Taxing Subjects

Time Running Out to File for Recovery Rebate Credit

Wed, 22 Nov 2023 09:56:48 -0500

The window for claiming a pandemic-driven tax credit is still open to taxpayers who didn’t take advantage of it during the main Covid outbreak. But closing dates are approaching, making filing a claim for eligible taxpayers (tax years 2020 or 2021) a priority for tax preparers.

For a historical background, we have to go back to 2020 as we faced national economic challenges arising from the Covid-19 pandemic. The IRS established the Recovery Rebate Credit to help those taxpayers who may have missed one or more of the Economic Impact Payments – also known as stimulus payments – that were released in 2020 and 2021.

While it is likely that the vast majority of eligible taxpayers have already gotten their Economic Impact Payments directly or by claiming the Recovery Rebate Credit, the IRS is concerned that there are still taxpayers who are due the credit, but haven’t received payment.

Any eligible taxpayers, however, must file a tax return to claim the credit – even if they had little or no income.

Who is Eligible and for How Long?

The Recovery Rebate Credit is available for the 2020 and 2021 tax years.

Taxpayers filing for 2020 must have been a U.S. citizen or resident alien in 2020 and cannot have been a dependent of another taxpayer during the tax year. In addition, qualified taxpayers must have a Social Security number issued before the due date of the tax return that’s valid for U.S. employment.

Taxpayers claiming the 2020 Recovery Rebate Credit must file a tax return by May 17, 2024.

Those taxpayers filing for 2021 must have been a U.S. citizen or resident alien in 2021 and cannot have been a dependent of another taxpayer during that tax year. Additionally for 2021 filers, taxpayers must have a Social Security number issued before the due date of the tax return that’s valid for U.S. employment or claim a dependent with an Adoption Taxpayer Identification Number.

Claims for the 2021 Recovery Rebate Credit must be filed in a federal tax return by April 15, 2025.

The Recovery Rebate Credit can also be claimed on behalf of a taxpayer who has died. The 2020 credit can be claimed for someone who died in 2020, while both the 2020 and 2021 credits can be claimed for someone who died in 2021 or later.

Note that any Recovery Rebate Credit that is received cannot be counted as income when determining one’s eligibility for federal benefits. This includes Supplemental Security Income or SSI; Supplemental Nutrition Assistance Program or SNAP; Temporary Assistance for Needy Families or TANF; or the Special Supplemental Nutrition Program for Women, Infants and Children, known as WIC.

If someone claims the credit, it has no bearing on their immigration status or their ability to get a green card or other immigration benefits.

Taxpayers who are unsure if they got the Economic Impact Payments can check their IRS Online Account to check for payments and amounts.

Source: IRS reminds eligible 2020 and 2021 non-filers to claim Recovery Rebate Credit before time runs out

Retirement Contribution Amounts Increased for 2024

Fri, 10 Nov 2023 10:58:19 -0500

The Internal Revenue Service has passed along an early Christmas present of sorts to many taxpayers by increasing the maximum contribution amounts for 401(k) plans in 2024.

The contribution hike covers those employees who take part in 401(k), 403(b), or most 457 plans. Participants in the federal Thrift Savings Plan are also included in the increase. Taxpayers who participate in any of these plans can now contribute up to $23,000 for 2024; that’s up from $22,500 under the previous rules. Catch-up contribution limits for these same taxpayers, however, stay at present levels.

For those with SIMPLE retirement accounts, contribution limits have been raised from $15,500 to $16,000.

The new rules also boost the limit on contributions to an IRA, raising the bar from $6,500 to $7,000. Despite legislation including an annual cost-of-living adjustment (via the SECURE 2.0 Act of 2022), IRA 2024 catch-up contribution limits remain at $1,000 for those participants 50 and over.

Income Limits on Deduction Eligibility Increased.

A taxpayer’s eligibility to deduct their contributions to traditional IRAs or Roth IRAs, or to claim the Saver’s Credit can hinge on the filer’s income. In all three instances, these income ranges were increased by the IRS as well.

Deduction phase-out for traditional IRAs gets an overhaul from the new guidance. Affected taxpayers include Single covered by a retirement plan at work, and Married filing jointly with the spouse making the IRA contribution covered by a workplace retirement plan.

Complete details on these and deduction phase-outs - including those for Roth and SIMPLE plans, and the Saver’s Credit - are available in Notice 2023-75 on the IRS website. The Notice has technical guidance on all the cost-of-living adjustments set in motion by the SECURE Act 2.0 legislation.

Source: 401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000

The IRS Offers a Way Out to Filers Worried About Bogus Employee Retention Credit Claims

Fri, 20 Oct 2023 12:02:06 -0400

The Internal Revenue Service has given small business owners and others who may have unintentionally filed inaccurate claims for the Employee Retention Credit (ERC) a way to escape monetary consequences for filing a bogus tax claim.

The IRS has now established a process allowing certain ERC filers to withdraw their credit claim before it’s processed, thereby avoiding interest and penalties.

The withdrawal option treats the claims as if they were never filed, and, because the withdrawal request is filed before the bogus claim is paid, the would-be recipient doesn’t have to pay their refund amount back to the IRS.

Filers who are worried about the accuracy of their ERC claim have legitimate reason for concern, particularly if their claim was submitted with premeditation. The IRS has made it clear that filers who knowingly submitted a fraudulent claim for credit won’t be able to escape criminal investigation or prosecution even if their bogus claim is withdrawn.

Scammers Behind the Push to File Inaccurate or Outright Bogus Claims.

The Employee Retention Credit was created as a refundable tax credit for businesses that paid their employees through the Covid-19 pandemic while the business was partially or completely shut down due to a government order or had a major drop in gross receipts during the eligibility periods.

It should be noted that the ERC is not available to individuals.

Scammers and unscrupulous promoters took the appeal of a big refund to business owners and other taxpayers who may not have qualified for the tax credit in the first place or gave in to pressure from the schemers to inflate various numbers to get a larger refund.

Promoters of these scams took to the airwaves, claiming the ERC application process was simple and fast, when, in reality, the credit is a complex piece of tax code, requiring exacting application requirements.

Under pressure from relentless marketing of these scams, the IRS was flooded with claims for the ERC, totaling some 3.6 million claims over the course of the program. We wrote about how the agency responded with a moratorium on processing new ERC claims in September. Instead, the IRS said it was doing more to screen incoming claims for compliance, to stem the flood of ineligible filings.

Some of those taxpayers, suspecting their claims for the credit may not have been strictly legitimate, are having second thoughts and may be looking for a way out.

That’s where the IRS withdrawal offer comes in. Employers seeking to withdraw their filed claims for the Employee Retention Credit may do so, but only if all the following conditions are met:

The claim was made on an adjusted employment return, such as Forms 941-X, 943-X, 944-X or CT-1X;
The adjusted return was filed only to claim the ERC and no other adjustments were made;
The taxpayer seeks to withdraw the entire amount of the ERC claim; and
The IRS has not paid the claim, or the IRS has paid the claim, but the taxpayer hasn’t cashed or deposited the refund check.

Those not eligible to use the withdrawal option still have a way back by filing an amended return that reduces or eliminates their ERC claim. Details on all the options for ERC filers are available in a Nov. 2 IRS webinar as well as a new question-and-answer checklist.

Check out Fact Sheet 2023-24 and IRS.gov/withdrawmyerc for more details on the ERC withdrawal process.

Source: IRS announces withdrawal process for Employee Retention Credit claims; special initiative aimed at helping businesses concerned about an ineligible claim amid aggressive marketing, scams

Hawaii Wildfire Victims Get Tax Relief from IRS

Thu, 24 Aug 2023 15:04:19 -0400

As recovery efforts are underway for victims of the devastating wildfires in Hawaii, the Internal Revenue Service is moving to give survivors one less thing to worry about.

The agency has launched its tax relief package for victims in Maui and Hawaii counties that basically delays an array of federal individual and business tax deadlines until February 15, 2024.

Relief is available to any taxpayer who lived or operated a business within the federal disaster declaration issued by the Federal Emergency Management Agency (FEMA). A list of towns and other localities currently included is available on the disaster relief page of the IRS.gov website.

Wildfire Victims Have Until February 15 to file 2022 Returns and Pay Tax Due.

The postponement period covers a wide range of filing and payment deadlines that would otherwise have occurred between August 8 of this year and the new deadline of February 15, 2024.

The new 2024 deadline includes:

Taxpayers with a valid extension that is due to expire on Oct. 16, 2023. It should be noted, however, that since payments for 2022 tax due were required before the wildfire event, those payments aren’t covered by the new 2024 deadline.
Quarterly estimated income tax payments normally due on Sept. 15, 2023, and Jan 16, 2024.

