Code Sections Form 1040 Page 1

I put together the following image. It details the code section used for every line on Form 1040 Page 1. I will be adding more pages in the future!

Tax Court Review After CDP Hearing

Another case released on May 26, 2016 is TC Memo 2016-105. There's not much great information in the case. However, there is one good point that practitioners should be aware of when helping a client with a Collection Due Process Hearing. If you go to a Collection Due Process Hearing and do not bring up an argument for your client, then you are barred from bringing up that same argument in a Tax Court review of the CDP hearing.


The court really stresses this at the end of TC Memo 2016-105.


Relevant Citations:
TC Memo 2016-105

New Case on Statute of Limitations for Refunds

TC Summary Opinion 2016-25 was filed on May 26, 2016, McAuliffe v. Commissioner. The main takeaway from this case is probably do not let your parole officer (who works part-time at H&R Block) handle your taxes. But there are several other interesting points.


The taxpayer went to jail in 2003 for mail fraud and money laundering. He believed his parole officer/H&R Block employee had filed his 2003 tax return. In 2007, he received a notice of deficiency for 2003 when the IRS filed an SFR under 6020(b).


The court did not believe that his return was filed in 2004, so the date of the taxpayer's claim for refund was in 2008, when he challenged the notice of deficiency.


During 2003, his only taxes paid were withholdings from an employer. These are deemed paid on April 15, 2004. Since the claim for refund was in 2008, this is more than two years from the date tax was paid. As such, the taxpayer could not get a refund.


The taxpayer brought up one final argument, that not getting his refund is not fair. Per the court, "Suffice it to say that the Supreme Court of the United States has clearly instructed that limitations on allowance of refunds and credits prescribed by section 6511 and 6512 shall be given effect, consistent with congressional intent, without regard to an individual's perceived notion of fairness. Commissioner v. Lundy, 516 U.S. 235." So, when client want refunds when it has past the SOL, this is a great case to cite for them.


Relevant Cites:
McAuliffe v. Commissioner, TC Summary 2016-25

IRS Audit Technique Guides

The IRS publishes guides that help auditors audit certain industry segments. These are known as ATGs. The people over at Uncle Fed Tax Board have all the old ones which are no longer available. These are a great resource.

You can find these here.

My favorite one is the Sports Franchise ATG. One of the little known facts about sports franchises is that when they trade a player, it is actually a tax free like kind exchange under IRC 1031.

From the ATG: "Player contracts constitute intangible personal property. As addressed in Chapter 9, if the player contract has a useful life of more than a year, it must be capitalized and amortized over the life of the player contract under IRC section 167.

Gains and losses on the sale or exchange of player contracts held by the sports franchise for more than a year constitute IRC section 1231 gains and losses. However, to the extent of amortization claimed under IRC section 167, player contract gains are subject to IRC section 1245 ordinary income recapture.

In general, player contract trades qualify for IRC section 1031 nonrecognition treatment for like kind exchanges. Gains recognized on player contract trades are limited to the amount of boot and, if applicable, non-qualifying property received by the transferor.

Rev. Rul. 67-380, 1967-2 C.B. 291 and Rev. Rul. 71-137, 1971-1 C.B. 104, specifically address these general provisions for sports franchise player contracts.

IRC section 1031(a) provides that no gain or loss is recognized if property used in a trade or business is exchanged solely for like kind property. Under IRC section 1031(b), any realized gain is recognized to the extent money or property that is not like kind is received in the exchange. Treas. Reg. section 1.1031(b)-1(c) provides:

Consideration received in the form of an assumption of liabilities (or a transfer subject to a liability) is to be treated as "other property or money" for the purposes of section 1031(b). Where, on an exchange described in section 1031(b), each party to the exchange either assumes a liability of the other party or acquires property subject to a liability; then, in determining the amount of "other property or money" for purposes of section 1031(b), consideration given in the form of an assumption of liabilities (or a receipt of property subject to a liability) shall be offset against consideration received in the form of an assumption of liabilities (or a transfer subject to a liability). See section 1.1031(d)-2, examples (1) and (2).

To the extent of IRC section 1245 recapture, gains recognized on player trades are ordinary gains. The IRC section 1245(a)(4) amalgamation rule for player contracts (addressed in chapter 10) only applies to player contracts transferred in connection with the purchase/sale of an entire sports franchise. Accordingly, the IRC section 1245(a)(4) amalgamation rule does not apply to the sale or trade of two or more player contracts by a sports franchise to another sports franchise. This means the IRC section 1245 recapture provisions are applied on an individual player contract basis versus an aggregate player contract basis.

