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April 20, 2021
NewsAs you know by now, the IRS postponed to May 17, 2021, the date to file 2020 Forms 1040 and 1040-SR and to pay any related tax. The due dates for estimated tax payments for 2021 were not postponed. The first 2021 estimated tax installment was due April 15, 2021. If an individual taxpayer has a 2020 overpayment and elects to credit the 2020 overpayment against the 2021 estimated tax, the date on which the 2020 overpayment is applied against the 2021 estimated tax depends on: (a) the date(s) of payment, and (b) the extent to which an overpayment exists as of April 15, 2021. An extension of time to file has no effect on either the date of payment or the date on which an overpayment exists. To the extent an overpayment of the 2020 tax exists as of April 15, 2021 (because payments made on or before April 15, 2021, exceed the 2020 tax liability), and the taxpayer makes a valid election to apply the overpayment to 2021 estimated tax, the overpayment would be applied as of April 15, 2021, whether the 2020 return is filed on April 15, May 17, or October 15, 2021. To the extent an overpayment of the 2020 tax is attributable to a payment made after April 15, 2021 (including any payment made after April 15, 2021, but on or before May 17, 2021), that overpayment would not be available for crediting as of April 15, 2021, and would be applied as of the payment received date, not as of April 15, 2021. For examples and more information, go to Electing To Apply a 2020 Return Overpayment From a May 17 Payment with Extension Request to 2021 Estimated Taxes.
Tip of the DayBasis worksheet clarified . . . Computing your basis in an S corporation or partnership can be critical in determining whether or not you can take a loss and in computing your gain or loss on the disposition of a partnership interest. The IRS provides a worksheet in the instructions to the K-1 for a partnerhip return (Form 1065). There's an error on the worksheet and the IRS has made two important corrections to the worksheet. At this time the IRS has not updated the instructions. Here's the correction that was posted on the IRS webpage at www.irs.gov/forms-pubs/clarifications-for-the-2020-partners-instructions-for-schedule-k-1-form-1065:
April 19, 2021
NewsIn an ongoing effort to help those experiencing homelessness during the pandemic by reminding people who don't have a permanent address or a bank account that they may still qualify for Economic Impact Payments and other tax benefits the IRS has taken some new measures. While Economic Impact Payments continue to be made automatically to most people, the IRS can't issue a payment to eligible Americans when information about them isn't available in the tax agency's systems. To help people experiencing homelessness, the rural poor and other historically under-served groups, the IRS urges community groups, employers and others to share information about Economic Impact Payments and help more eligible people file a tax return so they can receive everything they're entitled to. IRS.gov has a variety of information and tools to help people receive the Economic Impact Payments. For more information go to IR-2021-87.
Tip of the DaySold your home? . . . The new law hasn't changed the rules here. You can exclude $250,000 of the gain ($500,000 if married filing joint) of the gain if you owned and used the home as your principal residence for 2 out of the last five years (there are exceptions and fine points here; check the rules). But you could still have a gain after the taxable exclusion amount, particularly if you're single or your spouse passed away. You can add to the contract purchase price the cost of additions and improvements (see our Checklist) and many expenses that weren't deductible when your originally purchased the property. That includes abstract fees, legal fees associated with the purchase, recording and survey fees, transfer or stamp taxes and owner's title insurance. From the selling price subtract sales commissions, advertising fees, legal fees, other costs and fees to sell the property.
April 16, 2021
NewsThe recently signed American Rescue Plan includes an enhanced child tax credit. Under previous law the credit was equal to $2,000 for children up to age 16. The new credit increases the amount to $3,600 for each child under the age of 6 and to $3,000 for those aged 6 to 17. (For those 18 and over the credit will remain at $500.) In addition, instead of taking the full credit on your tax return, the credit will now be paid out monthly--$300 for those under age 6; $250 for children 6 to 17 for the last six months of 2021. The difference will be claimed on your 2021 tax return next year. The credit is phased out for higher-income taxpayers, but based on 2021 income. The credit will be direct deposited into your bank account if you provided the account on either your 2019 or 2020 return (if the latter is filed without extension). The IRS has announced that it is set to meet the July 1 deadline of beginning to direct deposit monthly amounts into taxpayer accounts.
Tip of the DayCheck your return . . . And do so carefully. Most people use computer software to complete their return. That avoids math and many other errors. But it's far from foolproof. Put in the wrong birthdate for a child and you may not get the child credit. Put in "various" for the purchase dates on a group of shares sold on one day and the software may default to a short-term gain. Put in the wrong birthday for you or your spouse and your standard deduction will be wrong. By checking the return after checking your inputs, you'll find obvious errors. And there are two ways to avoid many mistakes. First, don't rush to get the return out like a term paper in high school. Put it aside after you're done and return in a day or two. If you're down to the wire, file for an extension. The IRS doesn't look at an extended return differently than any other. Second, don't plug a number. If the software is looking for you to use a schedule rather than enter the number directly, do so. Shortcuts will undermine the checking features built into the software.
April 15, 2021
NewsThe IRS has announced (IR-2021-86) it is disbursing nearly 2 million payments in the fifth batch of Economic Impact Payments from the American Rescue Plan. This announcement brings the total disbursed so far to approximately 159 million payments, with a total value of more than $376 billion, since these payments began rolling out to Americans in batches as announced on March 12. The fifth batch of payments began processing on Friday, April 9, with an official payment date of April 14, with some people receiving direct payments in their accounts earlier as provisional or pending deposits. This batch is includes individuals who didn't file a return and didn't use the non-filer tool and includes additional ongoing supplemental payments for people who earlier this year received payments based on their 2019 tax returns but are eligible for a new or larger payment based on their recently processed 2020 tax returns. This batch included more than 700,000 of these "plus-up" payments, with a total value of more than $1.2 billion.
