Sec. 6050K, Code Sec. 6050L , per-return penalty equal to the greater of $540 (up from $530 for 2017) or 10% of the aggregate amount of items required to be reported correctly with no limit;

(b) under Code Sec. 6721(e)(2)(B), for a return to be filed under Code Sec. 6045(a), Code Sec. 6050K, or Code Sec. 6050L , per-return penalty equal to the greater of $540 (up from $530 for 2017) or 5% of the aggregate amount of items required to be reported correctly with no limit;

(c) under Code Sec. 6721(e)(2)(C), for a return required to be filed under Code Sec. 6050I(a), per-return penalty equal to the greater of $27,350 or the amount of cash received up to $109,000 (up from $26,820 and $107,000 for 2017); and

(d) under Code Sec. 6721(e)(2)(D), for a return required to be filed under Code Sec. 6050V, per-return penalty equal to the greater of $540 (up from $530 for 2017) or 10% of the value of the benefit of any contract with respect to which information is required to be included on the return with no limit.

Failure to furnish correct payee statements. For 2018, the penalty amounts under Code Sec. 6722 are:

(1) For persons with average annual gross receipts for the most recent three tax years of more than $5 million:

(a) under Code Sec. 6722(a)(1)’s general rule, $270 penalty per return (up from $260 for 2017) subject to a $3,282,000 calendar year maximum (up from $3,218,500 for 2017);

(b) if corrected on or before 30 days after the required filing date under Code Sec. 6722(b)(1), $50 per return (same as for 2017) subject to a $547,000 calendar year maximum (up from $536,000 for 2017); and

(c) if corrected after the 30th day but on or before August 1 under Code Sec. 6722(b)(2), $100 per return (same as for 2017) subject to a $1,641,000 calendar year maximum (up from $1,609,000 for 2017).

(2) For persons with average annual gross receipts for the most recent three tax years of $5 million or less:

(a) under Code Sec. 6722(d)(1)(A)’s general rule, $270 per return (up from $260 for 2017) subject to a $1,094,000 calendar year maximum (up from $1,072,500 for 2017);

(b) if corrected on or before 30 days after the required filing date under Code Sec. 6722(d)(1)(B), $50 per return (same as for 2017) subject to a $191,000 calendar year maximum (up from $187,500 for 2017); and

(c) if corrected after 30th day but on or before August 1 under Code Sec. 6722(d)(1)(C), $100 per return (same as for 2017) subject to a $547,000 calendar year maximum (up from $536,000 for 2017).

(3) Where failure is due to intentional disregard of the requirement to furnish a payee statement (or the correct reporting requirement):

(a) under Code Sec. 6722(e)(2)(A), for a statement other than one required under Code Sec. 6045(b), Code Sec. 6041A (in respect of a return required under Code Sec. 6041A(b), Code Sec. 6050H(d), Code Sec. 6050J(3), Code Sec. 6050IK(b), or Code Sec. 6050L(c), per-return penalty equal to the greater of $540 (up from $530 for 2017) or 10% of the aggregate amount of items required to be reported correctly with no limit; and

(b) under Code Sec. 6722(e)(2)(B), for a payee statement required under Code Sec. 6045(b), Code Sec. 6050K(b), or Code Sec. 6050L(c), per-return penalty equal to the greater of $540 (up from $530 for 2017) or 5% of the aggregate amount of items required to be reported correctly with no limit.

Inflation-adjusted 2018 figures for transfer tax and foreign items

Unified estate and gift tax exclusion amount. For gifts made and estates of decedents dying in 2018, the exclusion amount will be $5,600,000 (up from $5,490,000 for gifts made and estates of decedents dying in 2017).

Generation-skipping transfer (GST) tax exemption. The exemption from GST tax will be $5,600,000 for transfers in 2018 (up from $5,490,000 for transfers in 2017).

Gift tax annual exclusion. For gifts made in 2018, the gift tax annual exclusion will be $15,000 (up from $14,000 for gifts made in 2017).

Special use valuation reduction limit. For estates of decedents dying in 2018, the limit on the decrease in value that can result from the use of special valuation will be $1,140,000 (up from $1,120,000 for 2017).

Determining a 2% portion for interest on deferred estate tax. In determining the part of the estate tax that is deferred on a farm or closely-held business that is subject to interest at a rate of 2% a year, for decedents dying in 2018, the tentative tax will be computed on $1,520,000 (up from $1,490,000 for 2017) plus the applicable exclusion amount.

The increased annual exclusion for gifts to noncitizen spouses. For gifts made in 2018, the annual exclusion for gifts to noncitizen spouses will be $152,000 (up from $149,000 for 2017).

