2015-Issue 35—Some of you may have heard that on July 31, 2015, President Obama signed a bill into law that allowed for a short-term extension of mass transit and highway funding: the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, also known as the Highway Act. While the focus of the legislation was short-term highway transportation expenses and the title of the act does not mention anything about tax law, the law included some significant changes to current tax law. The majority of the changes relate to compliance and reporting requirements that will affect many taxpayers. The intention is that these tax law changes will generate sufficient revenue to offset the cost of the Highway Act without having to raise tax rates. Over a 10-year period, these changes are projected to generate $5 billion in revenues.
Foreign Financial Reporting
For a number of years, the United States has used financial reporting of foreign assets to prevent money laundering as part of the Bank Secrecy Act. That same reporting is starting to be used to ensure that proper information is filed on tax returns and proper taxes are paid. Americans with non-U.S. financial accounts, or authority over non-U.S. financial accounts containing $10,000 in aggregate, are required to provide substantial information to the Internal Revenue Service (IRS) annually, including account numbers, bank names and addresses, and balances.
Recently, as part of a major effort to track down money hidden offshore, the IRS has been aiming a sharp focus on taxpayers who don’t properly report their foreign bank and securities accounts. In an attempt to improve voluntary compliance and reduce the number of taxpayers who do not properly report foreign account information, the IRS has changed the filing deadline of these forms. Commencing with the 2016 tax year, the due date for filing FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR return) has been changed from June 30 to April 15, which is the same date on which individual income tax returns for U.S. taxpayers living in the U.S. are due. This change makes it easier to keep track of deadlines for filing requirements, and while the due date to file the FBAR return has been moved up, for the first time a six-month extension will be available. The extension for filing the FBAR return would extend the due date to October 15. This extension period also matches the extension available on individual tax returns. Ensuring proper compliance with the FBAR filing deadlines is very important because failure to timely file this informational return may result in substantial penalties. Fortunately, the IRS has also been given the authority to abate first-time FBAR penalties for taxpayers who missed the April 15 deadline and failed to formally ask for an extension, as long as they file by October 15.
Changes to Business Return Filing Dates
FBAR returns were not the only type of return to get a due-date makeover. Certain business return filing dates also changed. Changes were made to the filing deadlines because of the effect these returns have on the filing of individual tax returns. The current due date of April 15 for partnership returns forces individuals to file extensions because they are still waiting to receive information on Schedule K-1s that are not received until April 15 or later.
Under the new bill, partnerships and S corporations will now have a tax return due date of March 15 for calendar-year filers and a due date of the fifteenth day of the third month after the close of the year for businesses that use a fiscal year. Prior to enactment of the Highway Act, partnership tax returns were due on April 15 or the fifteenth day of the fourth month after the close of the fiscal year, and S corporations were due on March 15 or the fifteenth day of the third month after the fiscal year-end. Even though both partnerships and S corporations were flow-through entities, they had different filing deadlines, and this will no longer be the case.
C corporations also have a new due date. C corporation income tax returns will now be due on April 15 or the fifteenth day of the fourth month following the close of the corporation’s year-end. C corporation tax returns were originally due on March 15 for calendar-year filers or the fifteenth day of the third month after fiscal year-end corporations. The new law allows partnerships and S corporations a six-month extension, but in the case of calendar-year C corporations, the extension would be up to five months. The five-month extension for C corporations would apply until tax years beginning after December 31, 2025, after which a six-month extension will apply.
The due-date changes addressed above apply to taxable years beginning after December 31, 2015. This means that these changes will not affect most taxpayers until 2017, when they are filing their 2016 tax returns. The only exception is for C corporations with fiscal years ending on June 30, for which the current filing deadline of September 15 (without extensions) would continue to apply until tax years beginning after December 31, 2025.
The Highway Act also changed mortgage reporting requirements on Form 1098, Mortgage Interest Statement. Form 1098, which currently provides interest and points paid on a mortgage, will now be required to include the outstanding mortgage balance as of the beginning of the calendar year, the mortgage origination date, and the address of the property that secures the mortgage. It is worth noting that the increased reporting requirements are coming on the heels of President Obama signing the Trade Preferences Extension Act of 2015, where the penalties for filing incorrect Forms 1098 and for failure to provide information reports to recipients were increased from $100 per form to $250 per form for each failure. In addition, the maximum penalty for each violation increased from $1.5 million to $3 million. The effective date for the changes to the Form 1098 reporting apply to Forms 1098 due after December 31, 2016. The additional reporting requirements will pose a significant burden on affected taxpayers, as companies will have to modify their current systems to ensure that the required information can be captured for accurate reporting. Although the effective date is over a year out, companies need to begin addressing these new requirements now in order to be ready for when they take effect.
Basis Reporting of Assets Transferred Upon Death
The Highway Act imposes a new consistency standard when reporting the basis of property received by reason of death. This consistency will be achieved by the requirement of additional disclosures on estate tax returns. The reporting requirement will establish one fair market value to set basis for the asset being transferred so that consistency exists between the estate tax return and the beneficiary’s income tax return upon sale or disposition. This will prevent a disconnect where manipulations of fair market value serve to reduce the estate tax on a low valuation and will prevent a beneficiary from overstating basis when the transferred property is disposed of or sold in the future. This provision applies to estate tax returns filed after July 31, 2015.
Updated Statue of Limitation Period for Overstated Basis
The Highway Act also provides that an overstatement of basis will be an omission from gross income for the purpose of the six-year limitation period. The six-year statute of limitations period applies in situations of substantial misstatements (25 percent or more) of gross income. Currently, due to a Supreme Court decision, the statute of limitation regarding basis overstatements is three years and is not an omission of income for the purpose of the six-year limitation period. Expect this to be an area where audit activity will increase in the coming years as basis becomes more heavily scrutinized. This change applies to returns for which the normal statute of limitation of three years remained open as of July 31, 2015 and returns were filed after that date.
Alvarez & Marsal Taxand Says:
With tax rates being such a hot topic, look for the government to continue to come up with creative ways to generate revenue. This is evidenced by the changes to compliance requirements discussed above. Although some of the changes will not begin taking effect until future tax years, it is important to begin considering the effect of the changes. Failure to meet filing requirements or properly file extensions can cause significant penalties, especially when it comes to reporting foreign assets. Therefore, it is critical to keep apprised of all filing requirements that apply to you or your business.
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the US., and serves the U.K. from its base in London.Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in nearly 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.