News Letters

The IRS has announced a second Voluntary Disclosure Program for employers to resolve erroneous claims for credit or refund involving the COVID-19 Employee Retention Credit (ERC). Participation in the second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax period(s), and cannot be used to disclose and repay ERC money from tax periods in 2020.

The IRS has announced a second Voluntary Disclosure Program for employers to resolve erroneous claims for credit or refund involving the COVID-19 Employee Retention Credit (ERC). Participation in the second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax period(s), and cannot be used to disclose and repay ERC money from tax periods in 2020.

The program is designed to help businesses with questionable claims to self-correct and repay the credits they received after filing erroneous ERC claims, many of which were driven by aggressive marketing from unscrupulous promoters.

The first ERC Voluntary Disclosure Program was announced in late December 2023, and ended on March 22, 2024 (Announcement 2024-3, I.R.B. 2024-2, 364). Over 2,600 taxpayers applied to the first program to resolve their improper ERC claims and avoid civil penalties and unnecessary litigation.

The second ERC Voluntary Disclosure Program will allow businesses to correct improper payments at a 15-percent discount, and avoid future audits, penalties and interest.

Procedures for Second Voluntary Disclosure Program

To apply, employers must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, and submit it through the IRS Document Upload Tool. Employers must provide the IRS with the names, addresses, telephone numbers and details about the services provided by any advisors or tax preparers who advised or assisted them with their claims, and are expected to repay their full ERC claimed, minus the 15-percent reduction allowed through the Voluntary Disclosure Program.

Eligible employers must apply by 11:59 pm local time on November 22, 2024.

The Department of the Treasury and the IRS released statistics on the Inflation Reduction Act clean energy tax credits for the 2023 tax year. Taxpayers have claimed over $6 billion in tax credits for residential clean energy investments and more than $2 billion for energy-efficient home improvements on 2023 tax returns filed and processed through May 23, 2024.

The Department of the Treasury and the IRS released statistics on the Inflation Reduction Act clean energy tax credits for the 2023 tax year. Taxpayers have claimed over $6 billion in tax credits for residential clean energy investments and more than $2 billion for energy-efficient home improvements on 2023 tax returns filed and processed through May 23, 2024.

For the Residential Clean Energy Credit, 1,246,440 returns were filed, with a total credit value of $6.3 billion and an average of $5,084 per return. Specific investments include:

• Rooftop solar: 752,300 returns, up to 30 percent of the cost;
• Batteries: 48,840 returns, up to 30 percent of the cost.

For the Energy Efficient Home Improvement Credit, 2,338,430 returns were filed, with a total credit value of $2.1 billion and an average of $882 per return. Specific improvements include:

• Home insulation: 669,440 returns, up to 30 percent of the cost;
• Windows and skylights: 694,450 returns, up to 30 percent of the cost or $600;
• Central air conditioners: 488,050 returns, up to 30 percent of the cost or $600;
• Doors: 400,070 returns, up to 30 percent of the cost, $250 per door or $500 total;
• Heat pumps: 267,780 returns, up to 30 percent of the cost or $2,000;
• Heat pump water heaters: 104,180 returns, up to 30 percent of the cost or $2,000.

Internal Revenue Service Commissioner Daniel Werfel is calling on Congress to maintain the agency’s funding and not make any further cuts to the supplemental funding provided to the agency in the Inflation Reduction Act, using recent successes in customer service and compliance to validate his request.

Internal Revenue Service Commissioner Daniel Werfel is calling on Congress to maintain the agency’s funding and not make any further cuts to the supplemental funding provided to the agency in the Inflation Reduction Act, using recent successes in customer service and compliance to validate his request.

"The Inflation Reduction Act funding is making a difference for taxpayers, and we will build on these improvements in the months ahead," Werfel said during a July 24, 2024, press teleconference, adding that "for this progress to continue, we must maintain a reliable, consistent annual appropriations for the agency as well as keeping the Inflation Reduction Act funding intact."

During the call, Werfel highlighted a number of improvements to IRS operations that have come about due to the IRA funding, including expansion of online account features (such as providing more digital forms, making it easier to make online payments, and making access in general easier); providing more access to taxpayers wanting face-to-face assistance (including a 37 percent increase in interactions at taxpayer assistance centers); IT modernization; and the collection of more than $1 billion in taxes due form high wealth individuals.

Werfel did highlight an area where he would like to see some improvements, including the number of taxpayers who have activated their online account.

While he did not have a number of how many taxpayers have activated their accounts so far, he said that “"we are nowhere near where we have the opportunity to be,"” adding that as functionality improves and expands, that will bring more taxpayers in to use their online accounts and other digital services.

He also noted that online accounts will be a deterrent for scams, and it will provide taxpayers with the information they need to not be fooled by scammers.

“We see the online account as a real way to test these scams and schemes because taxpayers will have a single source of truth about whether they actually owe a debt, whether the IRS is trying to reach them, and also information we can push out to taxpayers more regularly if they sign up and opt in for it on the latest scams and schemes,” Werfel said.

By Gregory Twachtman, Washington News Editor

The IRS has intensified its efforts to scrutinize claims for the Employee Retention Credit (ERC), issuing five new warning signs of incorrect claims. These warning signs, based on common issues observed by IRS compliance teams, are in addition to seven problem areas previously highlighted by the agency. Businesses with pending or previously approved claims are urged to carefully review their filings to confirm eligibility and ensure credits claimed do not include any of these twelve warning signs or other mistakes. The IRS emphasizes the importance of consulting a trusted tax professional rather than promoters to ensure compliance with ERC rules.

The IRS has intensified its efforts to scrutinize claims for the Employee Retention Credit (ERC), issuing five new warning signs of incorrect claims. These warning signs, based on common issues observed by IRS compliance teams, are in addition to seven problem areas previously highlighted by the agency. Businesses with pending or previously approved claims are urged to carefully review their filings to confirm eligibility and ensure credits claimed do not include any of these twelve warning signs or other mistakes. The IRS emphasizes the importance of consulting a trusted tax professional rather than promoters to ensure compliance with ERC rules.

The newly identified issues include essential businesses claiming ERC despite being fully operational, unsupported government order suspensions, misreporting wages paid to family members, using wages already forgiven under the Paycheck Protection Program, and large employers incorrectly claiming wages for employees who provided services. The IRS plans to deny tens of thousands of claims that show clear signs of being erroneous and scrutinize hundreds of thousands more that may be incorrect. In addition, the IRS announced upcoming compliance measures and details about reopening the Voluntary Disclosure Program, aimed at addressing high-risk ERC claims and processing low-risk payments to help small businesses with legitimate claims.

IRS Commissioner Danny Werfel emphasized the agency’s commitment to pursuing improper claims and increasing payments to businesses with legitimate claims. Promoters lured many businesses into mistakenly claiming the ERC, leading to the IRS digitizing and analyzing approximately 1 million ERC claims, representing over $86 billion. The IRS urges businesses to act promptly to resolve incorrect claims, avoiding future issues such as audits, repayment, penalties, and interest. Taxpayers should recheck their claims with the help of trusted tax professionals, considering options such as the ERC Withdrawal Program or amending their returns to correct overclaimed amounts.

The IRS, in collaboration with state tax agencies and the national tax industry, has initiated a new effort to tackle the rising threat of tax-related scams. This initiative, named the Coalition Against Scam and Scheme Threats (CASST), was launched in response to a significant increase in fraudulent activities during the most recent tax filing season. These scams have targeted both individual taxpayers and government systems, seeking to exploit vulnerabilities for financial gain.

The IRS, in collaboration with state tax agencies and the national tax industry, has initiated a new effort to tackle the rising threat of tax-related scams. This initiative, named the Coalition Against Scam and Scheme Threats (CASST), was launched in response to a significant increase in fraudulent activities during the most recent tax filing season. These scams have targeted both individual taxpayers and government systems, seeking to exploit vulnerabilities for financial gain.

CASST will focus on three primary objectives: enhancing public outreach and education to alert taxpayers to emerging threats, developing new methods to identify fraudulent returns at the point of filing, and improving the infrastructure to protect taxpayers and the integrity of the tax system. This initiative builds on the successful framework of the Security Summit, which was launched in 2015 to combat tax-related identity theft. While the Security Summit made significant progress in reducing identity theft, CASST aims to address a broader range of scams, reflecting the evolving tactics of fraudsters.

The coalition has received widespread support, with over 60 private sector groups, including leading software and financial companies, joining the effort. Key national tax professional organizations are also participating, all committed to strengthening the security of the tax system.

Among the measures CASST will implement are enhanced validation processes for tax preparers, including improvements to the Electronic Filing Identification Number (EFIN) and Preparer Tax Identification Number (PTIN) systems. The coalition will also target the issue of ghost preparers, who prepare tax returns for a fee without proper disclosure, leading to inflated refunds and significant revenue losses.

In addition to these technical improvements, CASST will address specific scams, such as fraudulent claims for tax credits like the Fuel Tax Credit. By the 2025 filing season, CASST aims to have new protections in place, bolstering defenses across both public and private sectors to make it more difficult for scammers to exploit the tax system. This coordinated effort seeks to protect taxpayers and ensure the integrity of the nation’s tax system.

The Internal Revenue Service will be processing about 50,000 "low-risk" Employee Retention Credit claims, and it will be shifting the moratorium dates on processing.

The Internal Revenue Service will be processing about 50,000 "low-risk"Employee Retention Credit claims, and it will be shifting the moratorium dates on processing.

"The IRS projects payments will begin in September with additional payments going out in subsequent weeks," the agency said in an August 8, 2024, statement."The IRS anticipates adding another large block of additional low-risk claims for processing and payment in the fall."

The agency also announced that it is shifting the moratorium period on processing new claims. Originally, the agency was not processing claims that were filed after September 14, 2023. It is now going to process claims filed between September 14, 2023, and January 31, 2024.

"Like the rest of the ERC inventory, work will focus on the highest and lowest risk claims at the top and bottom end of the spectrum," the IRS said. "This means there will be instances where the agency will start taking actions on claims submitted in this time period when the agency has seen a sound basis to pay or deny any refund claim."