Reporting foreign gifts. If the value of the aggregate “foreign gifts” received by a U.S. person (other than an exempt Code Sec. 501(c) organization) exceeds a threshold amount, the U.S. person must report each “foreign gift” to IRS. (Code Sec. 6039F(a)) Different reporting thresholds apply for gifts received from (a) nonresident alien individuals or foreign estates, and (b) foreign partnerships or foreign corporations. For gifts from a nonresident alien individual or foreign estate, reporting is required only if the aggregate amount of gifts from that person exceeds $100,000 during the tax year. For gifts from foreign corporations and foreign partnerships, the reporting threshold amount will be $16,111 in 2018 (up from $15,797 for 2017).

Expatriation. For 2018, an individual with “average annual net income tax” of more than $165,000 (up from $162,000 for 2017) for the five tax years ending before the date of the loss of U.S. citizenship will be a covered expatriate. Under a mark-to-market deemed sale rule, all property of a covered expatriate is treated as sold on the day before the expatriation date for its fair market value. However, for 2018, the amount that would otherwise be includible in the gross income of any individual under these mark-to-market rules will be reduced by $713,000 (up from $699,000 for 2017).

Foreign earned income exclusion. The foreign earned income exclusion amount will increase to $104,100 in 2018 (up from $102,100 in 2017).

At first blush, after the enactment of the new law, the use of a C Corporation appeared to be the winner. Indeed if the C Corporation reinvests all its income back into the C Corporation and fails to make any distributions, the overall federal and state combined rate will approximate 28% in California.

Unfortunately, that is not the way most family businesses operate and the 28% rate is not reality for most businesses in California. After dividends are paid out, the business owner would be left paying up to a net closer to 50% plus in taxes, instead of the 28% rate mentioned above.

One reason to choose the C corporation would be to avoid capital gains on the sale of the business through the exclusion provided taxpayers under Section 1202. Sec. 1202 allows noncorporate taxpayers to exclude from federal income tax 100% of the gain on the sale of certain qualified small business stock (QSBS), limited to the greater of $10 million or 10 times the adjusted basis of the investment. Unlike in prior years, this creates possible opportunities for noncorporate taxpayers who dispose of QSBS in a taxable transaction to potentially exclude the entire gain for federal tax purposes.

Unfortunately, that exclusion is not easy to qualify for and the State of California has eliminated that provision for State income tax purposes.

For a taxpayer to qualify for the exclusion, five criteria generally must be met:

1. The stock must have been directly acquired via an original issuance from a U.S. C corporation (Sec. 1202(c)(1));

2. Both before and immediately after stock issuance, the C corporation’s tax basis in gross assets did not exceed $50 million (Sec. 1202(d)(1));

3. The C corporation and shareholders must consent to supply documentation regarding QSBS (Sec. 1202(d)(1)(C));

4. The C corporation conducts certain qualified active trades or businesses (Sec. 1202(e)); and

5. The stock must have been held for more than five years (Sec. 1202(b)(2)).

The other option of minimizing tax is for the owner of the stock to hold on to it until he or she dies resulting in a basis step-up. I have not had many clients tell me they are willing to wait until they die to sell the business. However, for those who are willing to allow the earnings to continue to grow under the corporation, they must or should be concerned about the personal holding company tax and the accumulated earnings tax, neither of which have been modified since 1954.

Certainly one exit strategy to consider would be to make an S election to allow the distribution of current earnings which would be subject to just one layer of income tax, at the existing marginal rates for individuals. Although the accumulated C corporation earnings can also remain in the S corporation, the owners will need to be very watchful to ensure that the passive investment income test is not breached.

Most taxpayers need and want to take distributions from their business. The most effective way to do so would be through pass-through entities, such as S Corporations, LLCs, Partnerships or Sole Proprietorships. However, if a taxpayer is merely electing one of these new entities because of new Section 199A, which allows for a 20% deduction of Qualified Business Income (“QBI”), it is important for the taxpayer to be aware that there is no guaranty that they will get that deduction.

To be eligible for a deduction under 1999A the taxpayer needs to know if it is in a qualified trade or business because the deduction is not limited to active trade or businesses. Then the taxpayer has to deal with the calculation of qualified business income. Unfortunately, there are still many undefined terms in Section 199A and then there are limits on the amount of the deduction based upon adjusted gross income or W-2 income. The only bright star is that some limitations only apply if the taxpayer’s income exceeds $157,500 for individuals or $315,000 for joint filers.