Accordingly, the tax treatment to the transferor on the sale or exchange of a player contract is the same as the tax treatment given the sale or exchange of tangible personal property, such as machinery, used in any trade or business.

In the sports franchise’s tax year in which a player is cut, the sports franchise is entitled to an ordinary deduction under IRC section 165 for its adjusted basis in the player contract.

Generally, a sports franchise does not have an ascertainable tax basis in future draft picks given up in a player trade (treated as an inseparable part of the franchise intangible asset). Accordingly, in determining the sports franchise’s basis in player contracts acquired in trades, a zero adjusted basis should be used for future draft picks given up in the trade. To the extent a gain on a future draft pick given up in a trade is recognized under IRC section 1031, the gain is an IRC section 1231 gain."

As you can see, they go into really great detail about transactions.  The Sports Franchise ATG is available here.

21 Questions You Need to Know About a Client's Business in an Audit

The following are 21 questions every practitioner should know an answer to before heading into an business audit with the IRS:

 

1. Chart of Accounts Used?
2. Accounting Method? 
3. How was Income Determined? 
4. Is a double-entry accounting system used? 
5. Individual Responsible for: 

• General Bookkeeping 
• Cash Receipts 
• Accounts Receivable 
• Accounts Payable 
• Sales 
• Purchases 
• Reconciling Bank Statement

 

6. Who adjusts and closes book? 
7. Who handles deposits? How often are deposits made? 
8. Who opens the mail? 
9. How are credits memos and returns handled? 
10. Are personal funds of shareholders and officer kept completely separate from business funds
11. Are sales orders, work orders, and invoices pre-numbered? Are all numbers accounted for and used in sequence? What happens to voided orders and invoice?
12. How do you handle month-end and year-end cut-offs?
13. Are there policies covering the aging of accounts receivable? Are they followed?
14. Who authorizes write-offs of receivables?
15. Who authorized write-off of obsolete inventory? What guidelines are used? Who authorizes the write-off of other assets?
16. How are cash sales handled? Are duplicate deposit slips kept? Is cash deposited intact?
17. Who authorizes purchases of major items?
18. How are payrolls handled? Example: Separate payroll account?
19. How much petty cash is kept on hand? Who has access?  Is a voucher system in use?
20. How often are bank reconciliation’s prepared?
21. Are physical counts of inventories made? How often? Are the records available?
     

Employment Tax Audits: Section 3509 Relief

Another quick hit on employment tax audit relief options is section 3509, detailed below:

IRC section 3509 provides that if an employer fails to deduct and withhold any tax under chapter 24 (income tax withholding) or subchapter A of Chapter 21 (employee portion of FICA) with respect to any employee by reason of treating an employee as not being an employee, the employer's liability is 1.5 percent of the employee's wages plus 20 percent of the employee's portion of the FICA tax. The employer's liability is doubled in cases where the employer failed to meet the reporting requirements of IRC section 6041(a) or IRC section 6051 consistent with the treatment of the employees as independent contractors.

IRC section 3509(c) provides that the reduced rates of IRC section 3509 do not apply in cases of an employer's intentional disregard of the requirement to deduct and withhold such tax.

IRC section 3509(d)(1)(C) provides that if the amount of liability for tax is determined under 3509, then sections 3402(d) (regarding credit for tax paid by the worker) and 6521 (regarding offset for payment of SECA tax) do not apply. IRC section 3509(d)(2) provides that section 3509 rates do not apply where the employer withholds income tax withholding but not FICA.

Employment Tax Audits - Worker Classification Rules

Making the proper determination on whether to treat a worker as an employee or independent contractor can have significant tax implications. A lot of taxpayers feel they can just classify the worker how they want, however there are numerous situations that you need to look at. The following is a law section on a memo I drafted detailing the rules of how to classify a worker. Most of the information can be found in the IRM too:

IRC section 3121(d)(2) of the Internal Revenue Code provides that the term "employee" means any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of employee. See also IRC sections 3401(c) and 3306(i).

