Procedure Round Up(date):   Regulations, Mount Up! & State Law SOL Issue When Suing Promoters.

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This will be a short post that touches on some temporary and final regulations that were issued in the last quarter of last year that impact tax procedure, specifically information reporting and the preparer due diligence rules, which we have previously covered.  The second portion of the post will deal with a state law statute of limitations issue from a tax shelter participant suing the promoter.


Regulation Update

What is Keno?

Back in March of 2015, I wrote about the temporary regulations dealing with reporting of winnings from bingo, keno, and slot machines.  The Service has finalized those regulations, which can be found here.  I believe the final regulations are similar to the temporary regulations (although aspects regarding electronic slot machines were not included in the final regs). These rules peg the required reported winnings at $1,200 for bingo and slot machines (but $1,500 for keno).  Anyone have any idea why those amounts are different (or what keno is, I don’t go to casinos much)?  The information on the information reporting must include the name, address, and EIN of the payee, along with a description of the two types of ID used to verify the payee’s address.

Discharge Reporting- Buy Now, Three Years, No Payments!

I thought I had written up the proposed regulations from 2014 relating to the rules on discharge of indebtedness reporting when a borrower had not paid for more than three years, but I cannot find the post (very possible I just read about it and found it interesting).  Under Section 6050P, prior regulations treated nonpayment of debt for 36 months as an “identifiable event”, which indicated formal discharge of indebtedness and required the issuance of a Form 1099-C.  This caused many borrowers to believe the debt had been discharged, but it was simply an IRS reporting requirement.  Tax professionals, lenders and borrowers did not like the rule.  The final regulations can be found here.  The regulations eliminate the passage of that time frame as a reportable event, which is a good result.  This change may have come from discussions started in the ABA Tax Section, Low Income Taxpayer Committee.

Preparer Due Diligence Regs Updated.

The Government has issued temporary/proposed regulations regarding the preparer due diligence rules, which can be found here.  We’ve talked about preparer due diligence repeatedly on the blog, including one of our first posts (and most popular), where Les extensively discussed peeing in pools.  That was re-posted earlier this year, and can be found here.  In both 2014 and 2015, Section 6695 dealing with preparer due diligence was amended.  The penalty was indexed for inflation, and the due diligence requirements were expanded to include the Child Tax Credit, the Additional Child Tax Credit, and the American Opportunity Tax Credit.  The proposed regulations update the provisions to take into account these changes.

Information(less) Returns

In late December 2016, the Service issued guidance (Notice 2017-9) regarding the new de minimis safe harbor provisions enacted under the PATH act.  In general, failure to include all required information on an information return or payee statement will result in a penalty being imposed on the issuer.  The penalty is dependent on various factors, including the amount incorrectly reported, when it was not reported, how quickly it is rectified, and potentially other factors.

The penalty under Section 6721 can be reduced or eliminated in certain circumstances.  There is a de minimis exception to Section 6721, which allows the penalties to be waived if the error is corrected on or before August 1st in the year it is filed.  This is limited to the greater of ten returns or .5 percent of the information returns filed.  For returns required to be filed after December 31, 2016, there is a safe harbor that applies, where, if the information return has an error of $100 or less, or involves less than $25 of withholding, then the safe harbor applies, and no corrected return is required.  The notice is clear that this does not apply for intentional acts or intentional disregard.  It also indicates that regulations will be forthcoming regarding the safe harbor.

The de minimis safe harbor will not apply, however, if the payee elects out of the safe harbor.  Under Section 6721(c)(3)(B) and Section 6722(c)(3)(B), the payee can make an election and the payor has thirty days to furnish a corrected payee statement to the payee and the IRS.  If it is not done within thirty days the penalties will apply (it is possible for additional time in limited circumstances).

The payor must provide the manner for making such an election, which can be any reasonable manner including by writing, electronically or by telephone.  The payee must be told in writing the fashion in which the election can be made.  The notice goes on to indicate the timing of when the election must be made, and indicates the election must: 1) clearly state the election is being made; 2) the payee’s name, address, and TIN; 3) the type of statements and account numbers; and 4) the years in which the election should apply.

So, if you are super angry that Gigantor Bank and Lack of Trust Company misstated your 1099 by $4.37, you now have your avenue for redress.

Shelter Participant SOL Against Promotor Runs From Final Tax Court Ruling, Not Notice of Tax Deficiency

I initially saw this suit, and thought some aspect pertained to federal law claims against the tax shelter promoter, but the claims were state law based.  It is, however, still an interesting statute of limitations issue, that could impact future rulings based on state law.

In Kipnis v. Bayerische Hypo-Und Vereinsbank, AG, the Eleventh Circuit, following direction from the Florida Supreme Court, has reversed the district court in holding the statute of limitation on state based claims against a tax shelter promoter by a participant were not time barred.

The particular holding is for a relatively straightforward issue.  After the defendant admitted fault, the IRS issued a notice of deficiency to the plaintiff for his involvement in the shelter.  This occurred in October of 2007.  On November 1, 2012, there was a final tax court order disposing of the case (90 days thereafter appeal rights expired).  On November 4, 2013, plaintiff filed suit against the defendant alleging various state law claims including fraud from the promoting and selling of the transaction.

