 |
|
|
Looking for an expert in section 1031 exchanges?
|
(The following is a another take on a Like-Exchange ruling which was first discussed on our October 2007 newsletter based on the Special Feature under 1031 Newsletters located here which contains the full report) Highlights of Report Number: 2007-30-172 to the Internal Revenue Service Commissioners for the Small Business/Self-Employed and Wage and Investment Divisions. IMPACT ON TAXPAYERS The practice of deferring capital gains tax through like-kind exchanges is increasing in popularity. However, if taxpayers do not specifically follow the rules for like-kind exchanges, they could be held liable for taxes, penalties, and interest on their transaction. Therefore, its is important for the Internal Revenue Service (IRS) to provide specific and consistent guidance to taxpayers on this provision of the tax law. WHY TIGTA DID THE AUDIT This audit was initiated to evalute the IRS' oversight of the deferment of capital gains tax through like-kind exchanges. TIGTA also determined whether taxpayers' use of this investment strategy is growing and whether this poses any specific problems for the IRS. Under normal circumstances, when a taxpayer sells a business or investment property, tax must be paid on the gain. A like-lind exchange allows an exception to payment of the capital gains tax. When taxpayers sell businesses or investment real estate and replace them with different businesses or investment properties using an exchange, they can defer payment of the capital gains tax normally required on these sales. As long as a property used for business or investment is replaced with similar property, no gain or loss is recognized at that time; rather, it is deferred until the eventual sale of the replacement property. A taxpayer must report an exchange to the IRS on Like-Kind Exchanges (Form 8824), which is filed with his or her tax return for the year during which the exchange took place. The IRS Office of Research, Analysis, and Statistics reported that in Tax Year 2004 taxpayers filed more than 338,500 Forms 8824 claiming deferred gains (or losses) of more than $73.6 billion. While this represents a doubling of the number of like-kind exchanges reported in 1998, the total dollar amounts deferred more than tripled. WHAT TIGTA FOUND Like-kind exchanges require more IRS oversight to ensure taxpayers comply with tax law. Some IRS guidance needs revision to provide more consistent and complete information regarding like-kind exchange filing requirements. In addition, the IRS regulations for like-kind exchanges of second and vacation homes are complex and may be unclear to taxpayers, and little informaiton exists with respect to a published position by the IRS on like-kind exchanges involving such properties. The absence of clarification leaves unrebutted the sales pitch of like-kind exchange promoters who may encourage taxpayers to improperty claim deferral to capital gains through "tax-free" exchanges. WHAT TIGTA RECOMMENDED TIGTA recommended the Director, Research, Small Business/Self-Emplyed Division, conduct a study of issue-related returns selected by the National Research Program. At the conclusion of the study, the Research function would recommend to the Small Business/Self-Employed Division Examination function what particular data should be captured in future National Research Programs in order to ensure appropriate IRS oversight of taxpayer compliance with tax laws pertaining to like-kind exchanges. TIGTA also recommended the Commisioner Wage and Investment Division update some current guidance regarding Form 8824 and provide additional guidance to taxpayers regarding rules and regulations governing like-kind exchanges of second and vacation homes that were not used exclusively by owners. In their response to the report, IRS officials agreed with all of the recommendations. The IRS plans to conduct a research study of reporting and compliance issues associated with like-kind exchanges and share the results with the appropriate function. In addition, the IRS agreed to revise instructions for certain tax forms; update the information available on IRS.gov; and provide additional guidance on like-kind exchanges to taxpayers. The original text of the above-listed summary can be found on the TIGTA website using the following link http://www.treas.gov/tigta/auditreports/2007reports/200730172_oa_highlights.pdf
|
|
|
|