IMRS Industry Issues Quarterly Report - June 2012
Issue Management Resolution System – Turning Issues into Answers
The Issue Management Resolution System (IMRS) was designed to capture, develop and respond to stakeholder issues. IMRS also identifies nationwide trends in the reporting, filing and paying requirements that may indicate a need to change IRS processes or procedures.
This report provides synopses of some of the issues raised by or of interest to our industry stakeholders. Stakeholders should forward significant issues regarding IRS policies, practices and issues to their Stakeholder Liaison (SL) Local Contacts.
IMRS Issue 11-0001490 - Treatment of unemployment compensation when preparing a net operating loss
Issue: A taxpayer prepared a net operating loss carryback using commercial software. The software treated unemployment compensation as non-business income when computing the NOL, but the IRS changed it to business income. The taxpayer seeks clarification of the treatment of unemployment compensation.
Response: The 2011 revision of Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, pages 2 & 3, has clarified the treatment of unemployment compensation. It states there that unemployment compensation included in gross income is not to be included in non-business income. The IRS notified the software vendor and they will update their software.
IMRS Issue 11-0001522 – Failure to Pay Penalty Assessed on Returns on Extension
Issue: Taxpayers in Massachusetts, New York and Alabama reported that they received CP 14 notices assessing the failure to pay penalty even though they had filed valid 1040 extensions. The taxpayers paid 90% of the balances due with the extension request. The returns were e-filed and the remaining balance due was paid by check much later, but prior to the extended due date of the returns.
Response: An extension of time to file is not an extension of time to pay. Taxpayers must fully pay any balance due on returns on extension at the time the return is filed in order to avoid the failure to pay penalty: taxpayers do not have until the extended due-date to pay if the return is filed prior to the extended due-date. The Treasury Regulations, Title 26, Part 301: 301.6651-1(c)(3) state that reasonable cause will be presumed IF the taxpayer pays at least 90% of the tax shown on the return on or before the original due date (without regard to extensions), and pays the remainder when the return is filed. Accordingly, the computer is programmed to check four things when a return is processed before assessing the failure to pay penalty:
- Did the taxpayer have an extension of time to file?
- Did the taxpayer file by the extended due date?
- Did the taxpayer pay at least 90% of the tax shown on the return on or before the original return due date?
- Has the remainder of the tax shown on the return been paid in full?
Answer "No" to any of the above questions for a return with tax unpaid after the original due date, and we will assess the failure to pay penalty. The answer to the last question at the time of processing was “no,” so the penalty was assessed.
Local Issue View 1673 – Instructions for Line 2 of Schedule C
Issue: On Schedule C Line 2, "Returns and Allowances," it states, "see instructions." However, when you go to the Schedule C instructions there are no instructions for line 2. Nor is there any discussion of sales returns and allowances in the instructions.
Response: The IRS is aware of this issue and addressed it January 30, 2012, on the Schedule C page at IRS.gov/schedulec. There has never been a line instruction for returns and allowances. However, last year Line 2 was affected by proposed merchant card reporting requirements that would have required instructions for Line 2. The IRS deferred the requirement to separately report the amount of merchant card and third party network payments from Form 1099-K, but this requirement was removed too late to allow us to modify the form to remove the "see instructions" reference for 2011. Because the IRS does not intend to require a reconciliation in future years, Tax Forms and Publications has already removed the "see instructions" reference for 2012. We apologize for any inconvenience caused by this inconsistency. For more details on how to complete the Schedule C, see IRS.gov/schedulec.
IMRS Issue 12-0001592 – Request to Post Tip Reporting Video to the IRS Video Portal
Issue: Please put Publication 3374, the "Reporting Tip Income, the Jill and Jason Show" on the IRS Video Portal. It will be available to more employers and cost less cost than mailing hard copy DVDs.
Response: The IRS Video Portal at www.IRSvideos.gov contains video and audio presentations on topics of interest to small businesses, individuals and tax professionals. You will find video clips of tax topics, archived versions of live panel discussions and webinars, as well as audio archives of tax practitioner phone forums. "Reporting Tip Income, the Jill and Jason Show" has been posted: search “Reporting Tip Income” on the Video Portal.