Quarterly payroll and excise tax tax returns that otherwise would have been due on Oct. 31, 2023, and Jan. 31, 2024.
Calendar-year partnerships and S corporations with 2022 extensions due to expire Sept. 15.
Calendar-year partnerships with 2022 extensions due to expire on Oct. 16.
Calendar-year tax-exempt organizations with extensions expiring on Nov. 15.
Business taxpayers should remember that penalties for failure to make required payroll and excise tax deposits between Aug. 8 and Sept. 7 are abated, as long as deposits are made by Sept. 7.

Complete details are available on other returns and payments on the Disaster Assistance and Emergency Relief for Individuals and Businesses page on the IRS website.

Relief Package Also Covers Others Affected by the Disaster.

What about others who are affected by the fires, but aren’t residents of the disaster area? Consider the case of a taxpayer who lives outside the disaster area but lost the records necessary to meet a tax deadline in the disaster. These victims should call the IRS at 866-562-5227 to find out what relief the agency may have available for them.

Conversely, taxpayers who live within the federal disaster area do not need to call the IRS in order to qualify for the tax relief package. The IRS says benefits are tied to the taxpayer’s address of record on file with the agency, and so are enabled automatically when their returns are received.

In some cases, taxpayers may not have an address of record on file with the agency, because, for example, they may have moved into the disaster area after they filed their return. Due to circumstances, these taxpayers could find a late-filing or late-payment notice in their mailbox. These taxpayers should call the phone number stated on their printed notice letter to get the penalty abated, per the IRS.

Filing After the Fire Explained.

When it comes down to how to claim their losses on a tax return, it is the taxpayer’s choice.

Individual and business taxpayers within the federal disaster area can claim their uninsured or unreimbursed losses from the disaster in one of two ways. The loss can be claimed on the return for the year the loss occurred (in this case, on the 2023 return, normally filed in 2024) or on the return for the prior year, which would be 2022.

Any return claiming a disaster loss should have the FEMA declaration number, DR-4724-HI, displayed on the return. For more details on claiming a loss, check out Publication 547.

In general, qualified disaster relief payments are excluded from gross income. This usually means money received from a government agency for reasonable and necessary expenses, whether personal, family, living or funeral expenses, for repair or rehabilitation of a home, or for repair or replacement of a home’s contents.

More information on disaster payments is available in IRS Publication 525 on the IRS website.

Source: IRS: Hawaii wildfire victims qualify for tax relief; Oct. 16 deadline, other dates postponed to Feb. 15

IRS Unveils Timetable for Completely Paperless Filing by 2025

Sat, 05 Aug 2023 19:53:55 -0400

The Internal Revenue Service says it has constructed a blueprint for its future called the Paperless Processing Initiative. The plans are aimed at eliminating up to 200 million pieces of paper every year, while cutting processing times in half and speeding up refunds by weeks. The agency says it will realize these benefits by fully embracing digital filing and processing - the sooner, the better. The plan is a two-step process with work starting now and extending past filing season 2026. It’s funded by the Inflation Reduction Act.

When it comes to speeding up the taxpaying process, paper is the enemy.

Every year, the IRS gets about 76 million paper tax returns and forms, and another 125 million pieces of correspondence. Each one of those pieces of paper requires a human being to enter its information into the IRS computer systems.

This process can lead to a filing logjam as outside of the annual 1040 tax return and a relatively few other forms, taxpayers are currently limited to sending in forms and correspondence to the IRS on paper. Meanwhile, the agency can’t digitally process the mountain of paper it gets. In fact, just storing the paper returns and correspondence the agency receives costs a tidy $40 million every year. The plan is to push all tax filing into the digital world, and to devise a system to automatically scan any paper documents on arrival.

Step One: Taxpayers Can Go Paperless in Filing Season 2024

The first step is a big one in itself: taxpayers will be able to send all their correspondence, non-tax forms, and notice responses to the IRS in digital form. This may appear to be a small action, but it will take millions of paper documents out of the processing backlog every year. The IRS estimates that this initial step alone will mean some 94% of individual taxpayers will no longer ever need to send a piece of mail to the agency.

Some 20 additional tax forms, meanwhile, will be added to the digital availability list. This will include amendments to Forms 940, 941, and 941SSPR. The most popular non-tax forms - at least 20 of them - will also be moved over into the digital world and optimized for mobile devices. This includes the Request for Taxpayer Advocate Service Assistance.

Note, however, that in this first phase taxpayers who have a need to file a paper form or send paper correspondence may still do so.

Step Two: IRS Starts Paperless Processing for Tax Returns in Filing Season 2025.

In this phase, the IRS takes aim at the avalanche of paper it receives, whether tax forms or correspondence.

The agency timeline calls for all paper-filed tax and information returns to be digitally processed on arrival. Half of all non-tax forms, notice responses and other correspondence should start being digitally processed by this period, with full digital processing in place in a year’s time. Once in place, digital processing will also enable up to a billion historical documents - filed tax returns and other files - to be digitized, freeing up millions of dollars in storage costs.

Also, in this step, an additional 150 of the most-used non-tax forms will be available in digital form and optimized for mobile devices. This reflects the move by the IRS to make more of the most popular forms available for smartphones as they estimate that some 15% of Americans rely on their phones for main internet access, and do not have broadband at home.

IRS: Digital Processing Key to Agency’s Future.

The benefits of paperless processing are huge. First, it stands to speed up customer service by making filed returns and other information available digitally, reducing the possibility of human error in data entry as well as granting customer service representatives improved access to information for addressing taxpayer questions. Taxpayers could expect to see their refunds sooner, since all the data and tax forms will be processed faster. Finally, successful implementation could also have financial rewards from lower paper storage costs, which can be leveraged into other technical improvements within the IRS.

Calif. Disaster Victims Report Confusion Following IRS Notice

Mon, 12 Jun 2023 13:54:20 -0400

Weeks of record flooding and mountain snows brought on by an “atmospheric river" in California resulted in a federal disaster declaration from the Federal Emergency Management Agency (FEMA). While disaster victims received tax relief from filing and payment deadlines, some were confused after receiving notices from the Internal Revenue Service.

Why are California disaster victims confused?

When taxpayers fail to pay federal tax due by the deadline, the IRS is required by law to generate a Notice CP14 mailout telling recipients they have 21 days to resolve their balance. Some California disaster victims were reportedly confused after receiving the notice, believing they had additional time to file returns and pay any tax due.

(Spoiler: they do.)

While disaster victims did receive Notice CP14, the IRS noted in a recent statement that the mailings also included a special insert reminding these taxpayers that the previously issued tax relief still applies. However, the agency apologized for the confusion, stressing that storm victims who received the Notice do not need to contact the IRS or their trusted tax professional.

How can I learn more about IRS notices and installment arrangements?

DrakeCPE provides courses covering a variety of tax topics, including two that can help tax professionals better serve clients who have received IRS notices or are unable to pay all taxes owed in one lump sum:

For information about available courses, visit DrakeCPE.com.

Source: IRS statement on California mailing of balance due notices

Real Facts About Bogus Claims for the Employee Retention Credit

Thu, 08 Jun 2023 08:44:20 -0400

A new wave of advertising is churning up interest in a tax credit intended to help businesses and non-profits that tried to retain their employees during the COVID-19 pandemic. However, the ads on TV and radio, online, and even direct mail leave out a critical fact: most of the promoters’ clients won’t qualify for the credit.

That’s where you come in.

As a trusted tax professional, you are often the source of truth for your clients. You may be getting questions about ads touting big payoffs for claiming the Employee Retention Credit (ERC). If these stories sound too good to be true, that's because they are.

We want you to have all the facts, so your clients can make the right decisions.

Be wary of unrealistic claims for the ERC

To hear one of these ads, you’d think virtually anyone can claim the ERC: businesses, non-profits and individuals alike. In addition, they say “you have nothing to lose!” Both these statements are false.

True, the ERC is a refundable credit, but it is intended for businesses that continued to pay workers even while they were shut down during the pandemic. The credit also applies to businesses that had significant declines in gross receipts during the specified eligibility periods. And no matter what the ads say, individuals are not eligible for the ERC.

As far as filers having “nothing to lose,” consider that anyone who improperly claims the ERC has to pay it back—many times along with penalties and interest. The IRS cautions businesses and tax-exempt organizations that they could find themselves in a much worse cash position if they have to pay back the credit than if they never claimed it in the first place.

What are the requirements for claiming the ERC?

Companies can claim the credit on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021.

To be eligible, employers must have:

Carried out a full or partial shutdown of operations as ordered by an appropriate governmental authority because of Covid-19 during 2020 or the first three quarters of 2021;
Experienced a significant decline in gross receipts during 2020 or during the first three quarters of 2021, or;
Qualified as a recovery startup business for the third or fourth quarters of 2021.

How can clients know if an offer could be a scam?

