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In 2003, Congress allowed eligible taxpayers to deduct contributions up to a certain amount to a health savings account (HSA). In order to qualify for the HSA deduction, a taxpayer must be covered by a high-deductible health plan (HDHP). This means that the plan must require the covered individual to pay a rather large amount out-of-pocket before the insurer must contribute. The HDHP is not, however, required to have a high deductible for services deemed “preventive care.” In July 2019, the IRS issued Notice 2019-45, which describes an expanded list of medical services and medications that will be considered preventive care for the purposes of HSA deductions. This is hopefully good news for people who need various preventive medical services.

What Is a Health Savings Account?

Congress created HSA’s in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Title XII of the bill, entitled “Tax Incentives for Health and Retirement Security,” adds a new § 223 to the Internal Revenue Code (IRC), codified at 26 U.S.C. § 223. It allows “eligible individuals” to deduct contributions to an HSA, with an annual limit of $2,250 for a health insurance plan with single coverage, or $4,500 for a family plan. Additional contributions are allowed for people who are 55 years old or older. In order to be an “eligible individual,” they must be covered by an HDHP.

What Is a High-Deductible Health Plan?

Section 223(c)(2) of the IRC defines an HDHP as a health insurance plan with an annual deductible of at least $1,000 for a single individual, or $2,000 for a family; and an annual sum of the deductible and out-of-pocket expenses of no more than $5,000 for an individual or $10,000 for a family.
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The overall percentage of federal income tax returns audited by the IRS has been decreasing over the past several years. This is at least partly due to budget cuts, which leave the IRS with fewer resources to conduct audits. People with particularly high incomes have reportedly seen a steeper decline in audit rates than other people, but they still get audited at a higher rate than the general U.S. population.

The apparent decline in IRS audits is definitely not cause to be less careful with one’s taxes, especially for high-income individuals. The Tax Cuts and Jobs Act (TCJA) of 2017 led to significant tax cuts for many people with high incomes, but it also created opportunities for tax write-offs that are likely to catch the IRS’s attention. It may take the IRS a few years to catch up to some of these new opportunities, but they almost certainly will.

Decline in Audit Rates

In 2017, the IRS audited one out of every 160 tax returns that were filed. This was the sixth year of decline in the total number of audits, and the lowest number in fifteen years. The audit rate for individuals with annual earnings of $1 million or more was higher than the rate for the general population, at more than four percent in 2017. That same group, however, was audited at a rate of almost ten percent in 2015. This is also the lowest rate since the early ‘00s.
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Congress passed H.R. 3151, a bipartisan bill known as the Taxpayer First Act (TFA), in June 2019. The president signed it into law on July 1. Title I of the new law, entitled “Putting Taxpayers First,” improves procedures for assisting taxpayers and handling appeals. Title II, entitled “21st Century IRS,” improves identity theft protections and directs the agency to make technological upgrades. This bill replaced an earlier version, H.R. 1957, which had been introduced in March. A series of media reports in April led to criticism of several provisions in the first bill. Those provisions were removed in the reintroduced bill.

Office of Appeals

Section 1001 establishes the Internal Revenue Service Independent Office of Appeals (IOA) to “resolve Federal tax controversies without litigation.” The TFA identifies three main goals for the office:
1. Fairness towards both taxpayers and the IRS;
2. Consistent enforcement of tax law, along with “voluntary compliance” by taxpayers; and
3. “[P]ublic confidence in the [IRS’s] integrity and efficiency.”

Taxpayers who receive a notice of deficiency can request a referral to the IOA. If the IRS denies the request, the TFA requires it to provide written notice to the taxpayer explaining the reasons for the decision and explaining the procedure for filing a protest.
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In recent years, taxpayers have been investing in virtual currency to exchange monies in the virtual marketplace or hold on to as investment assets. One of the subgroups of virtual currency is cryptocurrency, or a digital form of currency traded or secured using cryptography. The emergence of this digital asset has yet to provide definitive tax guidelines for taxpayers and tax practitioners, particularly for taxpayers who are concerned about their privacy rights in cryptocurrency. However, one thing is clear when it comes to virtual currency: taxpayers must pay their taxes on the gains made from the profits on virtual currency. If not, taxpayers will reap the consequences of enforcement from the IRS.

The IRS has provided some guidance to the virtual currency debacle in the form of Notice 2014-21. The IRS defines virtual currency as a digital representation of value that functions as a medium exchange, a unit of account, and/or a store of value. Virtual currency can act as a substitute for real currency, also known as “convertible” virtual currency, but does not have legal tender status in any jurisdiction. An example of a convertible virtual currency is Bitcoin, which can be digitally traded between users and exchanged into US dollars, Euros, and other real or virtual currencies.

Based on that comprehensive yet confusing definition of virtual currency, taxpayers may wonder how virtual currency might be treated for federal tax purposes. According to the IRS, virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency. That means taxpayers who receive virtual currency as payment for goods or services must include the fair market value of the virtual currency, measured in US dollars, the date that the virtual currency was received. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.

Last month, the House Ways and Means Committee unanimously approved a bill to allow same-sex couples who married before the overturn of the Defense of Marriage Act (DOMA) to amend their filing status and claim their tax refunds as jointly-filed spouses. If enacted, this bill would be a huge step for the government because it would make an exception to the three-year statute of limitation rule for taxpayers to claim their refunds.

The purpose of H.R. 3299, or the Promoting Respect for Individuals’ Dignity and Equality (PRIDE) Act of 2019, is to permit legally married same-sex couples to amend their filing status for income tax returns outside the statute of limitations and to amend the Internal Revenue Code of 1986 to clarify that all provisions shall apply to legally married same-sex couples in the same manner as other married couples. It incorporates language from H.R. 3294, the Refund Equality Act, and H.R. 1244, the Equal Dignity for Married Taxpayers Act. This bill would provide same-sex couples, who married before the Supreme Court’s decision in U.S. v. Windsor, an opportunity to claim their tax refunds and would remove gendered language such as “husband” and “wife” from the Internal Revenue Code to accommodate same-sex married couples.

Prior to the Windsor decision, federal law defined marriage for federal purposes as the union of one man and one woman, and allowed states to refuse to recognize same-sex marriages granted under the laws of other states. DOMA barred same-sex married couples from being recognized as “spouses” for purposes of federal laws, effectively barring them from receiving federal marriage benefits such as the filing of joint tax returns and federal refunds from those joint returns. Although the Supreme Court declared section 3 of DOMA unconstitutional under the Due Process Clause of the Fifth Amendment, the IRS lacks the authority to override the three-year limitation on which a claim for refund can be made.

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