The defendants moved to have the case thrown out as being outside of Florida’s four and five year statute of limitations for the claims made.  The issue was appealed to the Eleventh Circuit, which sought guidance from the Florida Supreme Court on the issue, specifically:

Under Florida law and the facts in this case, do the claims of the plaintiff taxpayers relating to the CARDS tax shelter accrue at the time the IRS issues a notice of deficiency or when the taxpayer’s underlying dispute with the IRS is concluded or final.

The Florida Supreme Court, which the Eleventh Circuit followed, determined that the claims accrued at the time the tax court order became final, which was ninety days after the order was issued when the appeals period had passed. See Kipnis v. Bayerische Hypo-Und Vereinsbank, AG 202 So. 3d 859 (Fla. 2016).  I think this is inline generally with what the federal law would be in most analogous situations, but would invite others to comment on this aspect if they have thoughts.

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Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.



  1. Keno is one of the easiest and fastest ways for gamblers to lose money. Picture the numbers 1 through 80, arranged in 8 rows of 10. Players select the numbers they want to play, from just one number to fifteen of them. This is done either on a thin paper sheet that is turned in before the drawing, or on a touch-screen gaming machine of the kind that also offers electronic poker and blackjack. Then, 20 numbers (out of the 80) are drawn at random. The results are shown on large video screens in the keno area, and elsewhere. If you picked only 1 number and it is one of those drawn, you should win $4 on a $1 bet because the odds of this happening are 1 in 4. (OK, maybe the house should get 10% vigorish.) But the payoff is only $3, so the juice is 25%.

    If you bet on two numbers and they both come up, you win $12, even though the odds of this happening are 1 in 16. If you bet on five numbers and all of them are drawn (highly unlikely), you win $800. You would also collect on this bet if only four are drawn — the payoff is $10 — and if three are drawn, you get your dollar back. Payoffs vary among casinos, but the house typically keeps 25% or more of the money bet. The patrons lose money more slowly than with slot machines because of the time between drawings, and they enjoy watching the scantily-clad “keno runners” who take their cards and money from the bar or buffet table to the cashier.

    Gamblers can also play consecutive drawings with the same card, hoping that their numbers will eventually come up as they enjoy t&f shows, or even sleep. For the innocent and naive, let’s just say that t&f stands for track and field.

    The payouts are much better at roulette. The odds of winning a single number bet are 1 in 38, or 1 in 37 at most casinos outside the United States. The payoff on a $1 bet is $36. Also, there is no IRS reporting of roulette winnings, at least when played at a table with a real wheel and croupier, not on a machine.

    A reason for the $1,500 amount on keno W-2G requirements? Apparently there are no $1,200 payouts on the standard keno award chart. You either win something like $800, betting five numbers, or $1,500, betting six. Casino award charts may vary, but here is a sample:

    Of course, this assumes $1 bet. It’s possible to bet less, or more, on each game.

  2. Here is another 1099 story from the pages of my tax practitioner diary.

    The Trade Priorities and Accountability Act was signed into law on June 29, 2015. It reduced the minimum age at which public safety retirees could take distributions from their 457(b) plans, without paying a 10% “penalty,” from 55 to 50. This provision became effective for distributions in 2016.

    One of my clients – her career included both firefighter and police work – retired in 2016 after 25 years of service, at age 52. She had paid into a 457(b) “deferred compensation” plan through Nationwide, the company selected by her employer (the largest capital city in the country). She withdrew some money in 2016. She received a 1099R from Nationwide with a “1″ in Box 7, indicating that it was subject to the 10% additional tax because no exception applies.

    She called the Nationwide toll-free customer service number, after I suggested she ask that the code be changed to “2.” Nationwide is not interested in whatever tax relief Congress deemed just and proper for first responders. She was told that her tax preparer would know what form to use, to claim the exception to the penalty.

    Well, yes, I know there is a Form 5329 to file with her return and a place to enter a Code 1 to indicate that the Form 1099R Code 1 should really be a Code 2. But I also know that the IRS computer will flag the return because of the miscoding of the 1099R, and that if there is an IRS form for claiming an exception, there may be an IRS project for examining how many of these Form 5329 claims are allowable, and perhaps how many preparers exercised due diligence in helping clients claim them.

    I told my client that probably a third of those eligible for this new tax break would find a paid preparer who would know how to deal with this situation; a third would file returns, self-prepared or otherwise, without the Form 5329 and receive an IRS notice late next year; and a third would pay a preparer for a return that added the penalty and not even notice it when they sign off on the electronic-filing approval form.

    If Nationwide wants to be in the 457(b) business seeking public-safety employee accounts, one would hope that they would want to devise a system for verifying that the customer is a legitimate public-safety retiree so that IRS involvement could be avoided.

    This is probably not a problem covered by Section 6721 or its safe-harbor provisions. But even if it were, it’s not the insistent payee electing out of “safe harbor” who collects a penalty from the payor-in-error. It’s the IRS collecting the penalty. The payee just gets the satisfaction of knowing there is no compensation for time and effort correcting a mistake not her fault.

    Have I mentioned this involves a Nationwide 457(b) Form 1099R for public safety retirees? I would like to do that so that perhaps this information will show up in a Google search by other preparers researching this issue.

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