The next time you speed down the highway thinking of how late you are, you may want to take a moment to wonder whether your tax return was late too.
This may seem like a non sequitur, but taxes were evidently on Congress’ mind when it recently passed the short-term highway funding bill, more formally known as The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (HR 3236). President Obama signed the bill into law on July 31. This is the 34th short-term transportation extension bill that Congress has passed since 2009. A longer term fix was debated but abandoned, setting up a new debate in the fall, which may well bring us the 35th short-term extension.
I don’t normally care much about highway funding bills, other than as someone who drives on the highways and as a spectator of congressional politics. As a tax professional, transportation bills usually would not otherwise catch my attention. But besides funding our highways and veterans affairs for the next three months, the recent bill contains a number of tax law changes. I suspect a few tax practitioners, and certainly most individual taxpayers, run the risk of missing them. There is some time before the new rules take effect, since they generally kick in for the 2016 tax year, but it’s worth highlighting a few key changes.
Partnership tax returns will now be due on March 15, one month earlier than under the old law. For partnerships that operate on a fiscal year, the return will be due on the 15th day of the third month following the close of their tax year. C-corporation tax returns got moved back one month, to an April 15 deadline. S-corporations, which are truly more like partnerships for tax purposes, will keep their existing March 15 deadline. All of these entities can request a six-month extension.
The new partnership filing deadline reflects a logical change, since many individuals cannot complete their personal returns until a partnership’s return is done and reports the owner’s share of pass-through income. The American Institute of Certified Public Accounts (AICPA) and several state CPA societies have advocated such changes for several years. AICPA’s president, Barry Melancon, praised the new law, saying, “The changes will reduce the need for extended and amended corporate and individual tax returns and will correct the mismatch of information flow that exists in the system today.”
I agree this is a logical idea, but I am skeptical that we’ll see a large reduction in extensions. If anything, the new partnership deadline may actually increase the number of extensions, since tax practitioners may be unable to file more returns with a deadline one month sooner. Once the return is extended, any sense of urgency is gone, which may lead to more individual return extensions, rather than fewer.
The other major deadline change affects the FinCEN Report 114, more commonly known as the FBAR, which is the form for reporting foreign bank and financial accounts. The requirement to report foreign accounts has moved up from June 30 to April 15, to align with the well-known due date for individual tax returns. And, as allowed for individual tax returns, taxpayers can now request a six-month extension to file the FinCEN Report 114, which formerly was not an option. While the extension is a nice change, the new due date could be a trap for self-preparers or other taxpayers who miss this change and file in late June as usual. The law does provide penalty relief for first-time filers who file late by mistake, but nothing for repeat filers who miss the new deadline and forget to file an extension by April 15. The Treasury may eventually issue regulations addressing this issue, but for now, taxpayers beware.
In addition to moving various filing deadlines, the law adds a new reporting requirement for executors of estates that are required to file estate tax returns. The new rule adds some complexity to an estate’s filing situation, though relatively few estates are large enough to trigger an estate tax filing requirement outright. What is not yet clear is whether this rule applies to estates where the executor elects to file a return without being required to do so; given the rise of portability, this is an increasingly common scenario. The statute itself notes Treasury regulations will be forthcoming regarding such situations and other specific rules. Note also that, unlike the filing deadline changes, this new requirement takes effect for all estate tax returns filed after July 31, 2015 - the date the new law was enacted - so executors won’t be able to wait very long for such guidance.
Under the new law, executors must now provide information returns to the Internal Revenue Service and beneficiaries in order to make sure that anyone inheriting property from the estate reports its cost basis accurately. These new cost basis statements are due either 30 days after the estate tax return is due or 30 days after the estate tax return is actually filed, whichever is earlier. The idea is to make sure that whenever the beneficiaries sell the property, perhaps several years later, they will not overstate the basis when preparing their income tax returns.
Speaking of overstating cost basis, the new law also overruled, or more accurately clarified the law in response to, a recent U.S. Supreme Court decision. The IRS’ statute of limitations for assessing taxes on a taxpayer is usually three years from the date the return was due or was filed, whichever was later. But there are a variety of exceptions that extend this period. One of these is that the period is doubled to six years if a taxpayer underreports his or her gross income by more than 25 percent. In 2012, the Supreme Court held that overstating your cost basis was not the same as underreporting income; thus, the Court said, the three-year limit applied in such instances. In response, the new law amends the tax code to specifically apply the six-year statute of limitations if a taxpayer overstates cost basis and causes at least a 25 percent underreporting of income.
We can view this change as a minor defeat to taxpayers, but I assume Congress always meant for the law to apply this way. Such a fix is merely responding to a technical drafting issue that the Supreme Court pointed out. As a side note, a more recent high-profile case dealing with poorly drafted language (Chief Justice Roberts described it as “inartful drafting”) in the Affordable Care Act and its subsidies was decided differently, as we have recently discussed.
One final change worth mentioning is that the new law amended the tax code to require mortgage interest statements, Form 1098, to include the amount of the outstanding principal balance as of the beginning of the calendar year, as well as the date the mortgage originated and the address of the property securing it. This reporting change will help individuals and their tax preparers identify mortgages with a principal balance above the deductible limits, generally $1 million of home acquisition debt and $100,000 of home equity debt.
Who knows what will be in the 35th short-term highway funding bill. But the 34th is a reminder to always look closely for tax law changes, even in unexpected places. For those of us not in Congress, though, we should probably spend our highway time focusing on avoiding potholes, not filing our next tax return.
