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Keeping Your Balance: IRS makes determination on self-employment taxes

In a recent Chief Counsel Advice (201436049), the IRS Chief Counsel has made a determination that a limited partner’s distributive share of income from an LLC is subject to self-employment taxes unless the income is of an investment nature.

James W. Rahmlow

James W. Rahmlow

In the situation at hand, the individuals were actively working in a business that earned management fees. They were paid compensation on a form W-2, which purported to represent their reasonable compensation for services rendered. They also received their distributive share of the income from the LLC but did not have it subject to self-employment taxes.

The IRS disagreed, arguing that Congress did not intend to exclude partners from self-employment tax if they performed services for a partnership in their capacity as partners. The IRS concluded that the partners’ distributive income was not income of an investment nature and thus should be subject to self-employment tax.

The IRS has recently issued revised guidance for taxpayers who need to file a delinquent FBAR (Report of Foreign Bank and Financial Report) return with the Treasury’s Financial Crimes Enforcement Network. This process is available only if the taxpayer is not under IRS audit or criminal investigation and has not been contacted by the IRS about the delinquent returns.

The FBAR is due by June 30 by a taxpayer if they owned or had signature authority over one or more foreign financial accounts with an aggregate value that exceeded $10,000 at any time during the prior calendar year. If the return has not been filed and the taxpayer wants to correct the situation, a delinquent FBAR Form 114 must be filed including a statement as to why the report is late. The report must be filed electronically and the taxpayer must select a reason for the late filing.

It should be noted that there is a civil penalty which can be imposed of up to $10,000 for failure to file an FBAR. The IRS has stated that it will not impose a penalty for failing to file an FBAR if the taxpayer reported and paid tax on the foreign financial accounts on its U.S. tax returns, provided the IRS has not already contacted the taxpayer about an audit or about the delinquent FBAR.

In Rev. Rul. 2014-28, the IRS has issued its short-term, mid-term, and long-term monthly applicable interest rates and adjusted AFRs for November 2014.  Below is a summary of those monthly rates.


Short Term Mid Term Long Term
Applicable Federal Rates 0.39% 1.88% 2.87%
Adjusted Applicable Federal Rates 0.39% 1.31% 2.76%


Feeling that it is well on its way to accomplishing its goal of universal e-filing of individual tax returns, the IRS has now turned its attention to partnerships and corporations. It should be noted that the program is voluntary with the exception of reporting by certain large partnerships and corporations.

Including this group, the IRS reported in a recent announcement (IR-2014-98) that business e-file of returns has increased nearly 10 percent in 2014. This continued growth now has corporations and partnerships (both voluntary and required) total e-filings to approximately 70 percent during 2014. The push for 2015 will obviously be for those corporations and partnerships that still have the voluntary paper file option.

As referenced in the 2014-2015 IRS Priority Guidance Plan, the IRS is drilling down into the area of employee meals provided for the employer’s convenience. The reference did not exist in the 2013-2014 Priority guidance Plan. The IRS stresses that their review is designed to improve “guidance” and does not appear to address perceived abuses, although that certainly is below the surface.

Generally, meals provided by an employer to employees on the work premises are tax free to the employees if the meals are provided for the employer’s convenience. While the convenience of the employer is a facts and circumstances test, it is this area that undoubtedly will get the most scrutiny.

Reflecting our low and nonvolatile interest rate environment, the IRS has announced the interest rates to be used on overpayments and underpayments for the calendar quarter beginning Oct. 1, and ending Dec. 31.  By comparison, it can be seen that the rates are unchanged from the previous quarter.

For overpayments, the rate will be 3 percent for everyone other than corporations. For corporations, the rate will be 2 percent, except that the rate will decrease to 0.5 percent for corporate overpayments which exceed $10,000.

For underpayments, the rate will be 3 percent for all taxpayers with the exception that the rate will be 5 percent for large corporate underpayments.

The IRS recently issued draft instructions for the 2014 version of Form 990-EZ which appear at www.irs.gov. The most important take away for me was the clarification of which organizations qualify to file this much less cumbersome Form 990.

While not required, a smaller organization can file a Form 990-EZ if they have gross receipts of less than $200,000 and total assets of less than $500,000 at the end of the organization’s tax year. The four-page Form 990-EZ is a breath of fresh air compared to the 12 pages of the Form 990. The Form 990 itself is required to be filed annually by tax-exempt organizations, nonexempt charitable trusts and Code Sec. 527 political organizations.

James W. Rahmlow, CPA, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at jrahmlow@mmb-co.com.

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