IRS Commissioner Rettig has testified before the Senate Finance Committee that the tax gap may be much larger than the $400 billion and in other projections and could be as much as $1 trillion. Citing a marked reduction in staff personnel in the last 10 years the IRS is conducting fewer audits. Rettig also noted a rise in more sophisticaed ways of avoiding taxes and indicated increased staff and funding would go a long way in reducing the tax gap.
Tip of the DayEstimates due . . . You may have another month to complete your 2020 taxes, but your first quarter estimated taxes are due April 15. Most taxpayers can avoid a penalty by paying in as much as the prior year's liability. (High income taxpayers must add a 10 percent cushion.) That could be good news for many taxpayers if 2020 was a bad year for them. But keep in mind that you'll have to make up any shortfall next April.
April 14, 2021
NewsNotice 2021-24 amplifies the guidance in Notice 2020-22, which provides for penalty relief under Section 6656 for an employer's failure to timely deposit Employment Taxes with the IRS. This notice provides relief from Section 6656 for employers required to pay qualified sick leave wages and qualified family leave wages, and qualified health plan expenses allocable to these wages, mandated by the Families First Coronavirus Response Act, as amended by the COVID-related Tax Relief Act of 2020, and the American Rescue Plan Act of 2021. This notice also provides relief from Section 6656 for certain employers subject to a full or partial closure order due to COVID-19 or experiencing a statutorily specified decline in business under the Coronavirus Aid, Relief, and Economic Security Act, as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act. Finally, this notice provides relief from Section 6656 for certain employers for which COBRA continuation coverage premiums were not paid by assistance eligible individuals for such coverage by reason of Section 9501(a)(1) of the American Rescue Plan Act. This relief ensures that such employers may pay qualified sick leave wages and qualified family leave wages, qualified wages, and COBRA continuation coverage premiums using Employment Taxes that would otherwise be required to be deposited without incurring a failure to deposit penalty.
The IRS has issued proposed regulations (REG-121095-16) that include requirements that certain foreign persons and certain foreign-owned partnerships must meet in order to elect the Federal income tax benefits provided by Section 1400Z-2. This document also contains proposed regulations that allow, under certain circumstances, for the reduction or elimination of withholding under Section 1445, 1446(a), or 1446(f) of the Code on transfers that give rise to gain that is deferred under section 1400Z-2(a). Finally, this document contains additional guidance regarding the 24-month extension of the working capital safe harbor in the case of Federally declared disasters.
Tip of the DayEasy to file simple returns . . . A significant number of taxpayers have very simple returns, maybe only a W-2. If you're among them, using IRS Free File could be the way to go. (Free File can be used for more complicated returns too.) It's easy, free, and uses commercial software on the IRS website. There are a few restrictions, the primary one being you must make $72,000 or less. It's particularly attractive to students who might have a small paycheck and just want to claim any withheld taxes or others that just want to claim the Recovery Rebate Credit.
April 13, 2021
NewsUnemployment compensation is usually fully taxable, however the American Rescue Plan recently passed excludes the first $10,200 of unemployment benefits for taxpayers with less than $150,000 in modified adjusted gross income. This change only applies to tax year 2020. If you're using tax software your program should handle it automatically. If you're doing a return by hand, you should get the instructions and worksheet. If you've already filed and included the full amount in your income, the IRS has announced that it will automatically recalculate your tax and either mail a refund or applied to other taxes owed. The recalculation will be done in two phases. The first will apply to taxpayers who are eligible to exclude up to $10,200; the second to those married filing jointly who can exclude up to $20,400 and others with more complex returns. The IRS is expected to start issuing refunds in May. Thus, there should be no reason to file an amended return for federal purposes. (However, in those states that allow an exclusion check with your state. States are less likely to do the calculation for you. For more information, see COVID Tax Tip 2021-46.
The IRS has releaed FS-2021-07 providing information to persons (individuals, trusts, corporations, etc.) who have to file a Reports of Foreign Bank and Financial Accounts (FBAR). The filing requirement applies to individuals who have signature authority over one or more bank, brokerage, or mutual fund accounts in a foreign country if the foreign financial account exceeds $10,000.
Tip of the DayExempt interest . . . Interest on bonds issued by state and local governments and their agencies (water authority, bridge, etc.) are usually tax exempt for federal purposes. They may be tax exempt at the state level. Interest on bonds issued by your home state are generally exempt on your state return. It's easy if you buy the bond. Income on a New York bond is exempt to a New York resident, but not a California resident. Things get trickier if you own a municipal bond fund. Unless the fund is devoted solely to one state (e.g., a fund holding only California bonds) you'll have to find the percentage of the income from your state of residence and apply it to the total income. One more point. U.S. government interest on obligations such as Treasury bills, notes, bonds is fully taxable for federal purposes but generally exempt on your state return.
April 12, 2021
NewsThe American Rescue Plan Act of 2021 suspends the requirement that taxpayers increase their tax liability by all or a portion of their excess advance payments of the Premium Tax Credit (excess APTC) for tax year 2020. A taxpayer's excess APTC is the amount by which the taxpayer's advance payments of the Premium Tax Credit (APTC) exceed his or her Premium Tax Credit (PTC). The IRS announced that taxpayers with excess APTC for 2020 are not required to file Form 8962, Premium Tax Credit, or report an excess advance Premium Tax Credit repayment on their 2020 Form 1040 or Form 1040-SR, Schedule 2, Line 2, when they file. Eligible taxpayers may claim a PTC for health insurance coverage in a qualified health plan purchased through a Health Insurance Marketplace. Taxpayers use Form 8962, Premium Tax Credit to figure the amount of their PTC and reconcile it with their APTC. This computation lets taxpayers know whether they must increase their tax liability by all or a portion of their excess APTC, called an excess advance Premium Tax Credit repayment, or may claim a net PTC. For more information and links to additional resources, go to IR-2021-84.