The agency also said it has sent out "28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect," preventing up to $5 billion in improper payments. It also has "thousands of audits underway, and 460 criminal cases have been initiated" with potentially fraudulent claims worth nearly $7 billion. Thirty-seven investigations have resulted in federal charges, with 17 resulting in convictions.

Businesses that receive a denial letter will have the ability to appeal the decision.

The agency also offered some other updates on the ERC program, including:

• The claim withdrawal process for unprocessed ERC has led to more than 7,300 withdrawing $677 million in claims;
• The voluntary disclosure program received more than 2,600 applications from ERC recipients that disclosed $1.09 billion in credits; and
• The IRS Office of Promoter Investigations has received "hundreds" of referrals about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC.

"The IRS is committed to continuing out work to resolve this program as Congress contemplates further action, both for the good of legitimate businesses and tax administration," IRS Commissioner Daniel Werfel said in the statement.

By Gregory Twachtman, Washington News Editor

The IRS has announced substantial progress in its ongoing efforts to modernize tax administration, emphasizing a shift towards digital interactions and enhanced measures to combat tax evasion. This update, part of a broader 10-year plan supported by the Inflation Reduction Act, reflects the agency's commitment to improving taxpayer services and ensuring fairer compliance.

The IRS has announced substantial progress in its ongoing efforts to modernize tax administration, emphasizing a shift towards digital interactions and enhanced measures to combat tax evasion. This update, part of a broader 10-year plan supported by the Inflation Reduction Act, reflects the agency's commitment to improving taxpayer services and ensuring fairer compliance.

The IRS’s push for digital transformation has seen significant advancements, allowing taxpayers to conduct nearly all interactions with the agency online. This initiative aims to reduce the reliance on paper submissions, expedite tax processing, and improve overall efficiency. In 2024 alone, the IRS introduced extended hours at Taxpayer Assistance Centers across the country, particularly benefiting rural and underserved communities. The agency also reported a notable increase in face-to-face interactions, with a 37 percent rise in contacts during the 2024 filing season.

In parallel with these service improvements, the IRS has ramped up efforts to disrupt complex tax evasion schemes. Leveraging advanced data science and technology, the agency has focused on high-income individuals and entities employing sophisticated financial maneuvers to avoid taxes. Among the IRS’s new measures is a moratorium on processing Employee Retention Credit claims to prevent fraud, alongside initiatives targeting abusive use of partnerships and improper corporate practices.

The IRS also highlighted its progress in eliminating paper filings through the introduction of the Document Upload Tool, which allows taxpayers to submit documents electronically. This tool, along with upgraded scanning and mail-sorting equipment, is expected to significantly reduce the volume of paper correspondence, potentially replacing millions of paper documents each year. These technological upgrades are part of the IRS’s broader goal to create a fully digital workflow, thereby speeding up refunds and improving service accuracy.

Additionally, the IRS has launched new programs to ensure taxpayers are informed about and can claim eligible credits and deductions. This includes outreach efforts related to the Child Tax Credit and the Earned Income Tax Credit, aiming to bridge the gap for eligible taxpayers who may not have claimed these benefits. These initiatives underline the IRS's dedication to a more equitable tax system, ensuring that all taxpayers have access to the credits and services they are entitled to while maintaining robust compliance standards.

The IRS began its "Dirty Dozen" list for 2022, which includes potentially abusive arrangements that taxpayers should avoid. The tax scams in this series focus on four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance and monetized installment sales. These are the first four entries in this year’s Dirty Dozen series.

The IRS began its "Dirty Dozen" list for 2022, which includes potentially abusive arrangements that taxpayers should avoid. The tax scams in this series focus on four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance and monetized installment sales. These are the first four entries in this year’s Dirty Dozen series.

Taxpayers who have already claimed the purported tax benefits of one of these four transactions on a tax return should consider taking corrective steps, including filing an amended return and seeking independent advice. Where appropriate, the IRS will challenge the purported tax benefits from the transactions on this list and may assert accuracy-related penalties. Further, the IRS informed that to combat the evolving variety of these potentially abusive transactions, the IRS created the Office of Promoter Investigations (OPI). The IRS has a variety of means to find potentially abusive transactions, including examinations, promoter investigations, whistleblower claims, data analytics and reviewing marketing materials.

Further, the IRS reminded taxpayers to watch out for and avoid advertised schemes, many of which are now promoted online, that promise tax savings that are too good to be true and will likely cause taxpayers to legally compromise themselves. Additionally, the IRS informed that taxpayers who have engaged in any of these transactions or who are contemplating engaging in them should carefully review the underlying legal requirements and consult independent, competent advisors before claiming any purported tax benefits.

The American Institute of CPAs is calling on Congress to fund the Internal Revenue Service at the level requested by the White House in its fiscal year 2023 budget request. Separately, the group offered its suggestions on the IRS Guidance Priority List. "In advance of the Fiscal Year 2023 appropriations cycle, we request that you fund the Internal Revenue Service (IRS) at necessary levels to allow it to handle all the duties required of it by Congress, including properly administering and enforcing our nation’s tax laws as well as providing needed assistance to taxpayers and their advisers in a timely and professional manner," AICPA said in a May 25, 2022, letter to Democratic and Republican leadership in both the House and Senate Appropriations Committees.

The American Institute of CPAs is calling on Congress to fund the Internal Revenue Service at the level requested by the White House in its fiscal year 2023 budget request. Separately, the group offered its suggestions on the IRS Guidance Priority List. "In advance of the Fiscal Year 2023 appropriations cycle, we request that you fund the Internal Revenue Service (IRS) at necessary levels to allow it to handle all the duties required of it by Congress, including properly administering and enforcing our nation’s tax laws as well as providing needed assistance to taxpayers and their advisers in a timely and professional manner," AICPA said in a May 25, 2022, letter to Democratic and Republican leadership in both the House and Senate Appropriations Committees.

AICPA expressed concern that "service challenges will persist long after the pandemic has ended unless sufficient, targeted funding for technology improvements, human talent and training, and taxpayer services are appropriated."

The organization also noted that there needs to be more than money thrown at the agency to help its functioning. "It should be clear that funding alone will not solve the IRS’s problems,” AICPA wrote. “Structural reforms and organizational alignment from Congress, the President, the Secretary, and the Commissioner are necessary to delivering the promised goals. We look forward to working with all parties involved to this end and create an IRS that taxpayers deserve."

Priority Guidance Recommendations

In a separate letter sent to the IRS May 24, 2022, AICPA outlined its suggestions for the guidance that the agency should be prioritizing. The guidance recommendations cut across a range of programs and legislation, such as the Tax Cuts and Jobs Act, the SECURE Act, and the CARES Act and covering a number of areas such as corporation and shareholder taxation, employee benefits taxation, individual taxation, and international taxation.

R&E Recommendations

AICPA is also recommending the Internal Revenue Service issue specific regulations related to the treatment of research and experimental (R&E) expenditures under Sec. 174.

In a May 26, 2022, letter to the IRS, AICPA said that the Department of the Treasury and the IRS should "issue regulations providing that section 174(a) expenditures include direct costs, including employee compensation, contract labor, and materials, and at the taxpayer’s election, allocable indirect and overhead costs."

AICPA also said that Treasury and the IRS "should issue regulations that illustrate, using detailed examples, which costs are ‘incident to’ the development or improvement of a product as per Reg. §1.174-2."

If the agency doesn’t issue new regulations, AICPA recommended guidance to cover these requests.

Additionally, AICPA identified issues that have arisen with Rev. Proc. 2000-50, which covers the treatment of costs paid or incurred to develop, purchase, or lease computer software.

"IRS should modify the scope limitation under section 4 of Rev. Proc. 2000-50 to clarify that the limitation on costs that a taxpayer has treated as R&E expenditures under section 174 only applies to costs previously subject to an irrevocable election under section 174, including 174(b) or charging the expenses to capital account."

The IRS issued guidance on the federal income and employment tax treatment of cash payments made by employers under leave-based donation programs to aid victims of the further Russian invasion of Ukraine.

The IRS issued guidance on the federal income and employment tax treatment of cash payments made by employers under leave-based donation programs to aid victims of the further Russian invasion of Ukraine. Employer leave-based donation payments made by an employer before January 1, 2023, to Code Sec. 170(c) organizations to aid said victims (qualified payments) will not be treated as gross income, wages or compensation of the employees of the employer.

Similarly, employees electing or with an opportunity to elect to forgo leave that funds said qualified payments will not be treated as having constructively received gross income, wages, or compensation. Further, electing employees are not eligible to claim a charitable contribution deduction under Code Sec. 170 for the value of the forgone leave that funds said qualified payments.

During the National Small Business Week, May 1 to 7, the IRS highlighted tax benefits and resources tied to the theme for this year’s celebration: " Building a Better America through Entrepreneurship.".The IRS urged business taxpayers to take advantage of tax benefits for 2022, make estimated tax payments electronically, e-file payroll tax returns, and check out the Work Opportunity Credit.

During the National Small Business Week, May 1 to 7, the IRS highlighted tax benefits and resources tied to the theme for this year’s celebration: " Building a Better America through Entrepreneurship.".The IRS urged business taxpayers to take advantage of tax benefits for 2022, make estimated tax payments electronically, e-file payroll tax returns, and check out the Work Opportunity Credit.

The IRS urged business taxpayers to begin planning now to take advantage of the enhanced 100 percent deduction for business meals and other tax benefits available to them when filing their 2022 income tax return. For 2021 and 2022 only, businesses can generally deduct the full cost of business-related food and beverages purchased from a restaurant. Further, more information about this provision is provided in IRS Publication 463, Travel, Gift, and Car Expenses.