 

The question of whether an individual is an independent contractor or employee is one of fact to be determined upon consideration of the facts and application of the law and regulations in a particular case. With certain limited statutory exceptions, the classification of particular workers or classes of workers as employees or independent contractors, for purposes of Federal employment taxes, must be made under common law rules. Guides for determining the existence of a worker's status are found in three substantially similar sections of the Employment Tax Regulations; namely sections 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1 relating to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and federal income tax withholding on wages at source, respectively.

 

Section 31.3121(d)–1(c)(2) of the regulations provides that generally, the relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services not only as to the results to be accomplished by the work, but also as to the details and means by which the result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done, but also as to how it shall be done. In this connection, it is not necessary that the employer actually control or direct the manner in which services are performed; it is sufficient if he or she has the right to do so. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished and not as to the means and methods for accomplishing the result, he or she is an independent contractor. Similar language is found in regulation sections 31.3306(i)–1(b) and 31.3401(c)–1(b).

 

In determining whether an individual is an employee under the common law rules, a number of factors have been identified as indicating whether sufficient control is present to establish an employer– employee relationship. These factors have been developed based on an examination of cases and rulings considering whether an individual is an employee. The degree of importance of each factor varies depending on the occupation and the factual context in which services are performed. See Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318 (1992) and Weber v. Commissioner , 103 T.C. 378 (1994), aff'd 60 F.3d 1104 (4th Cir. 1995). See also Breaux and Daigle, Inc. v. U. S.. 900 F.2d 49 C.A.5 (La.),1990. Also see Rev. Rul. 87–41, 1987–1 C.B. 296.

 

Section 3121(d)–1(a)(3) of the regulations provides that if the relationship of an employer and employee exists, the designation or description of the parties as anything other than that of employer and employee is immaterial. Thus, if such relationship exists, it is of no consequence that the employee is designated as a partner, co-adventurer, agent, independent contractor, or the like. Similar language is found in regulation sections 31.3306(i)–l(d) and 31.3401(c)–1(c).

 

Because there are elements of controls as well as autonomy in all cases, regardless of whether an employment relationship or an independent contractor relationship exists, all evidence of both control and lack of control or autonomy must be evaluated in determining whether there is a sufficient degree of control to establish an employment relationship. In doing so, one must examine the relationship of the worker and the business. Facts which illustrate whether there is a right to direct or control how the worker performs the specific tasks for which he or she is hired, whether there is a right to direct or control how the business aspects of the worker's activities are conducted, and how the parties perceive their relationship provide evidence of the degree of control and autonomy.

 

Factors which influence if a worker is an independent contractor or an employee include:

 

Behavioral Control:

 

Behavioral control factors establish if an employer can control how a worker performs a task.

 

                       Instructions: Does the worker perform the required services:

                

Instruction focuses on how a job gets done and does not factor in the end result of the job. If a person needs to comply to instructions about, when, where and how he has to work is ordinarily an employee. Not all employees need instructions, such as highly proficient employees. Even with these employees, only the right to enforce instructions matters, not if the employer actually provides instructions. (Rev. Rul. 68-598, 1968-2 C.B. 464; Rev. Rul. 66-381, 1966-2 C.B. 449;   Silverstone et al. v U.S., USTC 66-1 P 9468.)

 

                 Training:

 

Training is when methods, procedures or skills need explanation before they are used to complete a job. This helps complete a job in a particular manner. Factors that highlight training are required meetings, correspondence or experience employees working with inexperienced trainees. This training demonstrates an employer wants control over how a job is done.

 

Financial Control:

 

Financial controls occurs when the company can direct economic aspects of worker’s activities.

                

                 Significant Investment:

                

If an individual has a significant investment in the business, then an independent contractor relationship may exist. The investment must only have substance; it does not need to meet any dollar threshold. This investment is seen in the facilities in which the individual has the investment. A lack of investment in the facilities will show an employee-employer relationship. Facilities are equipment or a work premise. These include machinery and office furniture, but not tools, instruments, clothing, etc.

 

The investment is only a significant factor if it is real, essential and adequate. The investment cannot be in facilities a normal employee will normally maintain for an employer. Rev. Rul. 71-524, 1971-2 C.B. 346,  Avis  Rent  A Car  System,  Inc.  v.  U.S. [74-2 USTC, 9725], 503 F2d 423, 429 (2nd Cir. 1974).

                

                       Unreimbursed Expenses:

 

Unreimbursed expenses is when a worker incurs their own expenses in relationship with the job. Having unreimbursed expenses show the worker has the right to direct and control financial aspects of business operations.

