401(K) Audit Procedures

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IRS tells its auditors how to audit 401(k) hardship distributions. The IRS’s Tax Exempt and Government Entities Division has issued a memo that explains substantiation guidelines for IRS auditors when they examine whether a 401(k) plan hardship distribution is “deemed to be on account of an immediate and heavy financial need” under safe harbor standards. Whether an employee has an immediate and heavy financial need is based on all relevant facts and circumstances. The IRS stated a financial need might qualify even if it was reasonably foreseeable by the employee.

IRS initiates program for auditing farmers’ tax returns

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The IRS’s Small Business / Self-Employed Division (SB/SE) has issued a memo that details a pilot program for auditing expenses farmers claim on Form 1040, Schedule F, “Profit or Loss From Farming.” Schedule F is used to report farm income and expenditures. The memo instructs auditors to focus on expenses including deposits, prepaid supplies, equipment rentals or leases and fuel.

Taxpayer’s loss not allowed

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The sole shareholder of an S corp guaranteed a loan taken out by the business. Years later, the company liquidated, but operations continued under the S corp’s name, and the borrower renewed the debt. On his return, the taxpayer reported a loss, claiming he’d assumed the note as guarantor after the liquidation and that created sufficient basis. The U.S. Tax Court ruled that the debt remained after the liquidation and the S corp was the “primary obligor.” Therefore, the taxpayer couldn’t claim a loss. (TC Summ Op 2017-9)

March 15 Deadline Looms

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An important deadline is coming up. March 15 is the due date for several tax matters, including 1) filing calendar-year partnership and S corp returns and making 2016 contributions to partners’ pension and profit sharing plans (unless a 6-month extension is filed on Form 7004); 2) electing S corp status for 2017 by filing Form 2553; 3) using up remaining Flexible Spending Account balances if a 2½ month grace period is allowed after the plan year ends; and 4) paying out certain bonuses for accrual-based businesses to claim a 2016 deduction. Contact us for assistance.