Additionally, many business owners may qualify for the home office deduction, also known as the deduction for business use of a home. Usually, a business owner must use a room or other identifiable portion of the home exclusively for business on a regular basis. Those eligible can figure the deduction using either the regular method or the simplified method. To choose the regular method, taxpayers can fill out and attach Form 8829, Expenses for Business Use of Your Home. Alternatively, business owners can choose the simplified method, based on a six-line worksheet found in the instructions to Schedule C, Profit or Loss from Business. Under both the regular and simplified methods, business expenses in excess of the gross income limitation are not deductible.

Further, the IRS informed taxpayers about a variety of other tax benefits often available to business owners. This includes business start-up expenses, qualified business income deduction and the health-insurance deduction for self-employed individuals. Finally, more information about these and other tax benefits is provided in Publication 535, Business Expenses.

Making Estimated Tax Payments Electronically

The IRS reminded all businesses to make estimated tax payments quarterly and that making them electronically is fast, easy and safe. Estimated tax is used to pay income tax and other taxes including self-employment tax and alternative minimum tax. If a taxpayer doesn’t pay enough tax through withholding and estimated tax payments, they may be charged a penalty. However, generally, paying quarterly estimated taxes will lessen or even eliminate any penalties.

Further, the IRS informed that individuals, including sole proprietors, partners and S corporation shareholders, generally must make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. For corporations, the threshold is $500 or more. Self-employed individuals and gig workers who also receive salaries and wages from an employer can avoid paying estimated tax by asking their employer to withhold more tax from their paycheck. They can check the Tax Withholding Estimator on the IRS website for more help. Individuals generally use Form 1040-ES to figure estimated tax while corporations generally use Form 1120-W.

Additionally, for estimated tax purposes, the year is divided into four payment periods. However, alternative payment periods are allowed if enough tax is paid in by the end of the quarter. Further, taxpayers can use the Electronic Federal Tax Payment System for all their federal tax payments. Individual Taxpayers can also create an IRS Online Account or use Direct Pay, a debit, credit card or digital wallet to make their estimated tax payments. The 2022 Form 1040-ES can help taxpayers estimate their first quarterly tax payment. Moreover, taxpayers may also send estimated tax payments with Form 1040-ES by mail. Finally, the IRS also provided a list of resources available to taxpayers, including the Small Business Tax Workshop and E-News for Small Businesses among others.

E-File Payroll Tax Returns

The IRS has urged small businesses to take advantage of filing their payroll tax returns and making tax payments electronically. Further, the IRS announced that payroll taxes include federal income tax withheld from employee wages, as well as both the employer and employee portions of Social Security and Medicare taxes. Payroll taxes also include the Federal Unemployment Tax.

Additionally, the IRS informed taxpayers that taxpayers who file on paper miss out on all the advantages of e-filing. E-filing saves time and is secure and accurate. The IRS acknowledges receipt of an electronically filed return within 24 hours. With electronic filing, any mistake is often discovered and fixed quickly. Additionally, employers choosing to e-file themselves will need to purchase IRS-approved software. Alternatively, the Authorized IRS e-file Providers Locator Service can help employers find a suitable tax professional.

Finally, the IRS informed that though some employers can choose to pay their taxes when they file their payroll tax returns, most need to deposit them regularly with the Treasury Department instead. Federal tax deposits must be made by electronic funds transfer (EFT). A fast, easy and free way to do that is through the Electronic Federal Tax Payments System (EFTPS). Payments can be made either online or by phone. To enroll or for more information, taxpayers can visit EFTPS.gov or call 800-555-4477.

Work Opportunity Tax Credit

The IRS reminded employers to check out the Work Opportunity Tax Credit (WOTC) for hiring long-term unemployment recipients and other group of workers facing significant barriers to employment. The WOTC encourages employers to hire workers certified as members of any of ten targeted groups facing barriers to employment. The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025. Further, the IRS also provided a list of the ten groups mentioned above.

Additionally, the IRS announced that to qualify for the credit, an employer must first request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency (SWA). It must be submitted to the SWA within 28 days after the eligible worker begins work. Further, employers can help new hires by making sure they have the right amount of tax taken out of their pay and encourage them to use the Tax Withholding Estimator. This tool will also help them correctly fill out Form W-4, Employee’s Withholding Certificate.

The IRS has reminded taxpayers to create or review emergency preparedness plans for surviving natural disasters. The Service has designated the month of May to include National Hurricane Preparedness Week and National Wildfire Awareness Month.

The IRS has reminded taxpayers to create or review emergency preparedness plans for surviving natural disasters. The Service has designated the month of May to include National Hurricane Preparedness Week and National Wildfire Awareness Month. Further, the IRS has advised taxpayers to:

• secure key documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space, make their copies and scanning them for backup storage on electronic media such as a flash drive;
• record all property, especially expensive and high value items. The IRS disaster-loss workbooks in Publication 584 can help individuals and businesses compile lists of belongings or business equipment;
• employers who use payroll service providers should check fiduciary bonds as they could protect the employer in the event of default by the payroll service provider; and
• reconstruct records after a disaster for tax purposes, getting federal assistance or insurance reimbursement. Further, taxpayers who have lost some or all their records during a disaster can visit IRS’s Reconstructing Records webpage as one of their first steps.

Additionally, the Service has urged taxpayers to not call the IRS to request disaster relief because it automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. Taxpayers impacted by a disaster with tax-related questions can contact the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues. Taxpayers who do not reside in a covered disaster area, but suffered impact from a disaster should call 866-562-5227 to find out if they qualify for disaster tax relief and to discuss other available options. Moreover, taxpayers can find complete disaster assistance and emergency relief details for both individuals and businesses on the Service’s Around the Nation webpage. Lastly, the taxpayers can also visit the FEMA Prepare for Disasters web page to Build a Kit of emergency supplies.

The Internal Revenue Service continues to struggle with issues related to staff shortages, the Treasury Inspector General for Tax Administration said.

The Internal Revenue Service continues to struggle with issues related to staff shortages, the Treasury Inspector General for Tax Administration said.

In a May 2, 2022, interim report on the 2022 filing season, the IG stated that "significant staffing shortages continue to hamper the IRS’s efforts to address backlog inventories and continue to affect the IRS’s ability to ensure that current year tax returns are processed timely."

The data in the report comes from March and predates a number of appearances of IRS Commissioner Charles Rettig before Congress where he has pledged that barring another significant spike in the pandemic or some other unforeseen issue, the backlogged inventories will be back to "healthy" by the end of the year.

The report highlights the agency’s overall "IRS Get Healthy Initiatives" and states the IG will be performing separate reviews on how the agency is addressing the backlog as well as hiring shortfalls.

The IG reported that as of March 15, 2022, the IRS onboarded 521 submission processing employees, or 9.5 percent of the hiring goal of 5,437, although Rettig has testified before Congress that in-person and virtual job fairs have yielded higher numbers since then and those hired should be onboarded and complete their training in June. The IG also reported that as of March 17, 2022, the agency onboarded 3,827 accounts management employees, or 76.5 percent of the hiring goal of 5,000 for the 2022 tax season.

Five staffing concerns were highlighted by the report, including:

• The use of a seasonal workforce that does not provide permanent employment or desirable schedules and shifts;
• Entry-level salaries that are lower than what can be obtained in private industry;
• Applicants who apply for multiple jobs, reducing the true number of candidates available to fill vacancies;
• Applicants who fail to respond to or pass pre-screnning or do not show up to work after they have been hired; and
• Long onboarding times.

IG estimates that as of the week ending March 12, 2022, there are nearly 5 million paper tax returns that still need to be processed. Through March 4, for the 2022 filing season, the IRS received nearly 55 million returns, including 1.5 million paper returns, which is 15 percent lower than the paper returns received in roughly the same window (March 5, 2021) during the previous year’s tax filing season.

As of March 4, the IRS has issued about 38 million refunds totaling $129.2 billion. Both represent increases from the same time in the previous tax filing season through March 5 that had about 36 million refunds issued totaling $107.8 billion.

Rettig Defends Budget Request Before Senate Appropriations Committee

Internal Revenue Service Commissioner Charles Rettig appeared May 3 before the Financial Services and General Government Subcommittee of the Senate Appropriations Committee to defend the White House budget request for fiscal year 2023.

During the hearing, Commissioner Rettig testified on a number of the usual topics, noting the backlog of unprocessed returns and other written correspondence should be at a "healthy" level by the end of the year, assuming no other spikes in the pandemic or other unanticipated issues, as well as improvements to the workforce due to direct hiring authority granted by Congress, and the need for more funding to update and improve the IT infrastructure. He also touched on the need for more enforcement personnel to help close the tax gap, reiterating that enforcement will be targeted toward the wealthy who are avoiding paying taxes and not the low and middle income taxpayers.

WASHINGTON–The Internal Revenue Service’s Independent Office Of Appeals has seen its cycle times for handling appeals cases stretch to more than year during the COVID-19 pandemic, but the office is working to get it back to pre-pandemic levels.

WASHINGTON–The Internal Revenue Service’s Independent Office Of Appeals has seen its cycle times for handling appeals cases stretch to more than year during the COVID-19 pandemic, but the office is working to get it back to pre-pandemic levels.

Speaking May 13, 2022, at the American Bar Association’s May Tax Meeting, office Chief Andy Keyso provided an update on where the agency stands as it, and the IRS as a whole, prepare for all offices to open for employees, as the end of June.

The cycle time for closed cases in fiscal year 2021 reached 372 days, up from 194 days in fiscal year 2018. Keyso noted that the upward trend started from there into FY 2019, where it increased to 229 days due to the government shutdown during that time, and then increased again in FY 2020 to 289 days during the first year of the pandemic that including a temporary shutdown as all employees were sent home and began working remotely.

Despite the increase, Keyso is optimistic that change can happen.

"I’m troubled by the increase in cycle time but I am not defeated by it," Keyso said. "I believe that it is reversible, and we will reverse it as we get people back in the office."

His optimism stems from the fact that while cycle times have gone up, it is not because more time is being spent on cases by appeals officers. That time hasn’t changed, he said. The problems are more a function of issues that are plaguing the agency as a whole since the start of the pandemic, including the backlog of processing written correspondence.

