The Protecting Americans from Tax Hikes Act (PATH Act), which was passed at the end of December 2015, made important changes to tax law and regulations effective for tax years beginning on or after January 1, 2016. Several other pieces of legislation and IRS administrative announcements which passed throughout 2014 and 2015 also made changes to tax law which impact 2016.
This first installment of our four part series will cover a few specific items for individual taxpayers. In our next three parts, we will highlight parts of various legislation that affect partnerships (Part II), businesses (Part III), and retirement plans (Part IV).
Changes to taxes for individuals for the 2016 tax year include: foreign bank account reporting requirement due dates brought in line to match individual tax reporting due dates; delays on refunds for returns with the Earned Income Tax Credit or Additional Child Tax Credit; the tightening up of regulations and requirements for the Child Tax Credit and the American Opportunity Credit, both of which are refundable and ripe for fraud and misunderstanding; and the provision that individuals may have their passports limited, revoked or denied due to deliquency on tax bills.
Foreign Bank Account Reporting (FBAR)
Commonly referred to as the FBAR, FinCEN Form 114 reports foreign bank accounts, assets, and trusts with values over $10,000 of which the taxpayer has a financial interest or signatory authority. For tax years 2015 and earlier, the FBAR has been due June 30th, with no opportunity for extension. Starting with tax year 2016, for reporting in 2017, this form will be due at the same time as the individual return (April 15th) and will be eligible for extension until October 15th, the same as the individual Form 1040. The intent of this change is to simplify reporting requirements and avoid multiple reporting due dates for individual taxpayers.
Child Tax Credit (CTC)
A taxpayer cannot claim the Child Tax Credit retroactively by filing an amendment (or an original return if not previously filed) for any prior year in which an individual, or a qualifying child for whom the child tax credit is claimed, did not have an individual tax identification number (ITIN). The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number, but who do not have and are not eligible to obtain a Social Security Number.
Once a CTC has been denied as a result of deficiency procedures, then no child tax credit will be allowed for any later tax year unless the additional information the IRS requires is provided to demonstrate eligibility.
If the CTC was disallowed due to the taxpayer’s reckless or intentional disregard of rules and regulations, then the child tax credit is not allowed for a two-year period following that determination. In cases of fraud, the denial is ten years following the most recent tax year for which there was final determination of fraud regarding the child tax credit.
Adding to the occasions for which the IRS can make a summary assessment of additional tax without sending the taxpayer a deficiency notice, is the ability of the IRS to deny an entry on a return claiming a CTC when they are disallowed because of reason of previously determined reckless or intentional disregard of rules and regulations or in cases of fraud. The IRS may also deny a CTC claim without deficiency procedures in the event a taxpayer omits required information because of a previous CTC denial. Another instance where the IRS may make a summary assessment is in the case of clerical or mathematical errors.
American Opportunity Tax Credit (AOTC)
As with the Child Tax Credit, a taxpayer cannot claim the American Opportunity Tax Credit retroactively by filing an amendment (or an original return if not previously filed) for any prior year in which an individual, or a qualifying child for whom the education credit is claimed, did not have an ITIN.
Again, as with the CTC, once the AOTC has been denied as a result of deficiency procedures, then no credit will be allowed for any later tax year unless the additional information the IRS requires is provided to demonstrate eligibility. The two-year/ten-year wait period also applies if the credit was disallowed due to disregard of rules and regulations/fraud.
In these cases, the IRS can make a summary assessment of additional tax without sending the taxpayer a deficiency notice when the AOTC is disallowed because of reason of reckless or intentional disregard of rules and regulations, or in cases of fraud.
Beginning on January 1, 2016, educational institutions must report on Form 1098-T qualified tuition and expenses actually paid (previously amounts paid and/or billed). The Form 1098-T must include the institution’s employer identification number (EIN), and the taxpayer must report this tuition and expenses amount when claiming the AOTC.
Refund Delay for Returns with Earned Income Tax Credit (EITC) or Additional Child Tax Credit
Individuals who file their tax returns very early in the season because they are used to receiving refunds as a result of the Earned Income Tax Credit and/or the Additional Child Tax Credit will need to adjust their planning. The PATH Act mandates that no credit or overpayment for a taxable year may be made before February 15th if the taxpayer claimed either one of these credits. The additional time will allow the IRS to check the information in order to prevent refund fraud and revenue lost due to identity theft.
Tax returns can still be filed and processed when tax season opens as usual; however, refunds will be held until at least February 15th. Entire refunds will be held for those returns that contain either one of the credits mentioned above, because the new law does not allow for partial refunds to be issued.
Major Consequence for Seriously Delinquent Taxpayers
Any tax debt that exceeds $50,000, has a Federal tax lien assessed against it, and does not have an agreement to repay in place is considered seriously delinquent. A seriously delinquent tax debt is grounds for denial, revocation, or limitation of a passport unless one of the following exceptions applies: 1) cases where collection is suspended because of collection due process, or 2) cases where innocent spouse relief has been requested or is pending.
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