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Issue Number:    IR-2020-227

Inside This Issue


IRS issues final regulations for Achieving a Better Life Experience accounts

WASHINGTON — The Internal Revenue Service posted to IRS.gov final regulations today for Achieving a Better Life Experience (ABLE) accounts.

The regulations issued today finalize two previously issued proposed regulations. The first proposed regulation was published in 2015 after the enactment of the ABLE Act. The second proposed regulation was published in 2019 in response to the Tax Cuts and Jobs Act, which made significant changes to ABLE accounts. 

Eligible individuals may now put more money into their ABLE account and roll money from their qualified tuition programs (529 plans) into their ABLE accounts. Also, certain contributions made to ABLE accounts by low- and moderate-income workers may now qualify for the Saver's Credit.

ABLE accounts are designed to help people with disabilities and their families save and pay for disability-related expenses. Though contributions are not deductible, distributions, including earnings, are tax-free to the designated beneficiary if used to pay qualified disability expenses. These expenses can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services and other disability-related expenses.

The final regulation addresses many comments received on the 2015 and 2019 proposed regulations. Specifically, they provide guidance on the gift and generation-skipping transfer tax consequences of contributions to an ABLE account, as well as on the federal income, gift, and estate tax consequences of distributions from, and changes in the designated beneficiary of, an ABLE account. 

Also, before Jan. 1, 2026, funds are allowed to be rolled over from a designated beneficiary’s 529 plan to an ABLE account for the same beneficiary or a family member. The regulations provide that rollovers from 529 plans, together with any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) cannot exceed the annual ABLE contribution limit.

Finally, these regulations provide guidance on the recordkeeping and reporting requirements of a qualified ABLE program.

For more information about ABLE accounts and other tax reform changes visit the Tax Reform page of IRS.gov.

IRS Tax Tips September 23, 2020

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Issue Number: Tax Tip 2020-124


Six tips for people starting a new business


Understanding the tax responsibilities that come with starting a business venture can save taxpayers money and help set them up for success. IRS.gov has the resources and answers to help people through the process of starting a new business.

Here are six tips for new business owners.

  • Choose a business structure. The form of business determines which income tax return a business taxpayer needs to file. The most common business structures are:
    • Sole proprietorship: An unincorporated business owned by an individual. There’s no distinction between the taxpayer and their business.
    • Partnership: An unincorporated business with ownership shared between two or more people.
    • Corporation: Also known as a C corporation. It’s a separate entity owned by shareholders.
    • S Corporation: A corporation that elects to pass corporate income, losses, deductions and credits through to the shareholders.
    • Limited Liability Company: A business structure allowed by state statute. 
  • Choose a tax year. A tax year is an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either:
    • Calendar year: 12 consecutive months beginning January 1 and ending December 31.
    • Fiscal year: 12 consecutive months ending on the last day of any month except December. 
  • Apply for an employer identification numberAn EIN is also called a federal tax identification number. It’s used to identify a business. Most businesses need one of these numbers. It’s important for a business with an EIN to keep the business mailing address, location and responsible party up to date. IRS regulations require EIN holders to report changes in the responsible party within 60 days. They do this by completing Form 8822-BChange of Address or Responsible Party and mailing it to the address on the form.
  • Have all employees complete these forms:
    • Form I-9, Employment Eligibility Verification U.S. Citizenship and Immigration Services
    • Form W-4Employee’s Withholding Allowance Certificate
  • Pay business taxes. The form of business determines what taxes must be paid and how to pay them.
  • Visit state’s website. Prospective business owners should visit their state's website for info about state requirements.

Understanding the tax responsibilities when starting a new business can save taxpayers money and help set them up for success. IRS.gov has the resources and answers to help people through the process of starting a new business.

Finding resources for choosing a business structure, tax year and applying for an EIN can easily be found on IRS.gov.

IR-2020-226: IRS expands enforcement focus on abusive micro-captive insurance schemes; taxpayers urged to consult independent tax advisor before Oct. 15 filing deadline

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IRS Newswire October 1, 2020

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Issue Number:    IR-2020-226

Inside This Issue


IRS expands enforcement focus on abusive micro-captive insurance schemes; taxpayers urged to consult independent tax advisor before Oct. 15 filing deadline

WASHINGTON – With the Oct. 15 deadline quickly approaching, the Internal Revenue Service today encouraged taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction.