Getting that cycle time back down is one of the office’s priorities once people are back in their offices full time, Keyso said.

Cycle times went up despite declines in new case receipts by the office. In FY 2018, the office received 92,430 cases. That number dropped in the following two years to 85,286 in FY 2019 and then to 57,573 in FY 2020 before rebounding to 72,216 cases in the last fiscal year. As expected, total case closures follows a similar trend, with 94,832 cases getting closed in FY 2018, dropping down to 73,207 in FY 2019, and falling again to 62,997 in FY 2020. In the last fiscal year, 66,522 cases were closed.

Collection due process cases make up the most cases handled by the Independent Office of Appeals in FY 2021 (27,420), followed by examination cases (25,247) and then offers in compromise cases (6,858).

The Internal Revenue Service is not providing taxpayers with sufficient tools to manage their accounts online, National Taxpayer Advocate Erin Collins said.

The Internal Revenue Service is not providing taxpayers with sufficient tools to manage their accounts online, National Taxpayer Advocate Erin Collins said.

In an April 28, 2022, blog post, Collins stated that despite progress in the development of its online account application, "the IRS has yet to develop and adopt a one-stop solution for online and digital offerings that combine communications and interaction with individual and business taxpayers as well as with tax professionals."

Collins offered a number of solutions the IRS should be working on to help improve its virtual offerings, including:

• providing taxpayers with the ability to navigate to all IRS online information and services;
• making it simple for taxpayers to access various online tools;
• conditioning taxpayers to use Online Account application as the starting and ending point with their online interactions with the agency; and
• providing the option for those who are married and jointly file their tax returns to link their individual accounts.

Additionally, the IRS needs to offer a business version of the Online Account application to increase digital support for businesses that “at minimum” offers the same support features for individual taxpayers, Collins added.

For tax professionals, Collins said there is a need for better access by those professionals to their clients’ Online Account application from within the Tax Pro Account application.

"This one improvement would be significant for tax professionals in assisting taxpayers to meet their filing and payment obligations and provide much-needed assistance and guidance to them," she stated.

Collins also called for the IRS to integrate the "Where’s My Refund" tool into the Online Account application as well as prioritize improving its functionality to help decrease the call volume customer service representatives are dealing with.

The agency "needs to have robust online accounts available for all taxpayers and tax professionals that provide information, guidance, and the capability to work and resolve issues online," she stated.

The gap between taxes owed and taxes collected by the Internal Revenue Service could be approaching $1 trillion, IRS Commissioner Charles Rettig told members of the House Committee on Oversight and Reform’s Government Operations Subcommittee as he advocated for more funding for the agency.

The gap between taxes owed and taxes collected by the Internal Revenue Service could be approaching $1 trillion, IRS Commissioner Charles Rettig told members of the House Committee on Oversight and Reform’s Government Operations Subcommittee as he advocated for more funding for the agency.

During an April 21, 2022, hearing of the subcommittee, Rettig noted updated tax gap figures for the three-year period of 2012-2014, along with projections through 2019, will be released this summer. However, those projections do not account for the growth in cryptocurrency, which could be widening the tax gap beyond the current calculations and projections.

"What is not in those estimates is virtual currencies, and there is over a $2 trillion market cap for virtual currencies," Rettig testified before the committee. "Last year, there was over $14 trillion in transactions in virtual currencies and the United States, if you view relative GDP, is somewhere between 35 and 43 percent of that $14 trillion."

He said that knowledge generated from John Doe summons activity in these space reveals "that the compliance issues in the virtual currency space are significantly low."

"The tax gap estimates that the IRS prepares are based on information that the IRS is able to determine, not information that we know is out there but we are not able to determine," Rettig said, adding that the agency is trying to get more information about virtual currencies through adding questions on the Form 1040, first on Schedule L and then moving it to page one of the Form 1040 last year "to try to enhance compliance."

He added that the agency is looking to get more into that area.

The comments on the tax gap and the need to be able to tackle compliance in the cryptocurrency space underscores the agency’s need for more funding as requested in the White House budget request for fiscal year 2023.

In his written testimony submitted to the committee, Rettig noted that the agency "can no longer audit a respectable percentage of large corporations, and we are often limited in the issues reviewed among those we do audit. These corporations can afford to spend large amounts on legal counsel, drag out proceedings and bury the government in paper. We are, quite simply, ‘outgunned’ in our efforts to assure a high degree of compliance for these taxpayers."

He wrote that it is "unacceptable" that corporations and the wealthiest individuals have such an advantage to push back on the nation’s tax administrator.

"We must receive the resources to hire and train more specialists across a wide range of complex areas to assist with audits of entities (taxable, pass-through and tax-exempt) and individuals (financial products; engineering; digital assets; cross-border activities; estate and gift planning; family offices; foundations; and many others)," his written testimony states.

Rettig wrote that the agency current has fewer than 2,000 revenue officers, "the lowest number of field collection personnel since the 1970s," to handle more than 100,000 collection cases in active inventory.

He continued: "In addition to our active inventory, we have over 1.5 million cases (more than 500,000 of which are considered high priority) awaiting assignment to these same 2,000 revenue officers. We have classified roughly 85 percent of those cases as high priority, many of which involve delinquent business employment taxes."

The lack of funding is also hampering criminal investigations.

"Much like other operating divisions in the IRS, CI is close to its lowest staffing level in the past 30 years. With fewer agents, we have fewer cases and fewer successful convictions," he stated in the written testimony.

Much of this also is compounded by the ancient IT infrastructure at the agency, another reason Rettig advocated during the hearing for more funding.

"Limited IT resources preclude us from building adequate solutions for efficiently matching or reconciling data from multiple sources," he wrote. "As a result, we are often left with manual processes to analyze reporting information we receive."

Retting specifically highlighted the Foreign Account Tax Compliance Act, which Congress enacted in 2010 but, according to Retting, has yet to appropriate the funding necessary for its implementation.

"This situation is compounded by the fact that when we do detect potential non-compliance or fraudulent behavior through manually generated FATCA reports, we seldom have sufficient funding to pursue the information and ensure proper compliance," he wrote. "We have an acute need for additional personnel with specialized training to follow cross-border money flows. They will help ensure tax compliance by improving our capacity to detect unreported accounts and income generated by those accounts, as well as the sources of assets in offshore accounts."

The IRS addressed the following common myths about tax refunds:

The IRS addressed the following common myths about tax refunds:

• Myth 1: Calling the IRS or visiting an IRS office speeds up a refund. The best way to check the status of a refund is online through the “Where’s My Refund?” tool. Taxpayers can also call the automated refund hotline at 800-829-1954.

• Myth 2: Taxpayers need to wait for their 2020 return to be processed before filing their 2021 return. Taxpayers generally will not need to wait for their 2020 return to be fully processed to file their 2021 tax returns. They should file when they are ready. Individuals with unprocessed 2020 tax returns, should enter zero dollars for last year's Adjusted Gross Income (AGI) on their 2021 tax return when filing electronically.

• Myth 3: Taxpayers can get a refund date by ordering a tax transcript. Ordering a tax transcript will not inform taxpayers of the timing of their tax refund, nor will it speed up a refund being processed. Taxpayers can use a transcript to validate past income and tax filing status for mortgage, student and small business loan applications and to help with tax preparation.

• Myth 4: "Where’s My Refund?" must be wrong because there is no deposit date yet. While the IRS issues most refunds in less than 21 days, it is possible a refund may take longer for a variety of reasons. Delays can be caused by simple errors including an incomplete return, transposed numbers, or when a tax return is affected by identity theft or fraud.

• Myth 5: "Where’s My Refund?" must be wrong because a refund amount is less than expected. Different factors can cause a tax refund to be larger or smaller than expected. The IRS will mail the taxpayer a letter of explanation if these adjustments are made.

• Myth 6: Calling a tax professional will provide a better refund date. Contacting a tax professional will not speed up a refund. Tax professionals cannot move up a refund date nor do they have access to any special information that will provide a more accurate refund date.

• Myth 7: Getting a refund this year means there is no need to adjust tax withholding for 2022. Taxpayers should continually check their withholding and adjust accordingly. Adjusting tax withholding with an employer is easy and using the Tax Withholding Estimator tool can help taxpayers determine if they are withholding the right amount from their paycheck.

As of the week ending April 1, the IRS has sent out more than 63 million refunds worth over $204 billion. The IRS reminded taxpayers the easiest way to check on a refund is the "Where’s My Refund?" tool. This tool can be used to check the status of a tax return within 24 hours after a taxpayer receives their e-file acceptance notification. Taxpayers should only call the IRS tax help hotline to talk to a representative if it has been more than 21 days since their tax return was e-filed, or more than six weeks since mailing their return.

Taxpayers who may need to take additional actions related to Qualified Opportunity Funds (QOFs) should begin receiving letters from the IRS in April. Taxpayers who attached Form 8996, Qualified Opportunity Fund, to their return may receive Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard. This letter lets them know that information needed to support the annual certification of investment standard is missing, invalid or the calculation isn’t supported by the amounts reported. If they intend to maintain their certification as a QOF, they may need to take additional action to meet the annual self-certification of the investment standard requirement.

Taxpayers who may need to take additional actions related to Qualified Opportunity Funds (QOFs) should begin receiving letters from the IRS in April. Taxpayers who attached Form 8996, Qualified Opportunity Fund, to their return may receive Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard. This letter lets them know that information needed to support the annual certification of investment standard is missing, invalid or the calculation isn’t supported by the amounts reported. If they intend to maintain their certification as a QOF, they may need to take additional action to meet the annual self-certification of the investment standard requirement.

To correct the annual maintenance certification of the investment standard, taxpayers should file an amended return or an administrative adjustment request (AAR). If an entity that receives the letter fails to act, the IRS may refer its tax account for examination. Additionally, taxpayers may receive Letter 6502, Reporting Qualified Opportunity Fund (QOF) Investments, or Letter 6503, Annual Reporting Of Qualified Opportunity Fund (QOF) Investments. These letters notify them that they may not have properly followed the instructions for Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments. This may happen if it appears that they may not have properly followed the requirements to maintain their qualifying investment in a QOF with the filing of the form.