First, the offer comes through an advertisement or an unsolicited phone call. Either may promote an “easy application process.”

Second, promoters will often claim they can determine the filer’s ERC eligibility within minutes, but charge a large up-front fee just to claim the credit. Many times, promoters will claim a business qualifies for the credit without any discussion of the client’s tax situation.

Finally, promoters’ fees tend to be based on the amount of ERC being claimed.

You are the best defense against ERC scams

The IRS says you, the trusted tax professional, have the skills needed to correctly determine eligibility for the Employee Retention Credit and to calculate the correct credit amount. These third-party promoters have only profit as their motive and cannot be trusted to act in taxpayers’ best interests.

To report abuse of the Employee Retention Credit, submit a Form 14242, Report Suspected Abusive Tax Promotions or Preparers, mailing or faxing the completed form along with any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations at:

Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, California 92677-3405

Fax: 877-477-9135

Source: IR-2023-105

Direct File Pilot to Debut Next Tax Season

Wed, 24 May 2023 13:08:13 -0400

The Internal Revenue Service is moving ahead with a program that will offer taxpayers a new option for filing their 2023 returns next year. Dubbed “Direct File,” a scaled-down version of the full program will allow taxpayers to file online for free, using an IRS-run website.

The move to online filing through the IRS is rooted in the Inflation Reduction Act (IRA). The IRA mandated that the Treasury Department and the IRS look into whether free online filing is possible through the IRS and what the agency needs to make it happen.

The IRS broke its fact-finding effort into three pieces.

1. Do taxpayers want it?

A number of sources were united to acquire and analyze public opinion about the project. The IRS used its Taxpayer Experience Survey (TES) to poll thousands of taxpayers on the issue. Next, results from an independent MITRE Corporation survey were pulled in. Then, independent analysis by New America and Professor Ariel Jurow Kleiman on the concept was added to the mix.

An IRS report to Congress on the Direct File initiative determined taxpayer interest in the project is sufficient to move forward.

2. Are there costs to implementing Direct File?

While the IRS report doesn’t give hard figures, it does caution Congress that building and executing an effective Direct File online filing site would require a sustained investment by lawmakers. Given the difficulty the agency has faced in receiving requested funding, this could prove to be a roadblock for the future of the program.

3. Is a free online filing portal even possible for the IRS?

The congressional report says creating a successful online filing portal is feasible despite presenting technical challenges for operation and administration. According to the report, the agency is ready and able to meet these challenges.

The IRS is embracing a proven method of testing for its new project: start small and work your way up. To that end, the agency intends to field its Direct File pilot program in 2024 with a limited scope so technicians can more easily track its operation. This approach will also allow system administrators to see if the pilot project adequately meets the customer support and technology needs of taxpayers before the system is scaled up.

In the short term, the IRS plans to meet with stakeholders in the tax industry over the coming months to hear concerns and offer some answers. According to the agency, more details on the Direct File program will soon be available.

Source: IRS submits Direct File report to Congress; Treasury Department directs pilot to evaluate key issues

Time Running Out to Claim Tax Year 2019 Refunds

Fri, 05 May 2023 14:27:20 -0400

The Internal Revenue Service says it has almost $1.5 billion in leftover tax refunds for 2019 taxpayers who haven’t filed—but the time remaining to claim this money is slipping away.

According to the agency, as many as 1.5 million taxpayers could benefit from the unclaimed refunds, but they must file a tax year 2019 return to get it. The median refund is calculated to be $893.

Expanded three-year filing window is about to close

Taxpayers usually have three years in which to file and claim a refund. After that point, the money goes into the government’s pocket. Because of the COVID-19 pandemic, the usual deadline for filing 2019 returns for refund was pushed back to July 17, 2023. Notice 2023-21 has more details.

The IRS has broken down the list of refunds on a state-by-state basis, providing some insight into which parts of the US still need to file tax year 2019 returns:

Texas leads the list in terms of total potential refunds. Lone Star State taxpayers could pick up more than $142 million if they file.
California has the highest estimated number of taxpayers who need to file to get it: 144,700.
New Hampshire, with roughly 6,900 affected taxpayers, has the highest median refund in the group: $974.
Vermont brings up the rear with just 3,100 estimated taxpayers who could benefit, with estimated refunds totaling just over $3 million.

Things to consider before filing

It’s worth noting that filing could have benefits beyond just the outstanding tax refund. A number of low- and moderate-income filers may be eligible for the Earned Income Tax Credit or EITC. In 2019, the EITC was worth as much as $6,557 to qualified taxpayers.

Despite four years passing, there are still options available for tracking down the various documents needed to file. Forms W-2, 1098, 1099, and 5498 may be available through the taxpayers’ employer, bank or other institution. The Get Transcript Online tool on IRS.gov can help taxpayer quickly track down forms that might be unavailable from other sources.

Taxpayers who need to file a paper Form 4506-T can request a “wage and income transcript” showing data from their W-2, 1099, 1098, and other financial forms. Keep in mind, though, this option is by far the slowest, taking weeks for the IRS to send the results.

As with all refunds, it’s worth remembering that the amount the taxpayer actually gets may be smaller than expected, depending on the circumstances. This decrease in expected refund is often due to 2019 tax refunds being held back to pay tax owed if a taxpayer hasn’t filed for 2020 and 2021. Additionally, a tax refund could be used to pay any tax debt owed to the IRS or state tax agency or offset unpaid child support and past-due student loan debt.

Source: IR-2023-79

2023 Dirty Dozen Spotlights New Scams, Some Usual Suspects

Mon, 10 Apr 2023 13:14:24 -0400

The Internal Revenue Service has released its annual Dirty Dozen list of the top scams and schemes posing threats to taxpayers and tax pros, and this year sees some new schemes among the known scams from previous lists.

While not ranked by importance or enforcement priority, the list shows the lengths scammers, hackers, and other thieves will go to crack the cyber defenses of tax preparers and their clients.

The Dirty Dozen list is issued every year by the IRS and Security Summit, a group of IRS officials, state tax agency, and national tax industry partners. The Summit is aimed at identifying security threats and devising defense strategies against them.

Let’s get started.

Bogus Employee Retention Credit Claims

The Employee Retention Credit was created to help a specific type of business that continued to pay employees while the firm was shut down during the COVID-19 pandemic. The credit is not available to individuals.

Scammers, however, hawk the credit on TV, radio and the internet as a way for anyone—whether a business or an individual—to file and get a big payday from the government. In truth, many of these claims are built on bogus eligibility statements and payout estimates rooted more in wishful thinking than in reality.

The real danger, the Security Summit cautions, is these third-party filers charge fees for their “service,” leaving taxpayers in the lurch when they’re turned down for a credit they cannot get. Individuals should remember the IRS holds the taxpayer responsible if their return isn’t accurate.

Using Text or Email to Trick Tax Pros and Taxpayers

This is a perennial offender in the Dirty Dozen lists.

The format is simple: Scammers send emails or texts to tax professionals that appear to be from potential clients, or they may target taxpayers by posing as the IRS or some other official agency.

The point of these bogus communications is to get the target tax pro or taxpayer to divulge vital personal information such as a Social Security number, account login information or other details that could help the scammer steal the taxpayer’s identity.

These attacks come in two basic forms: phishing and smishing. Phishing is an email sent by scammers posing as some sort of official agency or business. The email may threaten the recipient if they don’t click a certain link or pay a bogus fee, or offer a non-existent tax refund.

Smishing uses a text or smartphone SMS message in lieu of an email, with the same purpose. Smishers sometimes send messages warning that your account has been locked, accompanied by a link to “solutions” that will allegedly fix the problem. Like phishing attempts, these will take the victim to a fake website where their information can be stolen or otherwise compromised.

Risks from either method are great for both tax professionals and taxpayers. Never click on any link in an email or text message that arrives unsolicited.

Bogus Offers of “Help” to Set Up Online Accounts

It sounds so innocent: an offer to help taxpayers set up their Online Account on the IRS website. But this comes from a No-Good Samaritan. It’s the work of an identity thief.

Setting up an Online Account with the IRS is a straightforward process, requiring no outside help to establish. The scammers frequently market themselves to the elderly and to taxpayers with a limited command of English.

The scammer’s “helpful” service hides the true goal of what appears to be a good deed: to steal a taxpayer’s personal information so the scammer can do his damage.

Once the cyberthief gets the taxpayer’s address, Social Security number or Individual Taxpayer Identification Number (ITIN), and photo identification, he can file fraudulent tax returns (all claiming huge refunds), obtain loans and open new credit accounts.

Making Fraudulent Fuel Tax Credit Claims

This one is a variation on a theme: Scammers convincing taxpayers to claim a credit they’re not qualified to receive.

In this case, it’s the Fuel Tax Credit, designed to refund fuel tax paid by farmers and other off-highway users. Scammers and promoters pitch a claim for the Fuel Tax Credit to regular taxpayers, when in reality, it’s simply not available to most taxpayers.