The IRS is reminding (IR-2021-83) U.S. citizens, resident aliens and any domestic legal entity that the deadline to file their annual Report of Foreign Bank and Financial Accounts (FBAR) is still April 15, 2021. The extension of the federal income tax filing due date and other tax deadlines for individuals to May 17, 2021, does not affect the FBAR requirement.
Tip of the DayDouble check your work . . . A brokerage 1099 can contain a myriad of numbers. Make sure you pick up the amount of qualified dividends as well as the total dividends. The statement can have tax-exempt dividends (from a tax free mutual fund) and tax exempt interest. They're different and don't go in the same spot. And foreign taxes paid can produce credits to reduce your taxes. Those are some of the important ones but depending on your holdings there can be many more.
April 9, 2021
NewsThe IRS has issued Notice 2021-25 (IRB 2021-providing guidance under the Taxpayer Certainty and Disaster Relief Act of 2020. The Act added a temporary exception to the 50% limit on the amount that businesses may deduct for food or beverages. The temporary exception allows a 100% deduction for food or beverages from restaurants. Beginning January 1, 2021, through December 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is not lavish or extravagant under the circumstances. Under the temporary provision, restaurants include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption. However, restaurants do not include businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores. Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if these facilities are operated by a third party under contract with the employer.
Beginning January 1, 2021, a one-participant plan or a foreign plan required to file an annual return must file Form 5500-EZ either electronically using the Department of Labor EFAST2 filing system, or on paper with the IRS. All plan sponsors are encouraged to file their 2020 Form 5500-EZ electronically. If a Form 5500-EZ filer is subject to IRS e-filing requirements (see Mandatory Electronic Filing), they’re required to file the Form 5500-EZ electronically using EFAST2. If a filer fails to file Form 5500-EZ electronically when required to do so, they’re deemed to have failed to file the return. Beginning January 1, 2021, a one-participant plan or a foreign plan can no longer file a Form 5500-SF in place of Form 5500-EZ. Information on the Form 5500-EZ filed using the EFAST2 filing system will not be available to the public on the DOL
Tip of the DayExcess deferrals . . . The total of all salary deferrals a participant makes to various retirement plans--including 401(k), 403(b), SARSEP and SIMPLE IRA plans--is limited to $19,500 (plus an additional $6,500 if age 50 or over) for 2020. For example, if you have two jobs one with a 401(k) and one with a SIMPLE IRA the maximum you can defer for the two jobs together is $19,500. If you defer more than this limit for 2020, the excess deferral amount plus earnings must be distributed by April 15, 2021. Excess salary deferrals not withdrawn by April 15 are taxable in 2020 and again when withdrawn. The date to remove excess salary deferrals has not been extended. Individuals who made salary deferral contributions to two or more retirement plans in 2020 may be most at risk for exceeding the deferral limit.
April 8, 2021
NewsEven small business owners may operate using more than one entity. That's especially true if there are different types of business (e.g., retail vs. service), different locations, etc. In some cases there's a management company that provides services to one or more entities. There are often valid business reasons, but there can also be legitimate tax reasons. But don't be surprised if the IRS takes a close look at any transactions between related parties. In Aspro, Inc. (T.C. Memo. 2021-8) the taxpayer was a C corporation that was owned by three shareholders, one was an S corporation, one was a C corporation, and one an individual. The corporation took significant deductions for management fees paid to the three shareholders. The taxpayer did not enter into any written management or consulting services agreements with any of its three shareholders. No management fee rate or billing structure was negotiated or agreed to between the shareholders and the corpooration at the beginning of any of the years in issue. And none of the shareholders invoiced or billed the taxpayer for any services provided. Instead, the taxpayer's board of directors would approve the management fees to be paid to the shareholders at a board meeting later in the tax year, when the board had a better idea how the company was going to perform and how much earnings the company should retain. The board minutes did not reflect how these determinations were made. The board did not attempt to value or quantify any of the services performed by two of the shareholders but instead approved a lump-sum management fee for each shareholder for each year. The amounts were not determined after considering the services performed and their values. The management fees paid to each entity were always equal each year, even though the services provided might vary from year to year. The Court looked at a number of factors and sided with the IRS in disallowing a deduction for the payments to the shareholders.
Tip of the DayHad a loan forbearance? . . . If you haven't talked to the lender or don't have a clear picture of when the forbearance will end and what the lender intends to do at the end of the period, you should do so immediately. There really is no standard procedure. Some lenders want the delayed payments made up in a single payment, some will modify and extend the loan with minimal of paperwork while some will treat it as a refinancing, often with the costs associated with a refinancing. There can be other variations. Unless you're now sitting on enough cash to handle any contingency, you should be making plans to deal with the situation and avoid a very unpleasant surprise. If you have to provide a personal financial statement to another lender you should resolve any forbearance as soon as possible.
April 7, 2021
NewsThis is the time of the year when the IRS reminds taxpayers that, if they haven't filed an old return, they should if they want to claim the refund. After three years any estimated taxes or withholdings belong to the federal government. Most states have similar rules. And the deadline for filing tax year 2017 returns will close on May 17 this year. If you're entitled to a refund you still may not get it if you have not filed or owe money for 2018 or 2019 returns.