Finally, if these taxpayers intend to maintain a qualifying investment in a QOF, they can file an amended return or an AAR with a properly completed Form 8997 attached. Failure to act will mean those who received the letter may not have a qualifying investment in a QOF and the IRS may refer their tax accounts for examination.

The IRS informed taxpayers that it will send Notices CP2100 and CP2100A notices to financial institutions, businesses, or payers who filed certain types of information returns that do not match IRS records, beginning mid-April 2022.

The IRS informed taxpayers that it will send Notices CP2100 and CP2100A notices to financial institutions, businesses, or payers who filed certain types of information returns that do not match IRS records, beginning mid-April 2022. These information returns include:

• Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
• Form 1099-DIV, Dividends and Distributions
• Form 1099-G, Certain Government Payments
• Form 1099-INT, Interest Income
• Form 1099-K, Payment Card and Third-Party Network Transactions
• Form 1099-MISC, Miscellaneous Income
• Form 1099-NEC, Nonemployee Compensation
• Form 1099-OID, Original Issue Discount
• Form 1099-PATR, Taxable Distributions Received from Cooperatives
• Form W-2G, Certain Gambling Winnings

These notices inform payers that the information return is missing a Taxpayer Identification Number (TIN), has an incorrect name or a combination of both. Each notice has a list of payees or the persons receiving certain types of income payments with identified TIN issues. Taxpayers need to compare the accounts listed on the notice with their account records and correct or update their records, if necessary. This can also include correcting backup withholding on payments made to payees. The notices also inform payers that they are responsible for backup withholding. Payments reported on these information returns are subject to backup withholding if:

• The payer does not have the payee’s TIN when making the reportable payments.
• The payee does not certify their TIN as required for reportable interest, dividend, broker and barter exchange accounts.
• The IRS notifies the payer that the payee furnished an incorrect TIN and the payee does not certify its TIN as required.
• The IRS notifies the payer to begin backup withholding because the payee did not report all of its interest and dividends on its tax return.

The IRS has reminded taxpayers to take extra precautions to file accurate tax returns electronically to speed refunds as the agency begins the 2022 tax filing season. The IRS is now accepting and processing 2021 tax returns.

The IRS has reminded taxpayers to take extra precautions to file accurate tax returns electronically to speed refunds as the agency begins the 2022 tax filing season. The IRS is now accepting and processing 2021 tax returns. Over 160 million individual tax returns for the 2021 tax year are expected to be filed. Most taxpayers face an April 18, 2022, deadline due to the Emancipation Day holiday in Washington, D.C. falling on April 15. Taxpayers in Maine and Massachusetts will have an April 19 deadline due to Patriots Day. Disaster victims in some locations will have later filing deadlines. As several critical tax law changes took place in 2021, IRS Commissioner Chuck Rettig noted that taxpayers must take special care this year. He stated that taxpayers should file electronically as filing a paper tax return this year will mean an extended refund delay. Further, Rettig stated that the IRS will work hard to catch up on past tax returns affected by the pandemic and deliver refunds quickly.

Most taxpayers who file a return with no issues will receive their refund within 21 days of when they file electronically if they choose direct deposit. Additionally, the IRS has issued the following tips for a smooth filing season:

• Taxpayers should file electronically with direct deposit and avoid a paper tax return to avoid refund delays. Taxpayers may also use Free File on IRS.gov.

• Taxpayers must file an accurate return to avoid processing delays, extensive refund delays, and later IRS notices.

• Taxpayers who received a third Economic Impact Payment or advance Child Tax Credit (CTC) in 2021 should ensure that they enter these amounts correctly on the tax return. The IRS will need to further review the tax return in case of incorrect entries. The IRS is mailing special letters about stimulus payments and advance CTC payment amounts to help taxpayers. Taxpayers can check the amount of their payments in their Online Account available on IRS.gov.

• By law, the IRS cannot issue a refund involving Earned Income Tax Credit or Additional CTC before mid-February. Eligible taxpayers may file their returns beginning on January 24.

• The IRS has urged taxpayers to use online resources for help and avoid phone delays. Taxpayers should check IRS.gov for refund information and answers to tax questions. Taxpayers can also get information quickly by establishing an Online Account on IRS.gov.

• Individuals who do not normally file a return and did not file a 2020 return should file a 2021 return to receive the credits for which they are eligible. These credits include the Recovery Rebate Credit, advance CTC or the Earned Income Tax Credit.

• Taxpayers should use IRS.gov to get answers to tax questions, check refund status, and pay taxes. Online tools and resources are available 24 hours a day.

• IRS Free File is available to any individual or family who earned $73,000 or less in 2021. One-on-one tax preparation help around the nation is available for qualified taxpayers through the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs.

• Taxpayers whose tax returns from 2020 have not yet been processed can still file their 2021 tax returns. These taxpayers, if filing electronically, need their Adjusted Gross Income (AGI) from their most recent tax return. Taxpayers who are waiting on their 2020 tax return to be processed should enter zero dollars for last year’s AGI on their 2021 tax return.

• The filing deadline is April 18 for most taxpayers. Automatic six-month extensions of time to file are available for anyone by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

The Internal Revenue Service is halting its plans for widespread implementation of a system that would have required taxpayers to use facial recognition and authentication to access services on the agency’s website.

The Internal Revenue Service is halting its plans for widespread implementation of a system that would have required taxpayers to use facial recognition and authentication to access services on the agency’s website.

In a February 7 statement released by the IRS, the agency said "it will transition away from using a third-party service for facial recognition to help authenticate people creating new accounts. The transition will occur over the coming weeks in order to prevent larger disruptions to taxpayers during the filing season."

The agency added that it will be adding new authentication processes that do not involve facial recognition to help protect taxpayer data while ensuring broad access to online tools.

The IRS action comes on the heels of three separate congressional inquiries into its contract with ID.me to provide facial recognition and authentication services, which was announced in November 2021, with widespread implementation planned for the summer of 2022.

The first was a February 3 letter signed by all Republican members of the of the Senate Finance Committee, led by Ranking Member Mike Crapo of Idaho.

On February 7, a letter was sent by Finance Committee Chairman Ron Wyden (D-Ore.).

A separate letter dated February 7 was signed by four Democratic members from the House of Representatives: Ted Lieu (Calif.), Yvette Clarke (N.Y.), Pramila Jaypal (Wash.), and Anna Eshoo (Calif.).

Both the Senate Finance GOP and House Democrat inquiries cited the fact that databases comprised of facial recognition data are prime targets for cyberattacks and noted examples of where cyberattacks were successful in exposing data in both the public and private sectors.

The House Democrat’s letter, as well as Wyden’s letter, also noted some problems with facial recognition that disproportionately affect people of color. House Democrats also stated that the plan could prevent people without access to broadband technologies from accessing things like earned income tax credits because they are unable to provide the data needed for facial recognition and authentication.

Wyden and his GOP counterparts on the Finance Committee also raised civil liberties and privacy concerns with using facial recognition.

Only the Democrats requested a halt to the program.

The IRS released the optional standard mileage rates for 2022. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,

• medical, and

• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

The IRS released the optional standard mileage rates for 2022. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,

• medical, and

• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

2022 Standard Mileage Rates

The standard mileage rates for 2022 are:

• 58.5 cents per mile for business uses;

• 18 cents per mile for medical uses; and

• 14 cents per mile for charitable uses.

Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.

FAVR Allowance for 2022

For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2021 is:

• $56,100 for passenger automobiles, and

• $56,100 for trucks and vans.

Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.

2022 Mileage Rate for Moving Expenses

The standard mileage rate for the moving expense deduction is 18 cents per mile. To claim this deduction, the taxpayer must be:

• a member of the Armed Forces of the United States,

• on active military duty, and

• moving under a military order and incident to a permanent change of station

The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.

Unreimbursed Employee Travel Expenses

For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:

• members of a reserve component of the U.S. Armed Forces,

• state or local government officials paid on a fee basis, and

• performing artists with relatively low incomes.

Notice 2021-2, I.R.B. 2021-2, 478, is superseded.

The IRS has encouraged taxpayers to take important actions this month to help them file their tax returns in 2022, including special steps related to Economic Impact Payments and advance Child Tax Credit payments. As a part of a series of reminders to help taxpayers get ready for the upcoming tax filing season, the IRS highlighted a special page the outlines the steps taxpayers can take to make the tax filing season easier.

The IRS has encouraged taxpayers to take important actions this month to help them file their tax returns in 2022, including special steps related to Economic Impact Payments and advance Child Tax Credit payments. As a part of a series of reminders to help taxpayers get ready for the upcoming tax filing season, the IRS highlighted a special page the outlines the steps taxpayers can take to make the tax filing season easier.

Advance Child Tax Credit Payments

The IRS advised families who received advance payments to compare the advance Child Tax Credit payments that they received in 2021 with the amount of the Child Tax Credit that they can properly claim on their 2021 tax return. Taxpayers who received less than the amount for which they're eligible can claim a credit for the remaining amount of Child Tax Credit on their 2021 tax return. Similarly, taxpayers who received more than the amount for which they're eligible may need to repay some or all of the excess payment when they file. Additionally, eligible families who did not get monthly advance payments in 2021 can still get a lump-sum payment by claiming the Child Tax Credit when they file a 2021 federal income tax return next year. This includes families who don’t normally need to file a return.

The IRS announced that it would send Letter 6419 in January 2022 with the total amount of advance Child Tax Credit payments taxpayers received in 2021. Taxpayers should keep this and any other IRS letters about advance Child Tax Credit payments with their tax records.

Economic Impact Payments and Recovery Rebate Credit

Individuals who failed to qualify for the third Economic Impact Payment (EIP) or did not receive the full amount may be eligible for the Recovery Rebate Credit based on their 2021 tax information. Accordingly, these individuals will need to file a 2021 tax return, even if they do not usually file, to claim the credit. Further, individuals will also need the amount of their third EIP and any Plus-Up Payments received to calculate their correct 2021 Recovery Rebate Credit amount when they file their tax return.