The scammer can make off with an inflated fee for suggesting the Fuel Tax Credit and possibly taxpayer information to help file a fraudulent tax return.

Using Fake Charities to Dupe Taxpayers

The world has experienced tragedy of epic proportions over the past few years. When there’s a disaster of any kind, whether earthquake, hurricane, or famine, thankfully some charity steps up to help the recovery effort.

But scammers have learned this and they invent fake charities to pose as legitimate humanitarian organizations so they can rake in public donations that simply go into the scammers’ pockets. Disaster victims, meanwhile are left to fend for themselves.

On top of the diverted donations, fake charities offer scammers the opportunity to pull in donors’ personal financial information, leaving donors vulnerable to identity theft for their good deed.

Beware “Ghost” Tax Preparers

This Dirty Dozen entry revolves around fly-by-night tax preparers who cut corners in order to get a higher fee from their clients. One of their tactics is to gauge their fees according to the size of the client’s claimed refund. Some of these preparers are called “ghosts,” because they refuse to sign the returns they prepare—or ask their clients to sign a blank return up front.

A ghost preparer may also ask for a cash-only payment but won’t give a receipt, create fake deductions to boost the size of the refund, or direct refunds into their bank account instead of the client’s bank account.

Taking Tax Advice Found on Social Media

Let’s face it: taxpayers are always looking for ways to increase the size of their tax refund. Unfortunately, many of these schemes can land folks in hot water with the IRS.

The agency says two scams have recently surfaced that got their attention. One involves common tax documents such as W-2s, while the other utilizes the more obscure Form 8944, which is usually used by a very limited group of tax filers. In both cases, the online proponents encouraged taxpayers to submit false information to get a refund.

As the old advice goes, if something sounds too good to be true—it probably is.

Tax Pros Are Vulnerable to Spearfishing Attacks

This scheme shows up in the tax professional’s email in-box all dressed up like a legitimate email from an official source—a state taxing agency, another tax firm, or even the IRS.

Problem is, it’s from a scammer.

The point of these ersatz emails is to trick the tax pro into divulging some of their clients’ personal financial information—or even their own, thinking they are communicating with a legitimate and trusted agency.

Spearfishing can be aimed at individual tax pros, or even whole payroll departments of businesses. The methods are the same no matter the scale.

Steer Clear of Offer in Compromise “Mills”

Some scammers advertise they can settle a taxpayer’s outstanding tax debt for pennies on the dollar, when in truth, taxpayers can do it themselves without anyone’s help.

These ads are a staple on radio and television, promoting how they got a taxpayer’s tax debt reduced to easy-to-pay monthly notes.

The scammers tout their success at negotiating with the IRS, but it’s actually all done through the agency’s Offer in Compromise, designed to help taxpayers who owe a large tax debt but don’t have the assets to pay.

No third party is required. Taxpayers can go online themselves to sign up for an OIC that sets a payment schedule for a significantly reduced tax debt amount.

Taxpayers promote their services aggressively, raking in up-front fees from taxpayers who don’t even meet the qualifications of the Offer in Compromise.

High-Income Filers Need to Think Twice

The IRS has a stern warning for wealthy taxpayers who are willing to go to any lengths to protect their bank accounts from the taxman: Resorting to illegal means to shield income can have serious consequences.

These complex schemes rely on tax shelters little-known to the average taxpayer. Whether a Charitable Remainder Annuity Trust (CRAT) or a Monetized Installment Sale, the promoter’s pitch is the same—a tax benefit that is greater than the law allows.

Taxpayers should remember that variants of these strategies have been named abusive tax avoidance schemes by the IRS.

Beware of Schemes That Abuse the Tax System

While the previous Dirty Dozen entry catered to the very wealthy, this set of pitfalls are more widely known. They are all familiar to the IRS as tax-avoidance schemes. All are promoted as ways to protect income from taxation, but when discovered, won’t protect the taxpayer from prosecution.

Two of these methods, micro-captive insurance arrangements and syndicated conservation easements, follow existing processes, but use deception in filing to inflate the benefits that protect income.

International Moves Enter Sketchy Territory

Some taxpayers rely on offshore accounts and digital assets to shield their funds from IRS scrutiny. If deception is involved, however, IRS agents take a closer look.

Another scheme has taxpayers depositing money into a so-called “pension fund” in Malta or some other foreign country. By claiming erroneous treaty provisions and improper exemptions from U.S. income tax, the scheme becomes abusive in the eyes of the IRS.

In both these examples and others known to auditors, willful deception and misstating income are seldom good strategies for filers.

Learn More About Protecting Taxpayer Data

The sheer number of scams threatening taxpayer data can seem daunting, but there are reliable educational resources available. "Keeping Taxpayer Data Secure" is a self-study course on DrakeCPE.com that covers the risks posed by cybercrime, data security best practices, and strategies for mitigating breaches.

Sources: IR-2023-49; IR-2023-51; IR-2023-54; IR-2023-55; IR-2023-57; IR-2023-59; IR-2023-61; IR-2023-62; IR-2023-63; IR-2023-65; IR-2023-67; IR-2023-71

IRS Clarifies Mineral, Battery Component Requirements for Clean Vehicle Credit

Wed, 05 Apr 2023 11:35:56 -0400

The Inflation Reduction Act of 2022 (IRA) updated the Clean Vehicle Credit to make US-manufactured electric and fuel cell vehicles more attractive to American car buyers. Since provisions in the legislation changed several qualifying requirements that take effect in 2023, the Internal Revenue Service has been steadily issuing guidance since January.

Last week, the IRS again announced new guidance, this time addressing the critical mineral and battery component requirements. This clarification includes regulations that will be published in the Federal Register on April 17 and updates to frequently asked questions (FAQs) on the IRS website.

Critical mineral and battery component requirements take effect April 18

The IRS says that "new clean vehicles placed in service on or after April 18, 2023, are subject to the critical mineral and battery component requirements even if the vehicle was ordered or purchased before April 18, 2023." After this date, the maximum available credit of $7,500, will be split into two components:

$3,750 for meeting critical mineral requirements
$3,750 for meeting battery component requirements

For the purposes of determining eligibility for the credit, the IRS notes that "placed in service" means "the date the taxpayer takes delivery of the vehicle."

A PDF of the official notice can be downloaded from the Federal Register.

FAQ changes documented in the new fact sheet

The IRS notes that Fact Sheet 2023-08 "updates FAQs related to new, previously owned, and qualified commercial clean vehicles," including changes to the following topics:

Topic A: Eligibility Rules for the New Clean Vehicle Credit
- Added question 11
- Updated questions 2, 3, 4, 5, 6, and 7
Topic B: Income and Price Limitations for the New Clean Vehicle Credit
- Added question 2 (renumbered prior questions 2 through 10 to 3 through 11)
- Updated questions 1, 3, 7, 8, and 9
Topic C: When the New Requirements Apply to the New Clean Vehicle Credit
- Added question 8 (renumbered prior question 8 to question 9)
- Updated questions 2, 4, 5, and 6
Topic F: Claiming the Previously Owned Clean Vehicles Credit
- Updated question 2
Topic G: Qualified Commercial Clean Vehicles Credit
- Added question 10

While the agency considers FAQ updates the fastest method for providing taxpayers and tax professionals information, they should not be relied upon for determining precedent.

Want more information about the Clean Vehicle Credit?

For more information about the Clean Vehicle Credit, check out the following Taxing Subjects blogs:

To earn continuing professional education credits while learning about the Clean Vehicle Credit and other provisions included in the IRA, take the Inflation Reduction Act: Tax Implications self-study course on DrakeCPE.com.

Source: IR-2023-64

Non-Filers Can Still Benefit from Several 2021 Credits

Wed, 26 Oct 2022 17:12:46 -0400

The IRS is spreading the word

The Internal Revenue Service estimates over 9 million people who failed to file a tax year 2021 return could qualify for tax credits. This is not the first time the IRS has notified non-filers that they could be eligible for tax credits: the agency alerted 9 million taxpayers about their potential eligibility for Economic Impact Payments in September 2020.

"The special reminder letters, which will be arriving in mailboxes over the next few weeks, are being sent to people who appear to qualify for the Child Tax Credit (CTC), Recovery Rebate Credit (RRC), or Earned Income Tax Credit (EITC) but haven't yet filed a 2021 return to claim them," the agency explains. "The letter, printed in both English and Spanish, provides a brief overview of each of these three credits."