Posted by Anthony D. Criscuolo, CFP®, EA
photo courtesy Joshua Davis Photography
The next time you speed down the highway thinking of how late you are, you may want to take a moment to wonder whether your tax return was late too.
This may seem like a non sequitur, but taxes were evidently on Congress’ mind when it recently passed the short-term highway funding bill, more formally known as The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (HR 3236). President Obama signed the bill into law on July 31. This is the 34th short-term transportation extension bill that Congress has passed since 2009. A longer term fix was debated but abandoned, setting up a new debate in the fall, which may well bring us the 35th short-term extension.
I don’t normally care much about highway funding bills, other than as someone who drives on the highways and as a spectator of congressional politics. As a tax professional, transportation bills usually would not otherwise catch my attention. But besides funding our highways and veterans affairs for the next three months, the recent bill contains a number of tax law changes. I suspect a few tax practitioners, and certainly most individual taxpayers, run the risk of missing them. There is some time before the new rules take effect, since they generally kick in for the 2016 tax year, but it’s worth highlighting a few key changes.
Partnership tax returns will now be due on March 15, one month earlier than under the old law. For partnerships that operate on a fiscal year, the return will be due on the 15th day of the third month following the close of their tax year. C-corporation tax returns got moved back one month, to an April 15 deadline. S-corporations, which are truly more like partnerships for tax purposes, will keep their existing March 15 deadline. All of these entities can request a six-month extension.
The new partnership filing deadline reflects a logical change, since many individuals cannot complete their personal returns until a partnership’s return is done and reports the owner’s share of pass-through income. The American Institute of Certified Public Accounts (AICPA) and several state CPA societies have advocated such changes for several years. AICPA’s president, Barry Melancon, praised the new law, saying, “The changes will reduce the need for extended and amended corporate and individual tax returns and will correct the mismatch of information flow that exists in the system today.”
I agree this is a logical idea, but I am skeptical that we’ll see a large reduction in extensions. If anything, the new partnership deadline may actually increase the number of extensions, since tax practitioners may be unable to file more returns with a deadline one month sooner. Once the return is extended, any sense of urgency is gone, which may lead to more individual return extensions, rather than fewer.
The other major deadline change affects the FinCEN Report 114, more commonly known as the FBAR, which is the form for reporting foreign bank and financial accounts. The requirement to report foreign accounts has moved up from June 30 to April 15, to align with the well-known due date for individual tax returns. And, as allowed for individual tax returns, taxpayers can now request a six-month extension to file the FinCEN Report 114, which formerly was not an option. While the extension is a nice change, the new due date could be a trap for self-preparers or other taxpayers who miss this change and file in late June as usual. The law does provide penalty relief for first-time filers who file late by mistake, but nothing for repeat filers who miss the new deadline and forget to file an extension by April 15. The Treasury may eventually issue regulations addressing this issue, but for now, taxpayers beware.
In addition to moving various filing deadlines, the law adds a new reporting requirement for executors of estates that are required to file estate tax returns. The new rule adds some complexity to an estate’s filing situation, though relatively few estates are large enough to trigger an estate tax filing requirement outright. What is not yet clear is whether this rule applies to estates where the executor elects to file a return without being required to do so; given the rise of portability, this is an increasingly common scenario. The statute itself notes Treasury regulations will be forthcoming regarding such situations and other specific rules. Note also that, unlike the filing deadline changes, this new requirement takes effect for all estate tax returns filed after July 31, 2015 - the date the new law was enacted - so executors won’t be able to wait very long for such guidance.
Under the new law, executors must now provide information returns to the Internal Revenue Service and beneficiaries in order to make sure that anyone inheriting property from the estate reports its cost basis accurately. These new cost basis statements are due either 30 days after the estate tax return is due or 30 days after the estate tax return is actually filed, whichever is earlier. The idea is to make sure that whenever the beneficiaries sell the property, perhaps several years later, they will not overstate the basis when preparing their income tax returns.
Speaking of overstating cost basis, the new law also overruled, or more accurately clarified the law in response to, a recent U.S. Supreme Court decision. The IRS’ statute of limitations for assessing taxes on a taxpayer is usually three years from the date the return was due or was filed, whichever was later. But there are a variety of exceptions that extend this period. One of these is that the period is doubled to six years if a taxpayer underreports his or her gross income by more than 25 percent. In 2012, the Supreme Court held that overstating your cost basis was not the same as underreporting income; thus, the Court said, the three-year limit applied in such instances. In response, the new law amends the tax code to specifically apply the six-year statute of limitations if a taxpayer overstates cost basis and causes at least a 25 percent underreporting of income.
We can view this change as a minor defeat to taxpayers, but I assume Congress always meant for the law to apply this way. Such a fix is merely responding to a technical drafting issue that the Supreme Court pointed out. As a side note, a more recent high-profile case dealing with poorly drafted language (Chief Justice Roberts described it as “inartful drafting”) in the Affordable Care Act and its subsidies was decided differently, as we have recently discussed.
One final change worth mentioning is that the new law amended the tax code to require mortgage interest statements, Form 1098, to include the amount of the outstanding principal balance as of the beginning of the calendar year, as well as the date the mortgage originated and the address of the property securing it. This reporting change will help individuals and their tax preparers identify mortgages with a principal balance above the deductible limits, generally $1 million of home acquisition debt and $100,000 of home equity debt.
Who knows what will be in the 35th short-term highway funding bill. But the 34th is a reminder to always look closely for tax law changes, even in unexpected places. For those of us not in Congress, though, we should probably spend our highway time focusing on avoiding potholes, not filing our next tax return.
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