If you've got "seriously delinquent taxes" the Secretary of State can deny or revoke your passport. In Robert Rowen (156 T.C. No. 8) the taxpayer failed to pay assessed tax liabilities totaling at least $474,846 relating to tax years 1994, 1996, 1997, and 2003 through 2007. The IRS certified that the taxpayer had a "seriously delinquent tax debt" within the meaning of Sec. 7345(b). The taxpayer petitioned the Court to determine that IRS's certification was erroneous pursuant to Sec. 7345(e)(1) and moved for summary judgment on the basis that Sec. 7345 violates the Due Process Clause of the Fifth Amendment to the Constitution because it infringes the right to international travel. The taxpayer also alleged that Sec. 7345 violates his human rights as expressed in the Universal Declaration of Human Rights (UDHR). The IRS filed a cross-motion for summary judgment alleging that (1) Sec. 7345 is constitutional; (2) the UDHR does not create actionable claims in Federal courts; (3) the taxpayer's debt remained enforceable; and (4) the IRS did not err in certifying the taxpayer's tax liabilities as a seriously delinquent tax debt. The Court held that because Sec. 7345 merely provides for the certification of certain tax-related facts and does not restrict in any manner the right to international travel, it cannot run afoul of the Due Process Clause of the Fifth Amendment. The Court also held the IRS established that it is entitled to judgment as a matter of law that no portion of the taxpayer's seriously delinquent tax debt is unenforceable by operation of the period of limitations on collection.
Tip of the DayTransfer on death . . . Individuals put it, or a similar designation, payable on death (POD) on bank and brokerage accounts. These assets will transfer automatically to the named individual(s) without probate. That doesn't mean the assets escape estate taxes, but it can simplify transfers. This makes sense for small bank or brokerage accounts that could be a nuisance to transfer or costly if you have an attorney do so. In some cases most or all an individual's financial assets can be transferred this way. Of course it won't work for a large brokerage account where they may be multiple heirs, but it can simplify small accounts. Another plus. The income from the account the day after death belongs to the heir, making reporting income during an interum period on a trust return unnecessary.
April 6, 2021
NewsClaiming or claimed the Recovery Rebate Credit? The IRS is mailing letters to some taxpayers who claimed the 2020 credit and may be getting a different amount than they expected. You should remember that the first and second Economic Impact Payments (EIP) were advance payments of the 2020 credit. Most eligible people already received the first and second payments and shouldn't or don't need to include this information on their 2020 tax return. People who didn't receive a first or second EIP or received less than the full amounts may be eligible for the 2020 RRC. They must file a 2020 tax return to claim the credit, even if they don't usually file a tax return. When the IRS processes a 2020 tax return claiming the credit, the IRS determines the eligibility and amount of the taxpayer's credit based on the 2020 tax return information and the amounts of any EIP previously issued. If a taxpayer is eligible, it will be reduced by the amount of any EIPs already issued to them. If there's a mistake with the credit amount on Line 30 of the 1040 or 1040-SR, the IRS will calculate the correct amount, make the correction and continue processing the return. If a correction is needed, there may be a slight delay in processing the return and the IRS will send the taxpayer a letter or notice explaining any change. Taxpayers who receive a notice saying the IRS changed the amount of their 2020 credit should read the notice. Then they should review their 2020 tax return, the requirements and the worksheet in the Form 1040 and Form 1040-SR instructions. Here are some common reasons the IRS corrected the credit:
IRS.gov has a special section--Correcting Recovery Rebate Credit issues after the 2020 tax return is filed--that provides additional information to explain what errors may have occurred. Taxpayers who disagree with the IRS calculation should review their letter as well as the questions and answers for what information they should have available when contacting the IRS.
In Mainstay Business Solutions (T.C. Memo. 2021-7) the taxpayer petitioned the Court pursuant to Sec. 6404(h) to review the IRS's failure to abate interest. The taxpayer later moved the Court to allow it to withdraw the petition and to dismiss the case. The Court held it had discretion to allow P to withdraw the petition because the petition did not invoke the Court's jurisdiction to redetermine a deficiency. The Court ordered the petition withdrawn and the case dismissed.
Tip of the DayCustomer finances? . . . It's clear the forecast is brightening for most businesses. But just because your customers are selling more doesn't mean they're out of the woods. You should still be vigilant in granting credit. Companies that have been in business for a number of years may be on safer ground, but relative newcomers may have a heavy debt load. Some businesses have blown through their cash and tapped expensive reserves, some used cash kept for a rainy day. You might want to be less generous with credit until you know who's who.
April 5, 2021
NewsThe IRS has issued guidance for employers claiming the Employee Retention Credit. Notice 2021-23 explains the changes to the Employee Retention Credit for the first two calendar quarters of 2021, including:
As a result of the changes made by the Relief Act, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.
Tip of the DayCheck IRS addresses . . . If you're mailing tax returns, estimates, etc. whether personal or business, check the current address for the item you're sending. The IRS periodically consolidates offices and maybe more so considering mail volume is probably down because of more electronic filing. The IRS usually provides substantial warning, but it still can be missed. Check the latest instructions with the form. And remember that, in many cases, returns with a payment go to a different address than those without.
April 2, 2021
NewsThe IRS has announced (IR-2021-72) it has now disbursed some 130 million payments totalling $335 billion. The Service is also who earlier in March received payments based on their 2019 returns but are eligible for a new or larger payment based on their recently filed 2020 returns. These "plus-up" payments could include a situation where a person’s income dropped in 2020 compared to 2019, or a person had a new child or dependent on their 2020 tax return, and other situations. Starting April 2 payments will be going to Social Security recipients who didn't file a 2019 or 2020 return.