For qualified filers, benefits could be substantial

Legislative packages like the American Rescue Plan Act expanded several tax credits for tax year 2021. While the IRS notes that more information on these benefits can be found in FS-2022-10, the agency also listed information in its news release:

An expanded Child Tax Credit: Families can claim this credit, even if they received monthly advance payments during the last half of 2021. The total credit can be as much as $3,600 per child.
A more generous Earned Income Tax Credit: The law boosted the EITC for childless workers. There are also changes that can help low- and moderate-income families with children. The credit can be as much as $1,502 for workers with no qualifying children, $3,618 for those with one child, $5,980 for those with two children, and $6,728 for those with at least three children.
The Recovery Rebate Credit: Those who missed out on last year's third round of Economic Impact Payments (EIP3) may be eligible to claim the RRC. Often referred to as stimulus payments, this credit can also help eligible people whose EIP3 was less than the full amount, including those who welcomed a child in 2021. The maximum credit is $1,400 for each qualifying adult, plus $1,400 for each eligible child or adult dependent.

An increased Child and Dependent Care Credit: Families who pay for daycare so they can work or look for work can get a tax credit worth up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons.
A deduction for gifts to charity: Most tax-filers who take the standard deduction can deduct eligible cash contributions they made during 2021. Married couples filing jointly can deduct up to $600 in cash donations and individuals can deduct up to $300 in donations. In addition, itemizers who make large cash donations often qualify to deduct the full amount in 2021.

The IRS also reminds that these credits will not affect eligibility for a number of government programs:

Supplemental Security Income
Supplemental Nutrition Assistance Program
Temporary Assistance for Needy Families
Special Supplemental Nutrition Program for Women, Infants, and Children

Remember, non-filers do not have to wait on their letter to file and claim credits for which they qualify, and there is no penalty for missing the regular April 2022 tax deadline if the return has a refund due.

Source: IR-2022-178

Multi-Factor Authentication Can Head Off Sophisticated Scammers

Mon, 03 Oct 2022 19:58:29 -0400

Identity theft. Just the mere mention of this mayhem masquerade is enough to make the blood of tax professionals everywhere run cold.

As keepers of our clients’ most precious information, we are at once the target to identity thieves, and the solution for our customers' protection.

Sometimes it seems as if the scammers are winning. But we already have the tools that can help keep the bad guys at bay.

Identity theft is evolving (again)

Historically, most identity theft attacks are phishing emails, though scammers have begun using text messages. Whatever form these scams take, the Internal Revenue Service says they share a few characteristics:

They appear to come from a known or trusted source, such as a colleague, bank, credit card company, cloud storage provider, tax software provider or even the IRS and other government agencies.
They create a false narrative, often with an urgent tone, to trick the receiver into opening a link or attachment.

If successful, the “link” could install malware in the background, unknown to the personnel on the receiving end. Many times, a nasty "remote access trojan" (or RAT), is installed, allowing attackers to return to the system and gain ongoing access.

This software can take over a tax pro’s office system, identifying and completing pending tax returns, then e-filing them after changing the banking information to steal the refund.

Similar scenarios can be used to employ ransomware that holds an office’s data hostage until a ransom is paid.

Use multi-factor authentication to protect your accounts

Even the safest platforms can put data at risk when used improperly, and identity thieves are adaptable. Lately, the IRS has seen evidence that cloud-computing systems are being targeted by identity thieves. These breaches are often suffered by smaller tax offices that don't take advantage of security measures like multi-factor authentication.

Multi-factor authentication requires additional user-provided information to access an account, like a remotely generated code or answers to questions. This additional layer of security can stymie identity thieves attempting to log in fraudulently as office employees.

The Security Summit, a panel of IRS officials, state and local taxing agency representatives, and tax industry partners, has some recommendations about how multi-factor authentication should be constructed to be most effective.

First, whenever two-factor (2FA) or multi-factor (MFA) options are offered by storage providers or other cloud providers, use it. Either option could protect client accounts - even in the event that passwords become compromised.

Second, never use email as one of the additional methods of validating the user. Email is less secure and can be an easier nut to crack for the attacking identity thief. Text, phone calls or tokens are all a better choice.

Other good practices to follow include using encryption on critical drives and backing up files regularly. Don’t forget to update your anti-virus software on a regular basis.

As tax professionals, it’s up to us to secure our systems to protect the sensitive customer data.

For more information on protecting your office from scammers and identity thieves, see Publication 4557, Safeguarding Taxpayer Data and Small Business Information Security: The Fundamentals.

Other resources include Publication 5293, Data Security Resource Guide for Tax Professionals and the Identity Theft Central webpages on the IRS website.

Source: Security Summit warns tax pros of evolving email and cloud-based schemes to steal taxpayer data

Know the Signs of Possible ID Theft

Tue, 23 Aug 2022 17:18:11 -0400

We all know that identity thieves aren’t letting up in their efforts to steal your clients’ personal information so they can file fraudulent tax returns. If anything, they’re picking up the pace. But how can you know your tax prep office has been a target?

What are the signs of identity theft tax refund fraud?

Identity thieves work in the shadows, so the evidence of their malicious work isn’t always obvious. But it is there if you know what to look for.

While any one of these symptoms may—or may not—mean your computer systems have definitely been compromised, they are indicators that need to be investigated:

Client e-filed returns rejected because client's Social Security number was already used on another return.

More e-file acknowledgements received than returns the tax pro filed.
Clients responded to emails the tax pro didn't send.
Slow or unexpected computer or network responsiveness such as:

Software or actions take longer to process than usual,
Computer cursor moves or changes numbers without touching the mouse or keyboard,
Unexpectedly locked out of a network or computer.

If you’ve had more than one of these indicators occur on your office system, it’s time to call a professional IT firm to confirm the root cause.

Client reports can help you spot identity theft

Your clients may also get an indicator that something is amiss. The Summit says you should be on the lookout for these warning signs:

IRS Authentication letters (5071C, 6331C, 4883C, 5747C) even though they haven't filed a return.
A refund even though they haven't filed a return.
A tax transcript they didn't request.
Emails or calls from the tax pro that they didn't initiate.
A notice that someone created an IRS online account for the taxpayer without their consent.
A notice the taxpayer wasn't expecting that:

Someone accessed their IRS online account,
The IRS disabled their online account,
Balance due or other notices from the IRS that are not correct based on return filed or if a return had not been filed.

The upshot of all these indicators is that you, the tax professional, are the first line of defense against unlawful theft of your and your clients’ data.

When you see a pattern that doesn’t fit the circumstances, it’s time to investigate. Make sure you and your office have the best security possible, but don’t hesitate to get help if there’s a problem.

What should I do if I suspect data theft?

The first step toward recovery is to call the IRS, specifically the local IRS Stakeholder Liaison. They can notify IRS Criminal Investigation and other agency departments on your behalf. Do it IMMEDIATELY once data theft is confirmed; the IRS can move to block fraudulent returns in your clients’ names and can further assist you and your office staff.

Next, email the Federation of Tax Administrators for instructions on how to report information to your state and others where you e-file. Many times, states dictate that data breach information is reported to the state attorney general, and this may mean sending your information to multiple offices.

Once a data breach is identified, the IRS recommends tax pros identify and contact clients who may be affected by the breach and suggesting they acquire an IP PIN or, if necessary, file Form 14039, Identity Theft Affidavit.

Knowledge is power

The IRS website has a number of valuable resources available for tax professionals.

See Publication 5293, Data Security Resource Guide for Tax Professionals for an overview on avoiding data theft.

Help is also available from Publication 4557, Safeguarding Taxpayer Data, and from the Security Summit, a reminder about the importance of IP PINs.

Another vital piece of guidance comes from the National Institute of Standards and Technology, in Small Business Information Security: The Fundamentals.

Source: IR-2022-144

ETAAC Recommends IRS Funding, MeF Enhancements

Fri, 15 Jul 2022 10:55:23 -0400

One of the Internal Revenue Service’s main advisory committees is asking Congress to give the agency the funding it needs to function well. The recommendations, split into two categories, come from the Electronic Tax Administration Advisory Committee, or ETAAC, in its annual report to Congress.

The first category, recommendations to Congress, seeks to provide the Internal Revenue Service with flexible, sustainable, and predictable multi-year funding—a change that would give the agency more stability than its current annual funding model. The recommendations also seek to provide the IRS with budgetary and legislative support that allows the IRS to capitalize on its successes to deliver a level of service that taxpayers expect and deserve.

The second category, recommendations to the IRS, addresses topics like the following:

Implement enhancements to Modernized e-File that remove impediments to e-filing, with appropriate security features, taxpayer consent and acknowledgements.
Promote the use of identity protection PIN through a national, year-long campaign, leveraging stakeholders including the tax and financial services industries, to highlight the benefits of the program.
Work collaboratively with states and software providers to develop a long-term roadmap for Payroll and Information Return Modernization.

For the full 2022 ETAAC report, visit the IRS website.

What else does ETAAC do?