The IRS encourages any taxpayer who has continued to engage in an abusive micro-captive insurance transaction to not anticipate being able to settle its transaction with the IRS or Chief Counsel on terms more favorable than previously announced settlement offers and that any potential future settlement initiative that the IRS may consider will require additional concessions by the taxpayer.

With this in mind, the IRS encourages taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction. These taxpayers should seriously consider exiting the transaction and not reporting deductions associated with abusive micro-captive insurance transactions, like many other taxpayers did who were contacted by the IRS in March and July 2020.  For those taxpayers that do not exit the transaction and continue taking such deductions, the IRS will disallow tax benefits from transactions that are determined to be abusive and may also require domestic captives to include premium payments in income and assert a withholding liability for foreign captives.  The IRS will also assert penalties, as appropriate, including the strict liability penalty that applies to transactions that lack economic substance.  The IRS Office of Chief Counsel is well prepared to defend these positions in Tax Court. 

"The IRS enforcement efforts will continue on these abusive transactions.”  IRS Commissioner Chuck Rettig said. “Any future settlement terms will only get worse, not better. The IRS has never been better positioned in its quest to eradicate abusive transactions following the stand-up of a dedicated promoter office, a new Fraud Enforcement Office, enhanced service-wide coordination with Criminal Investigation and the Office of Professional Responsibility, and our advanced data analytics and mining capabilities. Taxpayers are strongly encouraged to use this opportunity to put this behind them and get into the compliance.”

Abusive micro-captives have been a concern to the IRS for several years. The transactions first appeared on the IRS "Dirty Dozen" list of tax scams in 2014 and remain a priority enforcement issue for the IRS. In 2016, the Department of Treasury and IRS issued Notice 2016-66 (PDF), which identified certain micro-captive transactions as having the potential for tax avoidance and evasion.  In March and July 2020, IRS issued letters to taxpayers who participated in a Notice 2016-66 transaction alerting them that IRS enforcement activity in this area will be expanding significantly and providing them with the opportunity to tell the IRS if they’ve discontinued their participation in this transaction before the IRS initiates examinations.  Early responses indicate that a significant number of taxpayers have exited the transaction. 

This summer, the IRS issued a new round of section 6112 letters to material advisors who filed with the IRS pursuant to Notice 2016-66. In addition, the IRS has deployed 12 newly formed micro-captive examination teams to substantially increase the examinations of ongoing abusive micro-captive insurance transactions.

Also, as part of IRS’s continued focus in this area, the IRS has become aware of variations of the abusive micro-captive insurance transactions. An example of one of these variations is a potentially abusive captive insurance arrangement that uses offshore captive insurance companies domiciled in Puerto Rico, and elsewhere, as opposed to section 831(b) captives.  This and other variations appear to be designed and marketed with the express intent of avoiding reporting under Notice 2016-66 and yet perpetuating in some cases the same or similar abusive elements as abusive micro-captive insurance transactions.  The IRS is aware of these abusive transactions and is actively working to counter their proliferation.

IRS Tax Tips October 1, 2020

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Issue Number: Tax Tip 2020-130


Taxpayers should know and understand their correct filing status


Taxpayers need to know their correct filing status and be familiar with each option.

Generally, the taxpayer's filing status depends on whether they are single or married on Dec. 31 and that determines their status for the whole year. However, more than one filing status may apply in certain situations. If this is the case, taxpayers can usually choose the filing status that allows them to pay the least amount of tax.

When preparing and filing a tax return, the filing status affects:

  • If the taxpayer is required to file a federal tax return
  • If they should file a return in order to receive a refund
  • Their standard deduction amount
  • If they can claim certain credits
  • The amount of tax they should pay

Here's the five filing statuses:

  • Single. Normally this status is for taxpayers who are unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
  • Married filing jointly. If a taxpayer is married, they can file a joint tax return with their spouse. When a spouse passes away, the widowed spouse can usually file a joint return for that year.
  • Married filing separately. Married couples can choose to file separate tax returns. When doing so it may result in less tax owed than filing a joint tax return.
  • Head of household. Unmarried taxpayers may be able to file using this status, but special rules apply. For example, the taxpayer must have paid more than half the cost of keeping up a home for themselves and a qualifying person living in the home for half the year.
  • Qualifying widow(er) with dependent child. This status may apply to a taxpayer if their spouse died during one of the previous two years and they have a dependent child. Other conditions also apply.

More Information:
Publication 501, Dependents, Standard Deduction, and Filling Information

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