Business startup expenses may not be completely deductible, but may have to be capitalized and amortized. Moreover, you have to be engaged in a trade or business to deduct any losses. In William Bruce Constello and Maritza Legarcie (T.C. Memo. 2021-9) the wife engaged in a farming activity from which, for the seven years up to and including the two years in issue, she reported losses. Her serial attempts at raising chickens, growing vegetables, and raising cattle were all unsuccessful. She also engaged in a rental real estate activity from which, for the first year in issue, she reported a loss. The IRS disallowed the taxpayer's deductions for the farming losses on the grounds that the wife had not incurred them in carrying on a trade or business. The IRS disallowed an operating loss deduction for one rental property on the grounds that it was not held for rental because it had been flooded, was in no condition to rent, and had not been advertised for rental. The Tax Court disallowed the deductions for losses from farming activity sustained because losses were startup expenses for which Sec. 195(a) prohibits a current deduction. The Court also disallowed the operating loss deduction for first rental property sustained because not held for rental.
Tip of the DayChanging tax software? . . . If you're using the same tax software as last year there are a number of items that are automatically carried forward. For example, unused capital losses, foreign tax credit, passive activity losses, depreciation information, etc. As a return increases in complexity, it's not unusual for the number of carryover items to increase. If you're switching software those items may not be carried forward automatically. Check last year's return carefully and be sure you enter the carryovers in the right spot on the return.
April 1, 2021
NewsThe IRS is warning taxpayers of an ongoing IRS-impersonation scam that appears to primarily target educational institutions, including students and staff who have ".edu" email addresses. The IRS' firstname.lastname@example.org has received complaints about the impersonation scam in recent weeks from people with email addresses ending in ".edu." The phishing emails appear to target university and college students from both public and private, profit and non-profit institutions. Taxpayers who believe they have a pending refund can easily check on its status at Where’s My Refund? on IRS.gov. The suspect emails display the IRS logo and use various subject lines such as "Tax Refund Payment" or "Recalculation of your tax refund payment." It asks people to click a link and submit a form to claim their refund. The site requests taxpayers to provide their social security number, full name, date of birth, prior year AGI, driver's license number, complete address, and electronic filing PIN. That's more than enough information to allow a scammer to access tax information with the IRS, file a return, and get into your other financial information.
The IRS continues its efforts to expand ways to communicate to taxpayers who prefer to get information in other languages. The IRS announced it now has a W-4 form in Spanish. It also has a Spanish-language version of Form 8821, Tax Information Authorization, and the instructions to that form are now available on IRS.gov. A Tax Information Authorization (TIA) is a critical form often used in assisting taxpayers with their IRS tax matters. A Form 8821 is a taxpayer's written authorization designating one or more third parties to receive and view the taxpayer's information. The designee(s) may inspect or receive confidential tax information for the tax matters, forms, and periods specified on Form 8821. This authorization includes the right to receive verbal and written account information (e.g., transcripts) and copies of IRS notices. The designee(s) of a TIA can be anyone the taxpayer chooses, including "family and friends."
Tip of the DayTaxes going up? . . . It's far too early for planning for a tax hike, but here are some thought. President Biden has promised not to raise taxes on individuals with income under $400,000. There are some good reasons to believe he'll keep his promise. But capital gains may lose some of their favored status and the changes in the estate tax are likely. If you're in the higher income range the top rates are likely to increase and operating as a C corporation would once again be disadvantageous. But it's also possible some breaks could return such as a larger cap or even no cap on the state and local tax deduction for individuals. One thing a business owner could plan for is a possible increase in capital gains taxes. If you're planning to sell all or part of your business in the near term, you might want to accelerate the process.
March 31, 2021
NewsPresident Biden has signed the bill extended the PPP Extension Act of 2021 that pushes back the deadline for applications for PPP loans to May 31, 2021.
The IRS has issued frequently asked questions on how students and higher education institutions should report pandemic-related emergency financial aid grants. Emergency financial aid grants made by a federal agency, state, Indian tribe, higher education institution or scholarship-granting organization (including a tribal organization) to a student because of an event related to the COVID-19 pandemic are not included in the student's gross income. Also, students should not reduce an amount of qualified tuition and related expenses by the amount of an emergency financial aid grant. If students used any portion of the grants to pay for qualified tuition and related expenses on or before December 31, 2020, they may be eligible to claim a tuition and fees deduction or the American Opportunity Credit or Lifetime Learning Credit on their 2020 tax return. See Higher Education Emergency Grants Frequently Asked Questions.
The IRS announced today that they anticipate payments will begin to be issued this weekend to Social Security recipients and other federal beneficiaries who do not normally file a tax return, with the projection that the majority of these payments would be sent electronically and received on April 7. After receiving data from the Social Security Administration on Thursday, March 25, the IRS began the multi-step process to review, validate, and test tens of millions of records to ensure eligibility and proper calculation of Economic Impact Payments. If no additional issues arise, the IRS currently expects to complete that work and to begin processing these payment files at the end of this week. Because the majority of these payments will be disbursed electronically – through direct deposits and payments to existing Direct Express cards – they would be received on the official payment date of April 7.
Tip of the DayEquipment writeoffs . . . There are several options to rapidly writing off equipment purchase. If the equipment qualifies you can use 100 percent bonus depreciation and write off the purchase in the year acquired; the Section 179 expense option will do the same thing, but with some restrictions. But for small items such as a laptop, printer, office furniture, etc. the easiest approach may be to just expense the item. You can expense up to $2,500 of such equipment if the invoice amount doesn't exceed that amount and you use the same approach for financial statement purposes. In addition you must have a policy of such expensing and make an election on your tax return. For example, you buy a laptop with an invoice price of $2,100. You can expense the amount. On the other hand if the invoice is for $2,550, none of the acquisition cost can be expensed. You can, of course, still use the Sectiom 179 expense option. The advantage to the $2,500 de minimus option is that you don't have to track the item and a drop in business use won't trigger recapture. Talk to your accountant about the details.