S Corp vs. Partnership

The next issue the taxpayer needs to face is whether they should elect an S corporation or a partnership. Suppose the S corporation generates $300,000 and distributes $200,000 to the owner as compensation. The S corporation would deduct the $300,000 as wages so it is left with $100,000 in QBI eligible for the pass-through deduction. However, if the partnership did not pay wages, and the partner received $300,000 and distributed its share as profits, the taxpayer would have $300,000 in QBI eligible for the pass-through deduction. There would be self-employment tax to pay and the taxpayer would have to compare the self-employment tax against the QBI deduction. Of course, it is possible that the IRS will come up with regulations that may categorize some of the partnership’s profit as wages for purposes of computing QBI.

Whether Trump’s new tax law remains in effect, is uncertain, given the political climate in Washington D.C. In 1986 we were all promised a flat tax of 28% in exchange for giving up some deductions. Some years later, it was more than 40% if you take into account the Obamacare tax. It is imperative that a taxpayer sit down with his or her legal and tax advisors to properly structure a business entity.

The Internal Revenue Service has decided to limit its probe of Coinbase users to those who engaged in transactions of $20,000 or more, according to a court filing.

The IRS sent a broad request known as a John Doe summons last November seeking information on all of the San Francisco-based digital currency service’s users in an effort to ferret out possible tax evaders (see IRS seeks information on bitcoin users from Coinbase ). Coinbase is one of the largest bitcoin and ethereum exchanges in the U.S., and the Treasury Inspector General for Tax Administration urged the IRS in a report last year to do more to ensure taxpayers aren’t using virtual currencies like bitcoin to avoid taxes (see IRS warned to safeguard against illegal use of virtual currency ).

The IRS requested a federal court in March to force the exchange to hand over the records, but two Coinbase users asked the courts in May to quash the summons.

Three Republican lawmakers in Congress who chair key committees and subcommittees related to tax policy wrote a letter in May to IRS Commissioner John Koskinen expressing concerns about the scope and nature of the summons (see GOP lawmakers question IRS summons to Coinbase users ).

“We strongly question whether the IRS has actually established a reasonable basis to support the mass production of records for half of a million people, the vast majority of whom appear to not be conducting the volume of transactions needed to report them to the IRS,” House Ways and Means Committee Chairman Kevin Brady, R-Texas, Senate Finance Committee Chairman Orrin G. Hatch, R-Utah, and House Ways and Means Oversight Subcommittee Chairman Vern Buchanan, R-Fla., wrote in a letter to Koskinen. “Based on the information before us, this summons seems overly broad, extremely burdensome, and highly intrusive to a large population of individuals.”

In a court filing last week, first reported by the digital currency news site Coindesk , the IRS limited the scope of the original request. It said the U.S. is seeking information for users “with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013-15 period.”

The IRS court filing also said it is not seeking information on “certain identified users who are known to the Internal Revenue Service.” However the narrowed summons request is still asking for a great deal of information on the Coinbase users covered, including their “name, address, tax identification number, date of birth, account opening records, copies of passports and/or driver’s license, all wallet addresses, and all public keys for all accounts/wallets/vaults.”

An IRS spokesperson declined to comment based on ongoing and pending litigation.

Coinbase spokesperson Megan Hernbroth emailed Accounting Today, “We aren’t making any further comments at this stage outside of our last public statement on March 16.”

In its March statement, Coinbase said, “Our legal team is in the process of reviewing the IRS’s motion. We will continue to work with the IRS to assess the government’s willingness to fundamentally reconsider the focus and scope of the summons. If it does not, we anticipate filing opposition papers in court in coming months. We will continue to keep our customers updated as to status.”

Hurricane Harvey Victims: Easier Access to Retirement Funds

On August 30, 2017, the IRS announced that 401(k)s and similar sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Harvey and members of their families. Additionally, the IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions.

With the relaxed rules, a plan may rely on the representations made by a victim as to the need for and amount of hardship distribution. The amount may not exceed the specified statutory limits from the victim’s retirement plan. However, the relief applies to any hardship of the employee, not just the types enumerated in the regulations, and no post-distribution contribution restrictions are required.

Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster area localities affected by Hurricane Harvey. These areas are identified on FEMA’s website at http://www.fema.gov/disaster. If a plan makes Hurricane Harvey withdrawals available, the plan must be amended no later than the end of the first plan year beginning after December 31, 2017. Hardship withdrawals must be made by January 31, 2018.

The IRS emphasized that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable and subject to a 10-percent early-withdrawal tax.

For further details, see Announcement 2017-11 posted on the IRS website.