The AMT Patch, Mortgage Debt Relief, Technical Corrections and Other Late-Breaking Tax Laws
Here is a preview of the new tax laws Congress passed in late December.
The Tax Increase Prevention Act of 2007 - For tax year 2007 only, this law boosts AMT exemption amounts for individuals, and provides that most personal, nonrefundable credits may offset AMT as well as regular tax. Without this extension, a majority of our clients would have paid the AMT tax.
The Mortgage Forgiveness Debt Relief Act of 2007 -This is a new exclusion for up to $2 million of principal residence mortgage forgiveness debt, effective for debt discharged in 2007-2009.The law doubles the previous exclusion of $ 1 million and provides a three-year extension of the rule allowing mortgage insurance premiums to be treated as qualified residence interest. A liberalized home-sale exclusion rule for surviving spouses was included.
The Tax Technical Corrections Act of 2007- In addition to technical corrections, the TCA makes a number of substantive changes to legislation that was enacted in recent years. For example, it liberalizes the rules for claiming the refundable AMT credit, revises the rules for a shareholder basis reduction on account of contributions of appreciated property by S corporations, and revises several important tax rules dealing with the definition of active business income under Code Sec. 355 and the computation of foreign earned income exclusion.
New Return Preparer Penalties Loom for 2008 - In an effort to raise revenue, Congress has recently imposed stricter standards and penalties on tax return preparers. The goal is to put the onus on the preparer to disclose aggressive positions taken on tax returns by giving the IRS a bigger to stick to use on preparers that support the "aggressive" tax positions.
On tax returns that have any understatement of tax, the standard for an undisclosed tax position was raised from a “realistic possibility” of success to that of a reasonable belief that it is “more likely than not” the proper tax treatment was applied. Translation: tax preparers must believe any tax position taken has a greater than 50% chance of success under government review or complete a disclosure form explaining the position to IRS. The standard for a tax return accompanied by disclosure was raised from “not frivolous” to that there be a “reasonable basis” to support the disclosed position.
Per the IRS, a tax preparer may rely in good faith upon information furnished by the taxpayer or another adviser or third party, and is not required to independently verify or review the items reported on tax returns to determine if they are likely to be upheld if challenged by the IRS. However, the tax return preparer must make "reasonable inquiries" if the information appears to be incorrect or incomplete.
The new standards now apply to all “tax returns” including payroll, pension, information returns, not just “income tax returns. Bottom line: tax preparers will need to be more diligent to insure every position taken on a tax return is fully supported by law. Any questionable position will need to be disclosed on the return and communicated to the taxpayer. It's not clear how much revenue this new standard will generate but it will no doubt increase the cost of tax preparation. Other penalty changes include new or increased penaties on late filed partnership and S-Corporation tax returns. |
