Federal tax developments you need to be aware of

By David Fulton, CPA

The third quarter of 2009 has seen a flood of new federal tax developments. I would like to highlight some of the more important federal tax developments for you.

Health care reform. Congress returned to work after its August recess with health care reform at the top of its agenda. The tax provisions in the pending bills are very different from each other and it is unclear at this time which will be enacted. The House has proposed a surtax on higher-income individuals to pay for heath care reform. This approach has little support in the Senate. A final Senate bill is likely to include new taxes on high-dollar health insurance plans. President Barack Obama wants Congress to get a health care reform bill to the White House before 2010.

Audits. The IRS is gearing up to launch a new employment tax compliance project. The project is expected to focus on four areas: worker classification, fringe benefits, non-filers, and officers' compensation. Taxpayers will be randomly selected for the National Research Program (NRP) study of employment tax noncompliance.

Penalties. The IRS announced a temporary freeze on the collection of Code Sec. 6707A penalties in July and extended the moratorium in September. Many small businesses have complained that the penalties are out of proportion to any tax benefits received. In some cases, small business owners purchased benefit plans that turned out to be tax shelters. The IRS will suspend collection through December 31, 2009 in cases where the annual tax benefit from the transaction is less than the penalty imposed under Code Sec. 6707A(b)(2): $100,000 for individuals or $200,000 for other taxpayers, per year. The suspension is intended to give Congress time to pass corrective legislation.

Levies. In July, IRS Chief Counsel determined that the agency can levy on a taxpayer's health savings account (HSA). The taxpayer would also be liable for an additional tax because an IRS levy on an HSA is not a distribution to pay qualified medical expenses.

Motor vehicle sales tax deduction. In July, the IRS reminded taxpayers that the motor vehicle sales tax deduction may be claimed for more than one vehicle but the deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle. The deduction phases out for higher-income individuals.

Filing status. The Tax Court signaled in July that it does not plan to extend married filing joint status to same-sex couples anytime soon ( Merrill v Commr ). Married filing joint status is based on a marriage, the court found. The Defense of Marriage Act of 1996 declared for federal purposes that marriage is between a man and a woman and a spouse is defined as a person of the opposite sex.

Roth IRAs. Effective for 2010, individuals will be able to roll over funds to a Roth IRA regardless of current income and other restrictions, the IRS reminded taxpayers in September. The IRS also issued interim guidance on rollovers from employer plans to Roth IRAs. It's not too early to start planning for Roth IRA conversions.

Retirement savings. President Obama and the IRS announced new initiatives in September to encourage Americans to save for retirement. The IRS issued seven rulings and notices to streamline automatic enrollment in retirement plans and more.

David Fulton is a Certified Public Accountant that graduated and became a CPA in the early 1980s. He earned a Master of Science in Taxation degree. He has operated his own business, a CPA practice, for 22 years, located at 320 Spanish Street in Sutter Creek. You can reach him at 209-267-0305.

COPYRIGHT 2009 AMADOR COUNTY CHAMBER OF COMMERCE