Charitable Deduction Changes

Finally, taxpayers who do not itemize deductions may qualify to take a charitable deduction of up to $600 for married taxpayers filing joint returns and up to $300 for all other filers for cash contributions made in 2021 to qualifying organizations.

The IRS has extended the availability of electronic signatures on certain audit and non-audit forms. Through October 31, 2023, taxpayers and their authorized representatives may electronically sign documents and email documents to the IRS. This is an exception to normal policy. Previously, the IRS had allowed e-signatures through the end of 2021.

The IRS has extended the availability of electronic signatures on certain audit and non-audit forms. Through October 31, 2023, taxpayers and their authorized representatives may electronically sign documents and email documents to the IRS. This is an exception to normal policy. Previously, the IRS had allowed e-signatures through the end of 2021.

Audit or Collection

The Service will accept e-signatures during audit or collection for:

• extensions of statute of limitations on an assessment or collection;

• waivers of statutory notice of deficiency and consents to an assessment;

• closing agreements; and

• other statements or forms collected outside standard filing procedures.

The IRS accepts two types of electronic signatures during an audit or collection interaction (1) digital signatures, and (2) imaged signatures. Regarding imaging signatures, taxpayers that do not have a digital certificate may hand sign a document, and then scan or photograph the document and save it in a standard picture format such as JPEG, TIFF or PDF.

Other Forms That Can Be Electronically Signed

Electronic signatures are also allowed through October 31, 2023 for the following forms and purposes:

• Form 11-C, Occupational Tax and Registration Return for Wagering;

• Form 637, Application for Registration (For Certain Excise Tax Activities);

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 706-A, U.S. Additional Estate Tax Return;

• Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions;

• Form 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust;

• Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations;

• Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts;

• Form 706 Schedule R-1, Generation Skipping Transfer Tax;

• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;

• Form 730, Monthly Tax Return for Wagers;

• Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons;

• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;

• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;

• Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation;

• Form 1120-H, U.S. Income Tax Return for Homeowners Associations;

• Form 1120-IC DISC, Interest Charge Domestic International Sales – Corporation Return;

• Form 1120-L, U.S. Life Insurance Company Income Tax Return;

• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;

• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;

• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;

• Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;

• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);

• Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;

• Form 1128, Application to Adopt, Change or Retain a Tax Year;

• Form 2678, Employer/Payer Appointment of Agent;

• Form 3115, Application for Change in Accounting Method;

• Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts;

• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner;

• Form 4421, Declaration – Executor’s Commissions and Attorney’s Fees;

• Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;

• Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues;

• Form 8038-G, Information Return for Tax-Exempt Governmental Bonds;

• Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales;

• Form 8283, Noncash Charitable Contributions;

• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms;

• Form 8802, Application for U.S. Residency Certification;

• Form 8832, Entity Classification Election;

• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent;

• Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement; and

• Elections made pursuant to Code Sec. 83(b).

The IRS has issued guidance for employers on the retroactive termination of the COVID-19 employee retention credit against the employer's share of Medicare tax. The Infrastructure Investment and Jobs Act (P.L. 117-58) amended Code Sec. 3134 so that for most employers the credit applies only to wages paid before October 1, 2021. If the employer is a recovery startup business, the credit continues to apply to wages paid before January 1, 2022.

The IRS has issued guidance for employers on the retroactive termination of the COVID-19 employee retention credit against the employer's share of Medicare tax. The Infrastructure Investment and Jobs Act (P.L. 117-58) amended Code Sec. 3134 so that for most employers the credit applies only to wages paid before October 1, 2021. If the employer is a recovery startup business, the credit continues to apply to wages paid before January 1, 2022.

The guidance applies to employers that:

• paid wages after September 30, 2021,

• either received an advance payment of the credit for those wages, or reduced employment tax deposits in anticipation of the credit for the fourth quarter of 2021, but

• are ineligible for the credit due to the change in the law.

Advance Payments

Employers that are not recovery startup businesses but received advance payments of the employee retention credit for fourth quarter wages of 2021 can avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns. Failure to repay the advance payment by the due date may result in the IRS imposing failure to pay penalties.

Reduced Employment Tax Deposits

Employers that reduced deposits on or before December 20, 2021, for wages paid during the fourth calendar quarter of 2021 in anticipation of the employee retention credit but are not recovery startup businesses will not be subject to a failure to deposit penalty for the retained deposits if they:

• reduced deposits in anticipation of the credit, consistent with the rules in Notice 2021-24;

• deposit the amounts initially retained in anticipation of the credit on or before the relevant due date for wages paid on December 31, 2021, regardless of whether the employer actually pays wages on that date; and

• report the tax liability resulting from the termination of the credit on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021.

Failure to Deposit Penalty Waiver

Due to the termination of the employee retention credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses, the IRS will not waive failure to deposit penalties for employers that reduce deposits in anticipation of the employee retention credit after December 20, 2021.

Reasonable Cause Relief

Employers that do not qualify for relief under this guidance can reply to an IRS penalty notice with an explanation. The IRS will consider reasonable cause relief.

Effect on Other Documents

This guidance modifies Notice 2021-49, IRB 2021-34, 316, and Notice 2021-24, IRB 2021-18, 1122.

The IRS has released the annual inflation adjustments for 2022 for the income tax rate tables, plus more than 56 other tax provisions.

The IRS has released the annual inflation adjustments for 2022 for the income tax rate tables, plus more than 56 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2022 Income Tax Brackets
For 2022, the highest income tax bracket of 37 percent applies when taxable income hits:

• $647,850 for married individuals filing jointly and surviving spouses,
• $539,900 for single individuals and heads of households,
• $323,925 for married individuals filing separately, and
• $13,450 for estates and trusts.

2022 Standard Deduction
The standard deduction for 2022 is:

• $25,900 for married individuals filing jointly and surviving spouses,
• $19,400 for heads of households, and
• $12,950 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,150 or
• the sum of $400, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,400 for married taxpayers and surviving spouses, or
• $1,750 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2022
The AMT exemption for 2022 is:

• $118,100 for married individuals filing jointly and surviving spouses,
• $75,900 for single individuals and heads of households,
• $59,050 for married individuals filing separately, and
• $26,500 for estates and trusts.

The exemption amounts phase out in 2022 when AMTI exceeds:

• $1,079,800 for married individuals filing jointly and surviving spouses,
• $539,900 for single individuals, heads of households, and married individuals filing separately, and
• $88,300 for estates and trusts.

Expensing Code Sec. 179 Property in 2022
For tax years beginning in 2022, taxpayers can expense up to $1,080,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $2,700,000.

Estate and Gift Tax Adjustments for 2022
The following inflation adjustments apply to federal estate and gift taxes in 2022:

• the gift tax exclusion is $16,000 per donee, or $164,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $12,060,000; and
• the maximum reduction for real property under the special valuation method is $1,230,000.

2022 Inflation Adjustments for Other Tax Items
The maximum foreign earned income exclusion amount in 2022 is $112,000.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• lifetime learning credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2022 Adjustments
These inflation adjustments generally apply to tax years beginning in 2022, so they affect most returns that will be filed in 2023. However, some specified figures apply to transactions or events in calendar year 2022.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2022 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2022 cost-of-living adjustments (COLAs) were released for:

• pension plan dollar limitations, and
• other retirement-related provisions.

Highlights of Changes for 2022
The contribution limit has increased from $19,500 to $20,500 for employees who take part in:

• 401(k),
• 403(b),
• most 457 plans, and
• the federal government’s Thrift Savings Plan.

The catch-up contribution limit for employees aged 50 and over in the plans above remains $6,500.

The annual limit on contributions to an IRA remains unchanged at $6,000. The $1,000 IRA catch-up contribution amount is not subject to inflation adjustments.

The income ranges increased for determining eligibility to make deductible contributions to:

• IRAs,
• Roth IRAs, and
• to claim the Saver's Credit.

Phase-Out Ranges
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase out depends on the taxpayer's filing status and income.

• Single taxpayers covered by a workplace retirement plan, the phase-out range is $68,000 and $78,000, increased from between $66,000 and $76,000.
• Joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $109,000 and $129,000, increased from between $105,000 and $125,000.
• An IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $204,000 and $214,000, increased from between $198,000 and $208,000.
• For a married individual filing a separate return who is covered by a workplace plan, the phase-out range remains $0 to $10,000.
• The phase-out ranges for Roth IRA contributions are:
• $129,000 to $144,000, for singles and heads of household,
• $204,000 to $214,000, for joint filers, and
• $0 to $10,000 for married separate filers.

Finally, the income limit for the Saver' Credit is:

• $68,000 for joint filers,
• $51,000 for heads of household, and
• $34,000 for singles and married filing separately.

The IRS has urged taxpayers, including ones who received stimulus payments or advance Child Tax Credit payments, to follow some easy steps for accurate federal tax returns filing in 2022.

The IRS has urged taxpayers, including ones who received stimulus payments or advance Child Tax Credit payments, to follow some easy steps for accurate federal tax returns filing in 2022.

Organized tax records
Taxpayers can easily prepare complete and accurate tax returns with the help of organized tax records. Organized tax records also help avoid errors that lead to processing and refund delays. Taxpayers must have all tax information available before filing their tax returns. Taxpayers must inform the IRS of any address changes and the Social Security Administration of a legal name change.

Recordkeeping for individuals includes the following:

• Forms W-2 from employer(s),
• Forms 1099 from banks, issuing agencies and other payers, including unemployment compensation, dividends, distributions from a pension, annuity or retirement plan,
• Form 1099-K, 1099-MISC, W-2 or other income statement for workers in the gig economy,
• Form 1099-INT for interest received, and
• other income documents and records of virtual currency transactions.