March 30, 2021
NewsThere are tax traps whether you do business as an S corporation, C corporation, partnership, or sole proprietorship. In Aspro, Inc. (T.C. Memo. 2021-8) the C corporation paid management fees to its three shareholders. The IRS argued the taxpayer paid the management fee mostly as disguised distributions (the distributions would not be deductible by the corporation but would be dividend income to the shareholders). As a result of the management fees the corporation had little taxable income in most years. The Court noted there was no written management or consulting services agreements with any of its three shareholder, nor was there a management fee rate or billing structure negotiated or agree to before the beginning of the year the services were provided. The management fees paid were always equal each year, even though the services provided might vary from year to year. Nothing in the record explains the fluctuation in management fees paid from $500,000 in tax year 2012 to $800,000 in tax years 2013 and 2014. The Court also noted the corporation paid no distributions during the years at issue. The Court cited another case where the Court held the absence of dividends to shareholders out of available profits justifies an inference that some of the purported compensation really represents a distribution of profits as dividends. Moreover, the percentages of management fees paid roughly corresponded to the respective ownership interests. The Court disallowed the management fees paid.
Tip of the DayGot an incorrect 1099-G? . . . More than a few taxpayers received an incorrect 1099-G for unemployment benefits or got a 1099-G when they never registered for unemployment. In 2020, particularly during March, April and May, the state unemployment offices were overwhelmed and there were a significant number of fraudulent claims, There are three possibilities, you may have received an incorrect 1099-G, you may have received a 1099-G when you never filed a claim, you may have received benefits but did not get a 1099-G, or you may might not receive a 1099-G even though the state paid benefits under your social security number. In the last situation you'll only discover the error when you get a notice from the IRS or state you have unreported income. The only solution is to contact the state, explain the situation, and request a corrected 1099-G. If you don't have the corrected form by May 17, file an extension. If you're up against the extended deadline, file reporting only the income you received.
March 29, 2021
NewsThe Senate has passed (by a 92 to 7 vote) an extension of the Paycheck Protection Program (PPP). President Biden is expected to sign the bill. The legislation extends the application deadline for loans to May 31 (was set to expire March 31) and will process pending application until June 30. However, it's likely the program will be out of funds well before the May 31 deadline.
The SBA has announced that, starting the week of April 6 the loan limit under the COVID-19 EIDL (Economic Injury Disaster Loans) will increase to $500,000 from $150,000. Businesses with an existing EIDL will be able to apply for an increase in their loan limit.
Revenue Procedure 2021-18 provides an automatic procedure for a State or local government in which an empowerment zone is located to extend the empowerment zone designation made under Section 1391(a). Specifically, this revenue procedure provides that a State or local government that nominated an empowerment zone is deemed to extend until December 31, 2025, the termination date designated by that State or local government in its empowerment zone nomination (designated termination date), as described in Section 1391(d)(1)(B). This revenue procedure further provides the procedure for such State or local government to decline this deemed extension of its designated termination date.
Tip of the DayMissing tax documents? . . . If you are it's now easier than ever to get a statement from a bank or broker online. If you're missing a W-2 you can ask for a replacement from your employer or may be able to access it on line from the payroll service. If you're missing a Form 1099-MISC or 1099-NEC contact the payer. If the W2 or 1099 is incorrect, contact the payer. While not having the W=2 or 1099 isn't an excuse for not filing on time, if you're up against the wire the first step is to request an extension. If you're about to reach the extension deadline you should use Form 4852 Substitute for Form W-2 and Form 1099-R.
March 26, 2021
NewsThe IRS's Criminal Investigation Division (IRS-CI) marks the one-year anniversary of the Coronavirus Aid, Relief and Economic Security (CARES) Act by pledging its continued commitment to investigating COVID-19 fraud. Over the last year, IRS-CI has been combatting COVID-19 fraud related to the Economic Impact Payments, Paycheck Protection Program (PPP) and Employee Retention Credit. The agency has investigated more than 350 tax and money laundering cases nationwide totaling $440 million. These investigations covered a broad range of criminal activity, including fraudulently obtained loans, credits and payments meant for American workers, families, and small businesses.
The IRS reported that the e-help desk is receiving a substantial number of misdirected calls. Tax professionals should not provide the e-help desk number to their clients for any issues including refund inquires, rebate recovery credit, tax law questions, etc. The e-help desk assists tax professionals such as Enrolled Agents (EA), Reporting Agents (RA), Electronic Return Originators (ERO), etc. with e-product concerns such as applications, e-services, transcript delivery system and rejected returns.
Tip of the DayClaiming Economic Impact Payments . . . If you didn't get the full amount of the Economic Impact Payments in round 1 ($1,200 per individual; $500 for each child) or round 2 ($600 per individual and child) (both amounts were phased out based on income), you may be entitled to additional benefits under the Recovery Rebate Credit. For example, if your 2018 return showed AGI of $300,000, you would not have received the first payment. Now assume your 2019 return showed only $60,000 in AGI. You would have been entitled to the full credit. Many taxpayers got the credit they were entitled to, but if you didn't, now is the time to claim it. For more information, got to Coronavirus Tax Relief at IRS.gov.
March 25, 2021
Newsthe IRS and the Treasury announced (IR-2021-63) they are disbursing approximately 37 million payments in the second batch of Economic Impact Payments from the American Rescue Plan. This brings the total disbursed payments from the American Rescue Plan to approximately 127 million payments worth approximately $325 billion. As announced on March 12, Economic Impact Payments will continue to roll out in batches to millions of Americans in the coming weeks. The second batch of payments includes direct deposits, as well as paper checks and debit cards being sent through the mail. Like the first batch of payments, the payments announced today primarily were sent to eligible taxpayers who filed 2019 or 2020 returns. People who don't typically file a return but who successfully used the Non-Filers tool on IRS.gov last year were sent payments in this batch.