Members of ETAAC also work closely with their counterparts on the Security Summit. Where the Security Summit is made up of tax practitioners, state tax agency representatives and national tax industry leaders, ETAAC is comprised of individual and business taxpayers, tax professionals, tax industry software developers, payroll service providers and representatives from the financial industry and state and local governments.

Source: Electronic Tax Administration Advisory Committee issues annual report to Congress

Time Short to Register for Nationwide Tax Forum

Thu, 14 Jul 2022 09:16:34 -0400

Every year, the Internal Revenue Service hosts the Nationwide Tax Forum, providing tax professionals the opportunity to learn more about topics like tax law and cybersecurity. Unfortunately, the registration window for this year's event is about to close.

According to the IRS, "Thursday, July 14, is the last day for tax professionals to register to attend the 2022 IRS Nationwide Tax Forum and have access to all 32 webinars—including a keynote address by IRS Commissioner Chuck Rettig, updates on tax law, cybersecurity, practitioner ethics and more."

Like recent Nationwide Tax Forum, this year’s event is virtual, spanning five weeks from July 19 through August 18—with livestreamed webinars held on Tuesdays, Wednesdays, and Thursdays. Registering three business days in advance is required for guaranteed access to any seminar, so those who register after July 14 won’t have access to the full lineup.

To help plan your experience, check out the event schedule and course descriptions. To register and to find more information visit the IRS Nationwide Tax Forum webpage.

Join an IRS Focus Group

With your registration to the Nationwide Tax Forum, you can take part in one or more virtual IRS focus groups. Topics examined by these focus groups include:

Improving the Taxpayer Experience and IRS Services
Improving the Taxpayer Experience and IRS Outreach
Tax Pro Account and Business Online Account
Digital Asset Transactions
Tax Treatment of Retirement Distributions
Affordable Care Act Forms
IRS Online Accounts
Responding to IRS Correspondence Audit Notices
Taxpayer civil rights: Are your clients receiving the services they need?
Online tools and resources for refundable credits: The past, the present, and the future

There will also be demonstrations of IRS online accounts for tax pros and individual taxpayers provided by the IRS Office of Online Services.

Earn continuing education credits

If you are an enrolled agent, certified public accountant, Annual Filing Season Program participant, California Tax Education Council (CTEC) participant, or Certified Financial Planner (CFP), you can get continuing education credits by attending any of the Nationwide Tax Forum webinars. Participants can earn up to 28 CE credits and four seminars in this year’s lineup are being offered in both English and Spanish.

For more information, visit the CE and CFP Certification page on the IRS website.

Important: The IRS notes that attorneys should check with their state bar to see if participating in the Nationwide Tax Forum qualifies for continuing legal education credit.

Visit Drake at the Virtual Expo!

There’s another perk to registering for the Nationwide Tax Forum: a chance to visit Drake’s booth in the Virtual Expo, where you can watch short videos showcasing product features. Our sales representatives will also be available to provide additional information on features, integrations, onboarding, and pricing.

Go to IRS Nationwide Tax Forum to register or to get more information.

Source: IRS Nationwide Tax Forum kicks off July 19

IRS Delays, Backlog Concerning to National Taxpayer Advocate

Wed, 06 Jul 2022 11:23:51 -0400

National Taxpayer Advocate Erin Collins says the Internal Revenue Service is concerned about the 21.3 million paper-return backlog. In her midyear report to Congress, Collins notes that low-income families could face financial burdens as affected refunds are frequently delayed by 10 months.

What is the Taxpayer Advocate Service?

The Taxpayer Advocate Service was established by the Taxpayer Bill of Rights 2 legislation in 1996. Later expanded by the IRS Restructuring and Reform Act of 1998, the TAS raises individual and systemic issues faced by taxpayers.

How Does the Backlog Affect Taxpayers?

The IRS’ delay in working through the mountain of paper tax returns leads Collins' list of concerns. At the end of May, over 21 million paper tax returns had yet to be processed by the IRS—up by 1.3 million from the same time last year. While diplomatic, Collins is clearly concerned about the trend this reflects.

"The IRS has said it is aiming to crush the backlogged inventory this year, and I hope it succeeds," she writes. "Unfortunately, at this point, the backlog is still crushing the IRS, its employees, and most importantly, taxpayers. As such, the agency is continuing to explore additional processing strategies."

The fact that most individual taxpayers get some level of refund is an indicator of how widespread the effects of the backlog can be. Besides delays in processing returns, taxpayers this year have also faced delays in processing correspondence to the IRS, and difficulties in reaching the agency by phone.

"At the end of the day, a typical taxpayer cares most about receiving his or her refund timely," Collins explains. "Particularly for lower-income taxpayers who receive Earned Income Tax Credit benefits, tax refunds may constitute a significant percentage of their household income for the year. Thus, these processing delays are creating unprecedented financial difficulties for millions of taxpayers and outright hardships for many."

A Mountain of Paper Returns

The IRS has worked hard over the last few years to move taxpayers to electronic filing, and it has largely worked: 90% of individual taxpayers e-filed last year. Unfortunately, that still left some 17 million taxpayers to file paper returns.

But why?

The IRS says some taxpayers just chose to file on paper. Other taxpayers had no choice; they may have hit a roadblock to e-filing, such as being required to file a tax form or schedule that the agency couldn’t process electronically.

Historically—before the pandemic—paper-filers could expect a refund within four to six weeks after filing. That timeframe has stretched out over the past year. Now, paper-filers can wait up to six months, although in some cases their refund might not show up for 10 months or even more.

In May of this year alone, the report says, the IRS averaged processing some 200,000 Forms 1040 tax returns every week. Yet, at the end of May, the IRS had a Forms 1040 backlog of 8.2 million returns.

As if that weren't enough, the backlog doesn’t include millions more paper tax returns that still had to be classified or were expected to arrive before the October 15 extended filing deadline.

Collins’ report concludes that the IRS would have to process well over 500,000 Forms 1040 returns every week to eliminate the backlog this year. That would mean processing twice as many returns as the IRS currently does.

There’s more to the backlog than just individual tax returns. Every year, millions of business tax returns and amended tax returns from individuals and businesses are also paper-filed.

Overall, the mountain of returns yet to be processed has grown by 7%.

Faced with a “daunting” backlog of paper returns that likely will be carried over into the 2023 filing season, Collins proposes the IRS uses 2-D barcoding or some other advanced scanning technology so the transcription of paper returns can be automated for future filing.

"Today, the digits on every paper return must be manually keystroked into IRS systems by an employee," Collins wrote. "In the year 2022, that doesn't just seem crazy. It is crazy."

Other Hurdles to Be Cleared

Correspondence Processing Delays: Another paper problem arises when a taxpayer gets a notice and is requested to respond—or chooses to respond; the taxpayer usually has to do so by mail.

For example: through May 21, the IRS had processed 5 million taxpayer responses to proposed tax return adjustments. It took an average of more than eight months for a taxpayer to complete the process—251 days to be exact—three times the average processing time in 2019.

"When a math error or similar notice is generated in connection with a paper-filed tax return," the report says, "the combination of the return processing delay and the correspondence processing delay may mean that the taxpayer must wait well over a year to get the issue resolved and receive the refund due."

The report also notes that taxpayers who are trying to resolve identity theft issues also have to suffer through long delays, waiting nearly a year on average to complete the process of sending affidavits and other documentation to substantiate their identities.

Telephone Overload: The Internal Revenue Service fielded about 73 million telephone calls during the 2022 filing season. While that number is overwhelming, consider that only one call out of 10 actually reached a human IRS employee. When compared with numbers from the 2021 filing season, the percentage of IRS-fielded calls in 2022 is very close to that in 2021.

"If a private company failed to answer nine out of 10 customer calls, customers would go elsewhere," Collins wrote. "That, of course, is not an option for U.S. taxpayers, so it is critical that the IRS increase staffing in its telephone call centers to handle the volume of calls it receives."

Hold times on IRS lines increased to 29 minutes, up from 20 minutes in 2021.

Looking Ahead

The Taxpayer Advocate Service, or TAS, has come up with some key objectives for the IRS over the coming year. Collins says her department will place a lot of emphasis on working with the agency to help its performance by:

Automating the processing of paper tax returns
Reducing barriers to e-filing tax returns
Improving the IRS’ hiring and training processes
Improving telephone service

For more of the latest tax-news updates, be sure to bookmark Taxing Subjects.

Source: National Taxpayer Advocate issues midyear report to Congress; expresses concern about continued refund delays and poor taxpayer service

IRS Voice Bots Get New Options

Mon, 27 Jun 2022 16:38:44 -0400

The Internal Revenue Service started using voice bots on many of its toll-free telephone lines around the first of the year. The system has already helped more than 3 million taxpayers avoid wait times for simple questions about payments or notices, and the agency is adding more options.