 

Most independent contracts incur business expenses. These expenses are either direct expenses or pro rata portions of several other expense. Typically included in these expenses are tools, equipment, training, advertising, wages for assistants, licensing, certification, supplies, travel, leasing equipment and inventory.

 

An employer furnishing tools, materials, etc for a job tends to show an employee-employer relationship. The control aspects originates in that the employer can determine which tools a worker uses, in what order and how to use the tools. Independent contractors normally have their own tools. This is how the independent contractor may show control. If an employee provides their own tools in an occupation where this is a customary practice, then such a practice does not demonstrate lack of control by the employer. Rev. Rul. 71-524, 1971-2 C.B. 346.

                

When an employer pays business or traveling expenses for a worker, then the worker is an employee. Rev. Rul. 55-144, 1955-1 C.B. 483. 

                

                 Services Available to the Relevant Market:

 

Independent contractors can seek their own business opportunities. Doing so incurs expenses such as advertising and a business location. If a person makes services available for the public, then they are normally an independent contractor. (Rev. Rul. 56-660, 1956-2, C.B. 693).

 

                 Method of Payment:

 

If a worker is compensated hourly, daily, weekly or in such other similar manner is guaranteed a return for the labor performed, then this is generally evidence of an employer-employee relationship. A task for a flat fee, however, tends to show an independent contractor relationship. Rev. Rul. 74-389, 1974-2 C.B. 330.

 

                 Opportunity for Profit or Loss:

 

A worker making decisions that affect his own bottom line indicates the presence of an independent contractor. The ability to affect one’s own bottom line is not present if the only way to affect the amount of money made is by working more or less hours. To the contrary, by only affecting the worker’s bottom line by changing work schedules indicates the presence of an employer/employee relationship. If the person can receive either a profit or loss due to the services he performs, then that person is seen as an independent contractor. Rev. Rul. 70-309, 1970-1 C.B. 199.

 

Relationship of Parties:

 

                         Intent of Parties through Written Contracts:

 

If a contract describes a worker as an independent contractor, then each party had intent for an independent contractor relation. This is not sufficient evidence of the worker’s status. This designation is immaterial and only the substance of the relationship determines the law. Reg. Sec. 31.3121(d)-1(a)(3)

                  

                   Employee Benefits:

                              

Any benefits received by a worker, such as a pension, health insurance, paid sick days can only be provided to employees, not to independent contractors.

 

                   Discharge:

 

It is harder for a company to discharge an employee than it is an independent contractor. This is due to the company being liable for items such as severance pay and notice. Therefore, the inability to discharge a worker shows the worker is more likely an employee. However, the right to discharge shows control over the worker. An independent contractor cannot be discharged unless he produces at a quality less than contractually agreed. Rev. Rul. 75-41, 1975-1, C.B.323.

 

Termination:

 

A worker may terminate his relationship with an employee usually on an easier basis. However, an independent contractor cannot merely terminate a relationship due to a legal obligation to complete the work. Rev. Rul. 70-309, 1970-1, C.B. 199.

 

Business Activity:

 

The services a worker performs and how integral the worker is to the company shows he is a key aspect to the company. This level of integration into the company shows the worker is an employee since he is subject to more direction and control. This test relies on the scope and function of the business and how the worker functions within it. If the company needs to rely on a person for company success, then that company will want more direct control over the individual. U. S. v. Silk 331 U.S. 704 (1947), 1947-2 C.B. 167.

 

Miscellaneous Factors to Consider:

 

                   Continuing Relationship:

 

A permanent relationship between the worker and the company is relevant evidence for an employer-employee relationship. Businesses may engage a worker with the intent of a continuing relationship instead of a specific project. This shows intent of an employee-employer relationship. Continuing relationships are shown through frequent recurring, even if irregular, intervals. U.S. v. Silk, 331 U.S. 704 91947, 1947-2, C.B. 167. 

 

                   Work Hours:

 

If the employee sets hours a worker must work, then there is control over the worker. The workers can no longer work as he sees fit but needs to conform to the employers arrangements. Rev. Rul. 73-591, 1973-2 C.B. 337.

                  

                   Full Time:

 

Working full time for the business shows the employer has control over the worker because he restricts access to the worker from finding other employment.  Rev. Rul. 56-694, 1956-2 C.B. 694.