The SBA has announced that starting April 6th the limit on EIDL (Economic Injury Disaster Loans) COVID-19 loans will increase. Currently the limit is six months of injury and a maximum loan amount of $150,000. Under the new limits it's 24 months of economic injury and a maximum loan amount of $500,000. If you have an existing COVID-19 EIDL loan you can request an increase in the limit beginning April 6.
March 24, 2021
NewsThe IRS has released the latest versions of the following publications for use with 2020 returns:
Pub 541 Partnerships
Pub 544 Sales and Other Dispositions of Assets
Pub 547 Casualties, Disasters, and Thefts
Pub 925 Passive Activity and At-Risk Rules
Pub 926 Household Employer's Tax Guide
Pub 946 How to Depreciate Property
In Meredith Yvette James (T.C. Memo. 2021-7) the taxpayer sought innocent spouse relief to recover a refund from a joint return that was deposited in her ex-husband's bank account. The IRS assessed additional tax and a penalty and applied the taxpayer's overpayment from a later return against the assessment. The taxpayer sought the refund of her overpayment. The Tax Court discovered the couple were not married at the time of filing the joint return and, as a result, the taxpayer was not eligible for relief because a valid return was not filed.
Tip of the DayDon't file amended return . . . Don't jump the gun on filing an amended return if you filed and paid tax on the full amount of unemployment benefits. The IRS may come up with a way to recompute the tax on those returns and send you a refund. Of course, then the question is what will the states do. Look for additional guidance from the IRS. A number of software providers have already modified their programs to handle the change. If you haven't filed, download the latest and run your return again.
March 23, 2021
NewsThe IRS announced (IR-2021-62) that the next batch of Economic Impact Payments will be issued to taxpayers this week, with many of these coming by paper check or prepaid debit card. For taxpayers receiving direct deposit, this batch of payments began processing on Friday and will have an official pay date of Wednesday, March 24, with some people seeing these in their accounts earlier, potentially as provisional or pending deposits. A large number of this latest batch of payments will also be mailed, so taxpayers who do not receive a direct deposit by March 24 should watch the mail carefully in the coming weeks for a paper check or a prepaid debit card, known as an Economic Impact Payment Card, or EIP Card. Taxpayers should note that the form of payment for the third EIP may be different than earlier stimulus payments. More people are receiving direct deposits, while those receiving them in the mail may get either a paper check or an EIP Card--which may be different than how they received their previous stimulus payments. IRS and the Treasury Department urge eligible people who have not received a direct deposit to watch their mail carefully during this period. Paper checks will arrive by mail in a white envelope from the U.S. Department of the Treasury. For those taxpayers who received their tax refund by mail, this paper check will look similar, but will be labeled as an "Economic Impact Payment" in the memo field.
Tip of the DaySavers' credit . . . Need another reason to contribute to an IRA or 401(k)? The savers' credit (Form 8880 Credit for Qualified Retirement Savings Contributions) provides a credit of up to $1,000 for contributions to a traditional IRA, Roth IRA, 401(k), or ABLE plan. A $1,000 credit is available for each spouse. The catch? For single individuals the credit begins to phase out at $19,500 and is completely gone if your AGI exceeds $32,500. For a married couple filing jointly, the phaseout begins at $39,000 and vanishes with AGI of $65,000 or more. There's another catch. Distributions from similar plans after 2017 will reduce or eliminate the credit. This is one of the few win-win deals in the tax code.
March 22, 2021
NewsThe IRS has announced (IR-2021-61) that the Office of Chief Counsel has embarked on its most far-reaching Settlement Days program ever. Settlement Days events are coordinated efforts to resolve cases in the United States Tax Court by providing taxpayers who are not represented by counsel with the opportunity to receive free tax advice from Low Income Taxpayer Clinics (LITCs), American Bar Association (ABA) volunteer attorneys and other pro bono organizations. "Virtual Settlement Day events enable the IRS to deliver meaningful resolution options to taxpayers as the nation works through the pandemic," said IRS Commissioner Chuck Rettig. "Virtual options are an addition to traditional methods of communication and interaction with taxpayers that the IRS will always make available under normal circumstances."
The IRS has announced that the IRS and Department of the Treasury has disbursed approximately 90 million Economic Impact Payments from the American Rescue Plan as of March 17. The first batch of payments primarily went to eligible taxpayers who provided direct deposit information on their 2019 or 2020 returns, including people who don't typically file a return but who successfully used the Non-Filers tool on IRS.gov last year. Individuals can check the Get My Payment tool on IRS.gov to see the payment status of these payments. Additional information on these Economic Impact Payments, along with a fact sheet of frequently asked questions, is available on IRS.gov.
Tip of the DayComplete Schedule A . . . We don't know what most preparers do, but many complete Schedule A (itemized deductions) even if it's unlikely the taxpayer will benefit from itemizing. If the information is provided (and it should be) entering the data means the program will select the best method automatically. In addition, the numbers will be carried over to the following year and can be used as a guide.
March 19, 2021
NewsThe IRS has released Post Release Changes to Forms addressing the problem of reporting unemployment benefits received in 2020 that qualify for the $10,200 of exclusion provision included in the American Rescue Plan recently signed into law. Thus, if your modified adjusted gross income (MAGI) is less than $150,000, you can exclude the first $10,200 of unemployment benefits earned by you and your spouse. The exclusion should be reported separately from your unemployment compensation. See the updated instructions and the Unemployment Compensation Exclusion Worksheet to figure your exclusion and the amount to enter on Schedule 1, lines 7 and 8. If you go to the page using the link above you'll find revised instructions for Line 7 and Line 8 of Schedule 1 and a worksheet to compute the amount of the exclusion. Keep in mind that your state may or may not follow the federal rules. Check the rules for your home state. If you're using tax software to prepare your return, at least one popular package was up and running on March 18; others should be up and running in a day or two.