Callers can set up or modify payment plans on the Automated Collection System (ACS) and Accounts Management toll-free lines. The system will even help create a personal identification number using information from a taxpayer’s most recent IRS bill and some additional personal information.

Will the IRS add more voice bots in the future?

IRS voice bots use artificial intelligence software to route callers to the information they need based on voice responses. Initially designed to answer simple questions, the IRS plans to continue adding voice-bot features that will help callers avoid extended wait times—even during tax season.

Voice bots aren’t just being used to collect payments. They have already been deployed on the Economic Impact Payment (EIP) and Advance Child Tax Credit toll-free lines to answer frequently asked questions. And the IRS says planned upgrades will provide taxpayers with active PINs access to a number of newly automated services:

Account and return transcripts
Payment history
Current balance owed

While voice bots can quickly provide information for taxpayers, the agency says live phone representatives will still be available for English and Spanish speakers.

More information about self-service options is available on IRS.gov.

Self-service? How about self-study?

Our education specialists on DrakeCPE.com have designed self-study and on-demand continuing education courses that can help you earn CPE and prepare for the upcoming filing season. We offer a variety of courses, from selling your home and fringe benefits to amended returns and virtual currency. If you’re interested in learning more about our Annual Federal Tax Refresher Course, read our blog: “Now Available: Drake 2022 AFTR Course!”

Source: IR-2022-127

Separation and Divorce Tax Issues to Consider

Thu, 23 Jun 2022 17:49:54 -0400

Singer Neil Sadaka was right: breaking up is hard to do. For clients in the process of ending their marriage, there is more to consider than a simple separation of assets. Whether legally separating or divorcing, they could be facing big changes in their individual tax situations—and the Internal Revenue Service recently highlighted information that could help.

One of the first issues is timing. The Internal Revenue Service considers a married couple to be wed until they get either a separate maintenance decree or a final divorce decree. So, until there is an official court ruling, they’ll still be viewed as a married couple for tax purposes.

Another early issue is withholding. When a taxpayer divorces or legally separates from their partner, they will normally need to modify their withholding setup at work. This means filing a new Form W-4 with their employer.

For some, the process may not be more complicated. Taxpayers who receive alimony payments, for example, may have to make estimated tax payments. However, help is available through the Tax Withholding Estimator tool on IRS.gov. This tool can determine whether current withholding amounts are correct for a specific situation.

What are the tax considerations of alimony and separate maintenance?

The IRS could view money “paid to a spouse or a former spouse under a divorce decree, a separate maintenance decree, or a written separation agreement may be alimony or separate maintenance payments for federal tax purposes.” Why is this important? Some payments are deductible for the payer and have to be included in income by the payee. However, there are exceptions.

"Individuals can't deduct alimony or separate maintenance payments made under a divorce or separation agreement executed after 2018 or executed before 2019 but later modified if the modification expressly states the repeal of the deduction for alimony payments applies to the modification," the IRS explains. "Alimony and separate maintenance payments received under such an agreement are not included in the income of the recipient spouse."

What about child custody?

Figuring out which partner can claim a dependent child is often a hotly contested topic among those on the brink of a breakup. According to the IRS, "the parent who has custody of the child can [generally] claim the child on their tax return." However, the situation gets murky if parents split custody 50-50 but can't agree who gets to claim the child(ren).

In that situation, there are tie-breaker rules that can apply. Further, under this arrangement, the IRS says these "child support payments aren't deductible by the payer and aren't taxable to the payee."

What filing statuses are available to separating or divorced couples?

The IRS lists four basic filing statuses available for individuals who are divorced or separating:

Married filing jointly. On a joint return, married people report their combined income and deduct their combined allowable expenses. For many couples, filing jointly results in a lower tax than filing separately.
Married filing separately. If spouses file separate tax returns, they each report only their own income, deductions, and credits on their individual return. Each spouse is responsible only for the tax due on their own return. People should consider whether filing separately or jointly is better for them.
Head of household. Some separated people may be eligible to file as head of household if all of these apply:

Their spouse didn't live in their home for the last six months of the year.
They paid more than half the cost of keeping up their home for the year.
Their home was the main home of their dependent child for more than half the year.

Single. Once the final decree of divorce or separate maintenance is issued, a taxpayer will file as single starting for the year it was issued, unless they are eligible to file as head of household or they remarry by the end of the year.

See Publication 504, Divorced or Separated Individuals, and Topic No. 452, Alimony and Separate Maintenance, for more information on tax issues for divorcing or separating couples.

Helping a client plan for the future?

Easily compare clients’ current tax situation to customizable tax scenarios—like a change in filing status—with the Drake Tax Planner. Since it’s accessed directly within Drake Tax, you have the tools you need to efficiently help clients plan for the future. Sign up for the free trial to see for yourself!

Source: IRS Tax Tip 2022-92

2022 Mileage Rates Increasing

Wed, 15 Jun 2022 15:37:29 -0400

Due to rising gasoline prices, the Internal Revenue Service has taken the rare step of increasing its optional standard mileage rates for the last six months of the 2022 tax year. These rates are significant since taxpayers use them to calculate the deductible costs of operating a vehicle for business purposes.

Typically, the IRS tweaks mileage rates for the upcoming tax year in the fall. However, record fuel prices pushed the agency to act now for the current year. The last time the IRS made a midyear adjustment was 2011.

What are the new mileage rates for 2022?

The IRS issued Announcement 2022-13 to make the new rates official, setting forth the associated legal language, guidance, and limitations for the new rates. Here is a short breakdown from the agency:

The standard mileage rate for business travel will be 62.5 cents per mile
The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents per mile
The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute
These new rates become effective July 1, 2022

Moving expenses are only available to active-duty service members "pursuant to a military order and incident to a permanent change of station" (Announcement 2022-13). Taxpayers who traveled prior to this update—from January 1 to June 30, 2022—should use Notice 2022-03 to calculate their mileage rates.

What are the limits on who can claim a deduction?

Announcement 2022-13 states that the Tax Cuts and Jobs Act (TCJA) passed in 2017 limits which taxpayers are eligible to claim a deduction. The TCJA suspends all miscellaneous itemized deductions that are tied to the 2% of adjusted gross income floor until 2026, including unreimbursed employee travel expenses.

So, how do reservists, some state or local government officials, and some performance artists get to claim the mileage rate whereas other taxpayers do not? They are paid on a fee basis, and the IRS considers the deduction in these cases to be an adjustment to income.

What is the big picture?

Fuel costs are, no doubt, a significant factor for determining mileage rates, but other factors also play a part, such as depreciation, insurance, and other costs. Taxpayers can use the optional business standard mileage rate to help calculate the deductible costs of operating a vehicle for business purposes, instead of keeping track of the actual cost.

In addition, the federal government and some businesses use the rate to reimburse employees for their mileage. The IRS notes that taxpayers always have the option to use their vehicle’s actual costs rather than the optional standard mileage rates.

We can help you stay up to date!

Here are just a few recent IRS updates we covered:

Sources: IRS increases mileage rate for remainder of 2022; Announcement 2022-13

Prior-Year Info Added to Where's My Refund

Mon, 06 Jun 2022 15:07:00 -0400

The Internal Revenue Service continues to add functionality to its online tools, now putting more muscle behind its Where’s My Refund? feature. Used more than 776 million times in 2021, it is one of the agency's most popular online offerings—and it can reduce client questions about refund status.

"Previously, Where's My Refund? only displayed the status of the most recently filed tax return within the past two tax years," the IRS explains. Now, users can view information for any of the last three tax years on their status report.

While this additional information will undoubtedly be more convenient for taxpayers with Internet access, it also marks a reduction in phone service that available to callers. The agency notes that those who call the refund hotline will only receive information related to their 2021 return.

Punctuating this shift, the IRS says, "There's no need to call the IRS to check on refund status unless it has been more than 21 days since the return was filed or the tool says the IRS can provide more information."

How do taxpayers access Where's My Refund?

Where’s My Refund? is accessed through IRS.gov or IRS2Go, the agency’s mobile app. The identification verification process requires their Social Security Number or ITIN, filing status for the requested tax year, and amount of the refund they’re checking on, using the original filed return.

The IRS says validated online users of Where’s My Refund? can get the status of a refund within:

24 hours after e-filing a tax year 2021 return
Three or four days after e-filing a tax year 2019 or 2020 return
Four weeks after mailing a return

For details on a taxpayer’s adjusted gross income, a balance due, or other account information, taxpayers should check their Online Account.

Speeding up 2021 returns

IRS Commissioner Chuck Rettig says the upgrade to Where’s My Refund? can help speed up the processing of TY 2021 returns—especially for taxpayers who chose to request an extension of time to file.

"We encourage those who expect a refund, but requested an extension, to file as soon as they're ready. We process returns on a first-in basis, so the sooner the better," said Rettig. "There's really no reason to wait until October 17 if filers have the relevant information to file now.”

