Tax Relief and Health Care Acts Shape 2011 Returns: Return Preparers Face New Regulations; Information Reporting Expands

By Bonner, Paul | Journal of Accountancy, January 2012 | Go to article overview

Tax Relief and Health Care Acts Shape 2011 Returns: Return Preparers Face New Regulations; Information Reporting Expands


Bonner, Paul, Journal of Accountancy


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As CPAs gear up for tax season, they'll find the Form 1040 series for 2011 looking much the same as that of the previous year, but only because of Congress 11th-hour compromise late in 2010 to keep it so. Nonetheless, a number of new features affecting individuals and businesses, such as new information reporting forms, are debuting, so return preparers should be aware of developments in the past year that will affect 2011 tax returns.

For 2011 inflation-adjusted tax rates and updated amounts of various credits and other items, see the "Quick Guide" that accompanies this article. For inflation-adjusted items for the 2012 tax year, see the sidebar, "Looking Ahead to the 2012 Tax Year."

The most significant event affecting 2011 returns was the signing on Dec. 17. 2010, of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act), EL. 111-312, which extended the ordinary income tax rates introduced by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), EL. 107-16, and the capital gain tax rates introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), EL. 108-27. The Tax Relief Act also extended a large number of other expired or expiring provisions.

Many of the tax provisions enacted in EGTRRA and JGTRRA had been set to expire after 2010. The Tax Relief Act amended EGTRRA and JGTRRA to postpone the sunset of the affected provisions until after 2012 and extended many other provisions to 2011 or 2012.

PRACTICE AND PROCEDURE

PTINs. This tax season is the second for which tax preparers must register with the IRS and obtain or renew preparer tax identification numbers (PTINs). The IRS reqnired preparers who registered and obtained a PTIN for the 2011 filing season to renew it for 2012 by the end of 2011. For more on PTIN renewal procedures, see Tax Matters on page 60.

Mandatory e-filing. This tax season, the threshold above which preparers must e-file most individual and fiduciary income tax returns drops from 100 returns they or their firm reasonably expect to file during the year to 11. A transitional rule allowing return preparers to paper file upon written request from the taxpayer expired at the end of calendar 2011 (Notice 2011-27).

EITC due diligence. The U.S.-Korea Free Trade Agreement Implementation Act, P.L. 112-41, increased the preparer penalty under Sec. 6695(g) from $100 to $500 for each failure to exercise due diligence with respect to the earned income tax credit. The higher penalty is effective for returns required to be filed after Dec. 31, 2011.

EXTENSION OF EGTRRA AND JGTRRA PROVISIONS

Tax rates. EGTRRA introduced a 10% tax bracket below the 15% bracket for individuals and reduced the other tax brackets to 25%, 28%, 33% and 35%. Those changes were scheduled to sunset after 2010 so that in 2011 the 10% rate would disappear (with income in that bracket reverting to the 15% bracket) and the other rates would revert to 28%, 31%, 36% and 39.6%, respectively. With the Tax Relief Act's postponement of the EGTRRA sunset, those rates are scheduled to continue through 2012.

Capital gains. In 2003, JGTRRA also lowered the capital gain tax rate to 15% (0% for taxpayers in the 10% and 15% ordinary income tax brackets). These rate changes also had been scheduled to expire after 2010. The Tax Relief Act's postponement of JGTRRA's sunset continues the lowered capital gain tax rate through 2012.

Itemized deductions and personal exemptions. The Tax Relief Act also extended EGTRRA's repeal of the itemized deduction phaseout and the personal exemption phaseout for two years through 2012.

PAYROLL TAX REDUCTION

For 2011 only, the Tax Relief Act also reduced the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2% (the employer's portion remained at 6. …

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