Treasury, IRS heading in the direction of greater disclosure requirements
Over the past several years, tax professionals have had a lot to digest with all the new changes resulting from the enactment of the Tax Cuts and Jobs Act and various other tax initiatives. The Treasury Department has provided thousands of pages of guidance in the form of regulations and notices to better implement these new laws. The Internal Revenue Service has also been busy crafting and implementing greater disclosure requirements for both business and individual taxpayers. These new requirements will, more often than not, increase the compliance burden for tax professionals and will provide the IRS with more information up front.
Here are some of the significant disclosure items that are either already required, or will be required, for next filing season:
Although we are switching back to a more streamlined Form 1040 with less schedules (goodbye postcard), the same amount of line items and information reported in 2018 is still required in 2019. The IRS also added a question to the top of Schedule 1 asking if the taxpayer received, sold, sent or exchanged any virtual currency during the tax year. This should come as no surprise since the IRS is making this an area of focus for review and reporting in 2020.
One other requirement is still in effect. In 2018 a note was added to the second page of Form 1040, Schedule E stating S corporation shareholders who have either reported a loss, received a distribution, disposed of stock or received a loan repayment from their S corporation were required to attach a basis computation schedule to their individual returns. Prior to this, the IRS only required these schedules be provided upon request. Now it wants evidence the taxpayer has adequate basis in the year the actual transaction takes place.
In 2018, the IRS instituted a new requirement for partnerships to report a partner’s tax basis capital account when either the beginning-of-year or end-of-year amount was negative. This could be disclosed directly on the partner’s K-1 or sent separately to the IRS within 180 days of the extended due date of the partnership return.
In September, when the IRS released a draft of the 2019 Form 1065, it amplified this disclosure by requiring partnerships to report tax basis capital on Schedule K-1 for all partners regardless of whether the partner’s capital account was negative. In December, after receiving a significant amount of comments about taxpayers not being able to timely comply with the change, the Treasury and the IRS delayed the disclosure requirement until tax years beginning on or after Jan. 1, 2020. For the 2019 tax year, reporting partners’ capital under Section 704(b), GAAP or any other method is still permitted with the exception that the 2018 negative tax basis capital disclosure mentioned above is still required.
No other single area of U.S. taxation has seen such major changes over the past few years as the U.S. international tax system. It is no surprise then that the amount of forms, schedules and disclosures has increased dramatically in this area.
The IRS has released forms to address the various new international systems (for example, Form 8992 for Global Intangible Low-Taxed Income, or GILTI), but it has also significantly altered existing forms, as well. Form 5471 filed by U.S. owners of controlled foreign corporations (CFCs) is a perfect example. On Schedule G, the IRS significantly increased the amount of informational questions related to the CFC, even going as far as adding a question that references an additional 22 questions listed only in the instructions. That is really just the tip of the iceberg. Schedule J for reporting the CFC’s accumulated earnings and profits (as well as Schedule E for reporting taxes) has turned into an extremely complex mess of buckets, rows and columns that needs to be tracked in Excel in order to be able to line everything up.
Overall, it’s clear the Treasury and the IRS are moving in the direction of greater disclosure. With the significant reduction in taxpayers being audited over the past decade, expect to see the increased disclosure trend continue as the IRS attempts to use its resources efficiently to help identify better candidates for examination.