Tip of the DayIRA contributions . . . While the due date for tax returns is extended to May 17, IRA contributions can be made no later than the original due date of the return. And if you're making a contribution for 2020 make sure you inform the sponsor, otherwise they can assume it's for the current year. A deductible IRA or Roth are best, but if you can't because of limitations, a nondeductible can let your investment grow tax free until retirement.
March 18, 2021
NewsThe Treasury Department and Internal Revenue Service announced (IR-2020-59 that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. The IRS will be providing formal guidance in the coming days. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed. This postponement applies to individual taxpayers, including individuals who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021. Individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17. Individual taxpayers do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the May 17 deadline can request a filing extension until Oct. 15 by filing Form 4868. Filing Form 4868 does not grant an extension of time to pay taxes due. Taxpayers should pay their federal income tax due by May 17, 2021, to avoid interest and penalties. This relief does not apply to estimated tax payments that are due on April 15, 2021. These payments are still due on April 15. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS by people whose income isn't subject to income tax withholding, including self-employment income, interest, dividends, alimony or rental income. Most taxpayers automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer.
Tip of the DayMore on extended due date . . . More than a few people are rejoicing that the filing date has been extended to May 17. But, as usual, the devil is in the details. First, as noted above, there's an estimated tax payment due April 15 for the first quarter. That due date has not been extended. Second, for most taxpayers there's also a state return due April 15. Not every state links it's due date to the federal. Virtually all states are expected to follow, but that's not certain. Finally, the extension only applies to individual returns.
March 17, 2021
NewsThere have been a number of changes to retirement plans for 2020, with many extending into 2021 and beyond. IR-2021-57 details a number of these changes including the age and rules when begining required minimum distributions (RMD), the delay of the RMD for 2020, and coronavirus-related distributions and loans. IR-2021-57 also provides links to FAQs regarding required minimum distributions and other information sources.
The IRS has reported (IR-2021-56) that it is continuing it efforts to expand ways to communicate to taxpayers who prefer to get information in other languages. Form 1040 is now available in Spanish and IRS Publication 17 is available in Spanish, Chinese (Simplified and Traditional), Vietnamese, Korean, and Russian. Taxpayers can also indicate their lanugage of preference for IRS-issued written communications. See IR-2021-56 for more information and links to publications.
Tip of the DayReporting capital gains . . . If your an old had, it's probably easy for you. But if you're new gains are split into six categories--short-term where basis is reported to IRS, basis is not reported to IRS, and transaction not reported to IRS. There are three similiar categories for long-term gain. The IRS tracks this info and compares your entries to the brokerage statements. Put a transaction in the wrong category and you might get a letter from the IRS. It's easy to make a mistake if you have a number of transactions. Instead of entering individual transactions you can enter the summary by category on your return and attach the brokerage statement as a PDF file. Finally, you may be able to download the statement from your broker and have it read by the software. The last two approaches enable you to avoid errors.
March 16, 2021
NewsIf you sell a patent you own, the sale produces long-term capital gain. On the other hand, the licensing of a patent produces ordinary income. But, there's some fine print. While the details are complicated here, and a full understanding requires a careful read of the case, the facts can be reduced. In Aaron G. Filler (T.C. Memo. 2021-6) the taxpayer transferred his rights in a patent to a related entity. A transfer of a patent to a related entity does not qualify for capital gain treatment. The Court also noted he had not acquired a sufficient interest in the patent. The Court denied capital gain treatment to the transaction and found the amount received was subject to the self-employment tax.
Tip of the DayCheck the box . . . And check the box before you check the box. There are more and more places on a individual return where you have to answer a question. The latest is "during 2020 did you acquire any virtual currency". If you're filing electronically you'll be warned. Same for the question involving foreign bank accounts. But there are other spots. If you're deducting vehicle expenses on a Schedule C or E or on a business return you'll be asked five questions about the vehicle. On the depreciation form there are a number of questions and elections. Same for Schedules C and E. Answering incorrectly can lead to trouble.
March 15, 2021
NewsThe IRS announced it is reviewing implementation plans for the newly enacted American Rescue Plan Act of 2021. Additional information about a new round of Economic Impact Payments, the expanded Child Tax Credit, including advance payments of the Child Tax Credit, and other tax provisions will be made available as soon as possible on IRS.gov. The IRS strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other unnecessary steps at this time. The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable. For those who haven't filed yet, the IRS will provide a worksheet for paper filers and work with software industry to update current tax software so that taxpayers can determine how to report their unemployment income on their 2020 tax return. For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance.
The IRS has released additional filing statistics for 2021 with comparisons to 2020. Because this year's filing season got off to a late start, the statistics can't be directly compared on dates this year and last, so the IRS has also provided a comparison based on similar number of days (26 in 2020 and 22 in 2021) also. The latter comparsion shows an almost 12 percent increase in the returns received, but only a 2 percent increase in returns processed. Visits to IRS.gov are up 129 percent.
Tip of the DayRecovery rebate credit . . . It's the counterpart to the Economic Impact Payment or stimulus payment that you may or may not have received in 2020 and early 2021. Individuals who qualified for the full amount would have received $1,200 for the first payment and $600 for the second. The payments were phased out depending on your adjusted gross income. The payments were intended as a advance credit on their 2020 tax returns. As a result, individuals who did not get the amount they were entitled to can do so entering the required information in their 2020 tax return. On the tax return it's called the Recovery Rebate Credit. See line 30 of Form 1040. You can get more information at Recovery Rebate Credit FAQs.
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