A Look Back at the Top Tax Developments of 2012
A Look Back at the Top Tax Developments of 2012
Tax law uncertainty
There was considerable uncertainty throughout 2012 over what tax laws would govern 2013 and beyond because of expiring tax cuts — especially those dealing with tax rates for individuals and stimulus incentives for businesses. However, even with the some elements of the tax code resolved, many others will require taxpayers to keep up-to-date on future tax legislation.
Supreme Court upholds PPACA
On June 28, 2012, the U.S. Supreme Court upheld the Patient Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act, in a 5 – 4 decision. Writing for the majority, Chief Justice John Roberts found that the individual shared responsibility provision in Code Sec. 5000A is a valid exercise of Congress’ taxing authority. Code Sec. 5000A generally requires qualified individuals to carry minimum essential health insurance coverage or pay a shared responsibility penalty, starting in 2014.
The IRS issued much-anticipated temporary and proposed regulations on the capitalization of expenditures relating to tangible property at the very end of 2011. At that time, the temporary regulations were slated to be effective for tax years beginning on or after January 1, 2012.
In October 2012, after months of concern over the impact of the new repair requirements on financial accounting and other adjacencies, the IRS announced that it would delay the application of the repair regulations for two years, including required accounting method changes. The final regulations will apply to taxable years beginning on or after January 1, 2014.
The agency further explained that it expects to issue final repair regulations in 2013. The IRS also amended the temporary regulations to delay their effective date until tax years beginning on or after January 1, 2014, while permitting taxpayers to apply the temporary regulations to tax years beginning on or after January 1, 2012.
The regulations are known as "repair regulations," but they potentially impact all businesses (regardless of business form size).
New Medicare taxes
Effective January 1, 2013, the PPACA imposes two new Medicare taxes on qualified taxpayers: a 3.8 percent net investment income (NII) surtax and a 0.9 percent additional Medicare tax. Despite many questions surrounding their application, guidance in the form of proposed reliance regulations was not finally issued until just over a month before these taxes became effective. The proposed regulations helped clarify the PPACA’s definition of net investment income for purposes of the new surtax.
Qualified taxpayers with compensation (including self-employment compensation) received after December 31, 2012, and above certain threshold amounts, are liable for additional Medicare tax. The regulations clarify the withholding obligations of employers with respect to this additional tax, especially in connection with married individuals who may exceed a threshold amount only when wages of both spouses are combined.
In December 2012, the IRS revised and temporarily expanded its voluntary classification settlement program (VCSP), which enables employers to rectify past misclassification of employees as independent contractors at a reduced cost. The temporary expansion of the VCSP that has been in existence since 2011 allows an additional group of employers until June 30, 2013 to take advantage of VCSP benefits.
IRS Fresh Start initiative
As it has done in recent years, the IRS emphasized compliance measures to enhance tax collection. In 2012, as many taxpayers continue to struggle economically, the IRS made some taxpayer-friendly changes to its Fresh Start initiative, including modified lien policies and streamlined installment agreements.
Limitations and basis overstatement
In April 2012, the Supreme Court resolved a longstanding split among the circuit courts of appeals over whether or not an overstatement of basis resulted in an omission of income. In Home Concrete & Supply, LLC, Sup. Ct., April 25, 2012, the Supreme Court concluded that an overstatement of basis does not result in an omission of income for statute of limitations purposes. As a result, the IRS has three years, rather than six, to act against taxpayers that overstate basis.
Foreign Account Tax Compliance Act (FATCA) and Foreign Bank and Financial Account (FBAR) reports compliance
IRS compliance and enforcement activities continued to focus on income earned abroad. The primary focus was on foreign accounts of U.S. taxpayers, involving the relatively new FATCA and FBAR reports.
Comprehensive proposed FATCA regulations. The IRS issued comprehensive proposed regulations to implement the requirements of FATCA. The regulations apply to foreign financial institutions, other foreign entities, and U.S. withholding agents who must identify, report, and withhold on foreign accounts owned by U.S. taxpayers. The IRS has reported that final FATCA regulations will be issued in the near future.
- FATCA due diligence. The IRS announced new deadlines for withholding agents and foreign financial institutions to satisfy due diligence requirements for their accounts under FATCA. Certain requirements slated to take effect in 2013 will not apply until 2014.
- 2012 OVDP. The IRS reopened its offshore voluntary disclosure program (OVDP) in 2012. The 2012 program imposes a higher penalty of 27.5 percent (compared to 25 percent in the 2011 program) of the highest aggregate balance of foreign assets during the eight years prior to disclosure. Certain taxpayers may qualify for reduced penalties of 5 percent or 12.5 percent.
FBARs and low-risk nonresident U.S. taxpayers. The IRS implemented streamlined filing compliance procedures for "low risk" nonresident U.S. taxpayers who failed to file returns, including FBARs.
The IRS issued final regulations on whistleblower awards made under the Tax Relief and Health Care Act of 2006. The 2006 Tax Relief Act enhanced the program by providing for mandatory awards of 15 percent to 30 percent of the collected proceeds in certain cases.
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