Rettig reminds that electronic filing is available 24 hour per day and his agency is actively taking in returns, processing and issuing refunds.

More improvements to come

If taxpayers are happy with this latest round of upgrades, Rettig said, more improvements are in the works.

"The IRS is committed to identifying opportunities to make improvements in real time for taxpayers and the tax professional community," said Rettig. "This enhancement to Where's My Refund? is just one of many."

Source: IRS updates feature on Where’s My Refund?

IRS Shares Info for Tax-Exempt Applications

Fri, 27 May 2022 16:11:30 -0400

Organizations seeking tax-exempt status with the Internal Revenue Service should know that there is more to the process than merely signing on the dotted line. The process for being declared tax-exempt under Section 501(c)(3) of the Internal Revenue Code can vary based on the applicant organization's specific situation.

First and foremost, it has to be organized and operated for one of the following purposes defined by the IRS:

Charitable, religious, educational, scientific, or literary purposes
Testing for public safety
Fostering national or international amateur sports competition
Preventing cruelty to children or animals

Application for 501(c)(3) status is made using a Form 1023-series application.

The Process

The circumstances around the organization determine how simple or complex the process will be. The IRS has created a step-by-step application process guide—but the agency also recently highlighted additional information that can help.

Before filling out the application, candidate organizations should apply for a nine-digit Employer Identification Number (EIN)—even if they don’t have any employees. EINs are issued by the IRS to identify companies and tax-exempt organizations when they file and report taxes, and every 501(c)(3) application requires this number.

To apply for an Employer Identification Number, organizations can simply apply online through the IRS website. Once the Form 1023-series application has been filled out, it must be sent to the IRS electronically using Pay.gov online.

Keep in mind, however, that not every organization seeking tax-exempt status has to apply for 501(c)(3) exemption. Churches (including integrated auxiliaries) and public charities with yearly gross receipts of no more than $5,000 are already considered tax-exempt.

Time and Other Considerations

Just when a candidate organization is deemed tax exempt depends on its Form 1023. "If they submit this form within 27 months after the month they legally formed, the effective date of their organization's exempt status is the legal date of its formation," the IRS explains. "If an organization doesn't submit this form within those 27 months, the effective date of its exempt status is the date it files Form 1023."

Once an organization has been approved as a tax-exempt entity by the IRS, it is considered a private foundation unless the group can meet the standards to be considered as a public charity. Approval for 501(c)(3) status also brings a responsibility to those in the new tax-exempt organization. As such, charitable organizations have to make certain documents available to the public for their inspection.

Among these public documents are the organization’s application for exemption and its annual information tax returns for the past three years. Publication 557, Tax Exempt Status for Your Organization has more information on public inspection requirements.

Additional information, including help for applying organizations, is available from the IRS website:

Source: Things organizations should know about applying for tax-exempt status

IRS Updates FAQs for 2021 CTC and ACTC

Wed, 25 May 2022 17:21:55 -0400

The Internal Revenue Service has once again revised the frequently asked questions (FAQs) for the 2021 Child Tax Credit (CTC) and Advance Child Tax Credit (ACTC). These revisions take into account several changes, including the end of filing season for the 2021 tax year.

The American Rescue Plan expanded the Child Tax Credit to include advance estimated payments during the last half of 2021. While filing season has concluded, some taxpayers can still file a late return to take advantage of the credit.

This new issue of FAQs covers eight topics, including:

Topic A: General Information: Updated questions 1, 2, 3, 4, 5, 8, 9, 10, 11, 13, 14, 15, 16
Topic E: Advance Payment Process of the Child Tax Credit: Updated questions 2, 3
Topic F: Updating Your Child Tax Credit Information During 2021: Removed questions 1, 2 and updated 3,4
Topic G: Receiving Advance Child Tax Credit Payments: Updated questions 1, 6, 7, 9, 10, 11
Topic H: Reconciling Your Advance Child Tax Credit Payments on Your 2021 Tax Return: Updated questions 1, 2, 9 and removed 10
Topic J: Unenrolling from Advance Payments: Updated question 1 and removed 2, 3, 4, 5, 6, 7
Topic K: Verifying Your Identity to View your Payments 2021 Child Tax Credit: Updated 2, 3, 5, 6 and removed 7
Topic L: Commonly Asked Shared-Custody Questions: Updated 1 and 2

Complete details for each of the updated topics and questions are available on the IRS website in Fact Sheet 2022-29. The 22-page fact sheet instructs that those with questions should consult the FAQs rather than call IRS assistance lines, as IRS operators do not have any additional information.

The agency also makes it clear that any frequently asked questions are meant to communicate information quickly to the general public, rather than to state official IRS policy or tax law. FAQs, the IRS says, should not be the basis for any arguments or positions before formal legal bodies, such as the Tax Court.

Details of the IRS stance on reliance on FAQs can be found here.

Sources: IRS revises 2021 Child Tax Credit and Advance Child Tax Credit frequently asked questions; Fact Sheet 2022-29

Higher IRS Interest Rates Coming in Q3

Mon, 23 May 2022 13:52:44 -0400

The Internal Revenue Service is increasing the interest rates it can charge taxpayers for under- or overpayments, starting July 1. This follows the trend of interest rates for consumer loans and other financial transactions.

The Internal Revenue Code dictates that IRS’ interest rates be calculated on a quarterly basis. The rates are split between corporate tax payers and non-corporate tax payers.

What are the new rates?

The IRS says the new rates will be 5% for overpayments (if the taxpayer is a corporation, the rate is 4%); corporate overpayments exceeding $10,000 draw a 2.5% rate; underpayments get a 5% rate; and large-corporate underpayments will add 7%.

In most cases, the underpayment rate for a corporation will be the federal short-term rate plus three percentage points. For corporate overpayments, the rate is the federal short-term rate plus two percentage points.

If the taxpayer is a large corporation, the underpayment rate swells to the federal short-term rate plus five percentage points. If a large corporation makes an overpayment that is more than $10,000 for the taxable period, its overpayment rate will be calculated as the federal short-term rate plus one-half (0.5) of a percentage point.

The new third-quarter rates are calculated using the federal short-term rate that took effect May 1 and are based on daily compounding.

The full schedule of interest rates is listed in Revenue Ruling 2022-11, which officially announces the new rates in Internal Revenue Bulletin 2022-23, dated June 6, 2022.

Source: IRS interest rates increase for the third quarter of 2022

IRS Highlights Work Opportunity Tax Credit

Mon, 16 May 2022 16:59:37 -0400

It’s a tight job market out there, and many employers are struggling to recruit and retain qualified employees to maintain operations. While tax pros can't provide employees for their clients' businesses, they can explain tax benefits like the Work Opportunity Tax Credit (WOTC). This credit is designed to reward employers who hire long-term unemployment recipients or those who face employment challenges.

Exploring the Work Opportunity Tax Credit

The Work Opportunity Tax Credit isn’t new. Dating back to 1996, it encourages employers to hire individuals whose circumstances have historically presented barriers to employment by providing a credit for wages paid to qualified workers who start their position on or before Dec. 31, 2025.

The IRS identifies 10 groups who could qualify for the WOTC:

Temporary Assistance for Needy Families (TANF) recipients
Unemployed veterans, including disabled veterans
Formerly incarcerated individuals
Designated community residents living in Empowerment Zones or Rural Renewal Counties
Vocational rehabilitation referrals
Summer youth employees living in Empowerment Zones
Supplemental Nutrition Assistance Program (SNAP) recipients
Supplemental Security Income (SSI) recipients
Long-term family assistance recipients
Long-term unemployment recipients

To qualify as one of these 10 targeted groups, candidates must meet certain criteria. For example, long-term unemployment recipients are generally defined as those who have been out of work “for at least 27 consecutive weeks and received state or federal unemployment benefits during part or all of that time.”

How do employers determine if a hire qualifies for the WOTC?

To qualify for the WOTC, employers must complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit with the job applicant on or before the day they make an offer of employment. Then, they must submit the form to their state workforce agency (SWA)—not the IRS—within 28 days after the eligible worker started the position.

The WOTC is claimed on Form 3800, General Business Credit, but it’s calculated based on the wages paid to new eligible workers during their first year on the job on Form 5884, Work Opportunity Credit. It’s important to note that this credit can only be claimed once for each new employee—rehires do not qualify.

Can tax-exempt organizations claim the WOTC?

Tax-exempt organizations cannot claim the WOTC for most new hires, with the exception of qualified veterans. Instead of Form 3800, tax exempt organizations instead use Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations Hiring Qualified Veterans.

For more information, see the LB&I and SB/SE Joint Directive on the WOTC issued by the IRS to help employers who have been impacted by extended delays in the Work Opportunity Tax Credit certification process.

Source: IR-2022-104