Individuals can determine if they are eligible for deductions or credits with the help of income documents. Further, taxpayers will need their related 2021 information to reconcile their advance payments of the Child Tax Credit and Premium Tax Credit. People will also need their stimulus payment and plus-up amounts to figure and claim the 2021 Recovery Rebate Credit if they received third Economic Impact Payments and think they qualify for an additional amount.

Further, taxpayers must secure the end of year documents, including the following:

• Letter 6419, 2021 Total Advance Child Tax Credit Payments, to reconcile advance Child Tax Credit payments,
• Letter 6475, Your 2021 Economic Impact Payment, to determine eligibility to claim the Recovery Rebate Credit, and
• Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage.

Online Account
Taxpayers can securely gain entry to the Child Tax Credit Update Portal to see their payment dates and amounts through their Online Account. This information will be required to reconcile taxpayers’ advance Child Tax Credit payments with the Child Tax Credit they can claim when filing their 2021 tax returns.

Eligible individuals claiming a 2021 Recovery Rebate Credit can view their Economic Impact Payment amounts in their online account to accurately claim the credit when they file.

Those who have an Online Account may:

• see the amounts of their Economic Impact Payments,
• access Child Tax Credit Update Portal for information regarding their advance Child Tax Credit payments,
• approve or reject authorization requests from their tax professional, and
• update their email address and opt-out/in for selected paper notice preferences.

Tax Withholding
The IRS has informed that individuals may want to consider adjusting their withholding if they owed taxes or received a large refund the previous year. Individuals can help avoid a tax bill or let individuals keep more money every payday by changing withholding. Some reasons for adjusting withholding might be marriage or divorce, childbirth or taking on a second job. Taxpayers may complete a new Form W-4, Employee’s Withholding Certificate, every year and when personal or financial situations change.

Further, individuals should make quarterly estimated tax payments if they receive a substantial amount of non-wage income like self-employment income, investment income, taxable Social Security benefits and in some instances, pension and annuity income. The due date for 2021 is January 18, 2022.

ITINs
An Individual Taxpayer Identification Number (ITIN) will expire on December 31, 2021 if it was not included on a U.S. federal tax return at least once for tax years 2018, 2019 and 2020. The IRS has reminded taxpayers that ITINs with middle digits 70 through 88 have expired. Further, ITINs with middle digits 90 through 99, IF assigned before 2013, have expired. Individuals are not required to renew again if they previously submitted a renewal application that was approved.

Direct Deposit
Individuals can access their refund faster than a paper check with the help of direct deposit. Taxpayers without a bank account can learn how to open an account at an FDIC-Insured bank or through the National Credit Union Locator Tool. Veterans can visit the Veterans Benefits Banking Program to access financial services at participating banks.

IRS Certified Volunteers
The IRS has encouraged people to join the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs to prepare a free tax return for eligible taxpayers.

For 2022, the Social Security wage cap will be $147,000, and Social Security and Supplemental Security Income (SSI) benefits will increase by 5.9 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2022, the Social Security wage cap will be $147,000, and Social Security and Supplemental Security Income (SSI) benefits will increase by 5.9 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax
The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2022, the wage base is $147,000. Thus, OASDI tax applies only to the taxpayer’s first $147,000 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $147,000.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2022
For workers who earn $147,000 or more in 2022:

• an employee will pay a total of $9,114 in social security tax ($147,000 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $18,228 in social security tax ($147,000 x 12.4 percent).

Additional Medicare Tax
Higher-income workers may have to pay an additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the additional Medicare tax.

Benefit Increase for 2022
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2022 by 5.9 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The IRS has announced that it intends to defer until 2023 the applicability of certain final regulations under Code Sec. 1446(a) and (f) relating to withholding of tax on foreign partners’ share of effectively connected income.

Withholding Provisions on Transfers of Interests in Publicly Traded Partnerships Deferred
The amendments will defer the applicability date to January 1, 2023, for certain provisions relating to (1) withholding under Code Sec. 1446(f) on transfers of interests in publicly traded partnerships ( "PTP interests"); (2) withholding under Code Sec. 1446(a) on distributions made with respect to PTP interests; and (3) withholding under Code Sec. 1446(f)(4) by partnerships on distributions to transferees.

Code Sec. 864(c)(8) generally provides that gain or loss derived by a foreign person on the sale or exchange of an interest in a partnership engaged in a U.S. trade or business is treated as effectively connected gain or loss and, therefore, is subject to U.S. tax. Code Sec. 1446(f)(1) generally requires a transferee of an interest in a partnership to withhold 10 percent of the amount realized if any portion of the gain on the disposition would be treated under Code Sec. 864(c)(8) as effectively connected with the conduct of a trade or business within the United States. Code Sec. 1446(f)(4) provides that if a transferee fails to withhold on the disposition as required under Code Sec. 1446(f)(1), the partnership must withhold on distributions to the transferee.

Taxpayers May Rely on Deferral Prior to Amendments
The final foreign partner withholding regulations were published on November 30, 2020, in T.D. 9926, I.R.B. 2020-51, 1602, and the provisions whose applicability dates the amendments will defer generally would have applied to transfers and distributions that occur on or after January 1, 2022. Taxpayers may rely on the deferrals announced in the notice prior to amendments being issued.

Lawmakers continue to debate comprehensive tax reform, aiming for a package to clear Congress and be signed into law by the President before summer. At the same time a “mini” tax reform package in an Affordable Care Act (ACA) repeal and replacement plan appears to have stalled in Congress.

Lawmakers continue to debate comprehensive tax reform, aiming for a package to clear Congress and be signed into law by the President before summer. At the same time a “mini” tax reform package in an Affordable Care Act (ACA) repeal and replacement plan appears to have stalled in Congress.

Tax reform

Tax reform for individuals and businesses is being driven by two proposals: ones made by President Trump during the campaign last year and ones set out by the House GOP (known as the GOP blueprint). In many areas, the two find common ground, including consolidation and a reduction in the income tax rates for individuals, a cut in the corporate tax rate, elimination of the federal estate tax, and abolishment of the alternative minimum tax (AMT). President Trump has also called for new tax incentives for child and elder care.

The chief tax writer in the House, Rep. Kevin Brady, R-Texas, has predicted that a comprehensive tax reform package will pass the House before summer. The top tax writer in the Senate, Orrin Hatch, R-Utah, has indicated that the Senate Finance Committee, which he chairs, is likely to develop its own tax proposals. Senate Majority Leader Mitch McConnell, R-Ky., has said that the pace of tax reform in the Senate will depend on the make-up of the House’s tax package.

Closely-related to tax reform is infrastructure spending. In January, President Trump called on Congress to support a $1 trillion spending initiative for highways, bridges, and other developments. White House officials indicated that tax credits of some type would be part of the proposal. In March, a senior GOP lawmaker indicated that infrastructure spending could be part of a federal aviation bill this year. Infrastructure spending is an area where there may be bipartisan support.

Health care

At the eleventh hour, House republicans pulled their ACA repeal and replacement plan (the American Health Care Act (ACHA)) from the House floor. The ACHA would have repealed the ACA’s tax measures including the,

• Net investment income (NII) tax
• Additional Medicare tax
• Excise tax on certain medical devices
• Excise tax on tanning services

The excise tax on high-dollar health insurance plans (also known as the “Cadillac plan” tax) would have been delayed. The medical expense deduction would have been returned to its pre-ACA parameters. In place of the premium assistance tax credit, the ACHA would have provided a new tax credit generally based on an individual’s age.

For now, ACA repeal and replacement appears to have been moved to the back burner in the House. The statute remains in place. There could, however, be some changes to regulations under the ACA.

If you have any questions about tax reform, health care reform or any federal legislative developments, please contact our office.

In a case that provides a lesson to anyone donating property to charity for which a deduction of more than $500 is claimed – get proof in writing and get it at the time you donate the property. After-the-fact substantiation, no matter how convincing, is not acceptable under the tax law to support a deduction.

In a case that provides a lesson to anyone donating property to charity for which a deduction of more than $500 is claimed – get proof in writing and get it at the time you donate the property. After-the-fact substantiation, no matter how convincing, is not acceptable under the tax law to support a deduction.

Case in point: The Tax Court, in Izen, Jr. v. Commissioner, 148 TC No. 5, found that a failure to follow the substantiation rules for donation of an aircraft precluded a taxpayer from claiming a deductions. The taxpayer’s evidence of donation did not satisfy the substantiation requirements, which are heightened for donations of vehicles, including aircrafts.

The taxpayer was assessed a deficiency on his federal income tax return for the year at issue. He then filed an amended return on which he claimed that he had donated a 50 percent interest in an aircraft to a tax-exempt historical society. His interest in the plane was appraised at $340,000, and he claimed a charitable contribution deduction in that amount.

The Tax Court observed that under Code Sec. 170(f)(12), contributions of used vehicles, including airplanes, whose claimed value exceeds $500, must satisfy special substantiation requirements. A taxpayer must obtain a contemporaneous written acknowledgment and include the acknowledgment with his or her return. Further, if the donee has not sold the vehicle or aircraft, the donee must certify the intended use or improvement to the property, among other requirements. Additionally, the donee must provide the IRS with a copy of the acknowledgment. The IRS developed Form 1098-C for this purpose.

The court found that the taxpayer did not include the requisite copy of Form 1098-C with his amended return, nor did the IRS receive the form from the historical society related to the taxpayer’s donation of the aircraft.

Although the taxpayer did include a copy of a letter to the IRS that was from the historical society thanking him for the donation, the court found that the letter failed to satisfy the contemporaneous written acknowledgement requirements. The letter failed to include the name and taxpayer identification number of the donor, among other items.

The court also rejected the taxpayer’s purported deed of a gift as satisfying the contemporaneous written acknowledgment requirement. The “aircraft donation agreement” did not meet the statutory requirements for a contemporaneous written acknowledgment. Like the letter, the deed failed to include the taxpayer identification number of the donor. The deed also did not include a certification of intended use.

Starting a new business venture can prove exciting, but rather costly. There are certain tax advantages that can help alleviate some of the financial burden associated with entrepreneurship.

Starting a new business venture can prove exciting, but rather costly. There are certain tax advantages that can help alleviate some of the financial burden associated with entrepreneurship.

A taxpayer may start a business by forming an entirely new business or acquiring an existing business. One of the most important decisions a business owner should make is to choose a type of business entity. If the business is entirely new, the taxpayer will be able to choose the type of entity from inception; however, if the taxpayer purchases an entity that differs from the entity of choice, the taxpayer must convert the purchased entity to the entity of choice. Be aware that each type of entity—be it sole proprietorship, corporation, or partnership—comes with its own advantages and disadvantages.

Regardless of the type of business entity that a taxpayer decides on for his or her new business, a portion of the start-up costs may be deducted, with amortization available for the remainder. Start-up costs are those incurred in investigating or creating an active trade or business before the day on which the active trade or business begins. Further, expenses paid or incurred before a business commences operations are start-up costs. Such costs do not include interest, taxes or research, nor do they include experimental expenditures. In addition, the cost must be one that would have been deductible if incurred in connection with an existing business in the same field.

Eligible start-up costs fall within three categories: investigatory, business start-up, and pre-opening costs. Start-up expenses include:

• Advertising costs;
• Training costs;
• Travel expenses incurred in lining up distributors, suppliers, or customers; and
• Fees incurred for executives, consultants, and similar professional services.

Start-up expenses do not include: 

• Acquisition costs;
• Amounts paid for the purchase of property;
• Organizational costs; or
• Deductible ordinary and necessary business expenses paid or incurred in connection with an expansion of a business.

A taxpayer beginning a new business can take a first-year deduction on the first $5,000 of start-up costs. Note that for tax years beginning in 2010, the deduction is $10,000. The $5,000 deduction is reduced dollar-for-dollar to the extent start-up expenses exceed $50,000. Any excess amount must be amortized over a 180-month period. For start-up expenses incurred in 2010, the deduction is limited to $10,000, and are reduced to the extent that expenses exceed $60,000.

Partnerships and corporations are deemed to have made an election to deduct start-up expenditures for the tax year in which the business begins an active trade or business. Such business entities may choose to forgo the deemed election by affirmatively electing to capitalize its start-up expenditures on a timely filed federal income tax return for the tax year in which an active trade or business begins.

To ensure you are maximizing the start-up related deduction for a new business, it is important to consider each cost incurred. If you would like assistance in determining the costs that qualify for the start-up cost deduction, please call our office at your earliest convenience to arrange an appointment.

Miscellaneous itemized deductions are certain nonbusiness expenses that individuals as taxpayers who otherwise itemize deductions may take against their taxable income. Such miscellaneous expenses are allowed only to the extent that they exceed 2-percent of a taxpayer’s adjusted gross income. Miscellaneous itemized deductions may also be limited by the overall itemized deduction phase-out.

Miscellaneous itemized deductions are certain nonbusiness expenses that individuals as taxpayers who otherwise itemize deductions may take against their taxable income. Such miscellaneous expenses are allowed only to the extent that they exceed 2-percent of a taxpayer’s adjusted gross income. Miscellaneous itemized deductions may also be limited by the overall itemized deduction phase-out.

These expenses include employee business expenses, expenses of producing income, expenses related to filing tax returns and certain hobby expenses. Specifically, the miscellaneous itemized deductions available to a taxpayer are:

• Professional society dues;
• Employment-related educational expenses;
• Home office expenses;
• Professional books, magazines and journals;
• Work clothes and uniforms;
• Union dues and fees
• A portion of unreimbursed business-related meal and entertainment expenses;
• Other unreimbursed employee business expenses;
• Employee expenses for which reimbursements are included in income;
• Rental of a safe-deposit box;
• Expenses incurred for tax counsel and assistance;
• Costs of work-related small tools and supplies;
• Investment expenses;
• Fees paid to an IRA custodian; and
• Certain expenses of a partnership, grantor trust or S corporation that are incurred for the production of income.

Additionally, there are some miscellaneous expenses that are not subject to the 2-percent of adjusted gross income limitation. These include:

• Bond premium amortization for taxable bonds;
• Gambling losses for the year up to the extent of gambling winnings;
• Casualty and theft losses associated with income-producing assets; and
• Federal estate tax on income in respect of a decedent.

There are many miscellaneous deductions and a number of very specific rules that may apply to any one. Please contact this office if you have questions about claiming the miscellaneous deductions and how they will affect your tax picture.

As the new administration and Congress get to work, tax reform is high on the agenda. Although legislative language has not been yet released, statements from tax writers in Congress shed some light on various proposals.

As the new administration and Congress get to work, tax reform is high on the agenda. Although legislative language has not been yet released, statements from tax writers in Congress shed some light on various proposals.

Tax reform

House Ways and Means Chair Kevin Brady, R-Texas, has predicted that tax reform will lower the tax rates for all businesses. "We are proposing a corporate rate of 20 percent and for small businesses, a top rate of no more than 25 percent," Brady said in February. As for the timeline of tax reform, Brady said that tax reform legislation will be unveiled in the "coming months," but "repeal and replacement of the Affordable Care Act (ACA) comes first.”

Senate Finance Committee Chair Orrin Hatch, R-Utah, has said that the Senate will work through its own tax reform process. "No one should expect the Senate to simply take up and pass a House tax reform bill," Hatch said in February. Hatch added that Senate tax writers are in the early stages of drafting a tax reform proposal. Hatch did not provide details of the proposal but said that House and Senate Republicans generally agree on basic principles, such as lower tax rates for individuals and businesses.

One area of potential friction is the House GOP’s so-called “border adjustability” proposal. Hatch has questioned if the border adjustment proposal, essentially taxing imports but not U.S. exports, is “in line with international trade obligations” and if “adjustments would need to be made to prevent shifting a tax burden onto specific industries.”

Democrats, although in agreement the tax code is in need of reform, have been critical of Republicans’ proposed solutions as appearing to focus on tax cuts for the wealthy. "They (Republicans) are for trickle-down economics…giving tax breaks to the wealthy, it trickles down and if somebody gets a job, that’s great, if they don’t, so be it,” House Minority Leader Nancy Pelosi, D-Calif., said in February. "You don’t receive economic security by tossing the rich even more tax breaks," she added.

Affordable Care Act

The Affordable Care Act (ACA) included a host of tax-related provisions. The ACA created the net investment income (NII) tax, the additional Medicare Tax, an excise tax on certain medical devices, and more. The ACA also imposes shared responsibility requirements on individuals and employers (known as the individual and employer mandates). Although President Trump and Republicans in Congress have called for repeal and replacement of the ACA, it is not clear at this time if repeal includes the ACA’s tax provisions. In February, Hatch said that all of the ACA’s taxes “need to go.”

The timeline for Congressional action on the ACA is expected to be known in March. GOP leaders in Congress have said that they will unveil an ACA repeal and replacement measure in March.

Pelosi said in February that Democrats have still not seen a repeal and replacement plan for the ACA. "They're supposed to have their plan to repeal the Affordable Care Act. We have not seen hide nor hair," Pelosi said. According to Pelosi, the GOP’s chosen route of reforming the healthcare law is a difficult endeavor "You have to know how to legislate," she said.

If you have any questions about tax reform, please contact our office.

The filing season is the most active time of the year for tax scams. These scams take every shape and form, ranging from telephone calls to individuals to sophisticated schemes targeting employers and businesses. The goal of all these scams is identity theft. Using legitimate identities of unsuspecting individuals allows criminals to file fraudulent returns and claim bogus refunds.

The filing season is the most active time of the year for tax scams. These scams take every shape and form, ranging from telephone calls to individuals to sophisticated schemes targeting employers and businesses. The goal of all these scams is identity theft. Using legitimate identities of unsuspecting individuals allows criminals to file fraudulent returns and claim bogus refunds.

Phone scams

Phone and email scams are among the most common scams. Every day, individuals receive calls and emails from criminals pretending to be IRS employees. Scammers often alter caller ID numbers to make it look like the IRS or another agency is calling. Criminals use IRS employee titles and fake badge numbers to appear legitimate. They may also use the victim’s name, address and other personal information to make the call sound official. The phone calls often threaten legal action or arrest if the taxpayers do not immediately make a payment, usually with a debit or gift card. Taxpayers receiving threatening telephone calls should hang up immediately. The IRS will never demand immediate payment using a specific payment method, such as a prepaid debit card, gift card or wire transfer. The IRS also will never threaten arrest.

Email scams

Email scams often ask recipients to provide personal and financial information in order “to verify” a tax obligation or claim a “refund.” The emails appear to be genuine communications from the IRS. Criminals create websites that appear legitimate in the hope that individuals will take the bait and provide money, passwords, Social Security numbers and other personal information. Scam emails also can infect a taxpayer’s computer with malware. The malware can give criminals access to the computer, laptop tablet, or other device, enabling them to access all sensitive files or track keyboard strokes, exposing login information. The IRS has repeatedly emphasized that it never initiates contact with taxpayers via email about a bill or refund. Taxpayers should delete these emails immediately.

Employers

Criminals are increasing disguising emails to make it appear as if the email is from a company or organization executive. Typically, this email is sent to an employee in the payroll or human resources departments, requesting a list of all employees and their Forms W-2, Wage and Tax Statement. This scam is sometimes referred to as business email compromise (BEC) or business email spoofing (BES). This scam targets all types of businesses: school districts, tribal casinos, chain restaurants, temporary staffing agencies, healthcare, and shipping and freight. Businesses that received the scam email last year also are reportedly receiving it again this year. The IRS has asked employers and businesses to forward these bogus emails to the agency at phishing@irs.gov.

Identity theft

The IRS is making progress in identifying and curbing tax-related identity theft, according to the Treasury Inspector General for Tax Administration (TIGTA). The IRS and tax professionals and the tax software community have joined together to better protect taxpayer information. The agency has upgraded its return processing identity theft filters and taken other behind the scenes measures to uncover fraudulent returns. All of these measures, TIGTA reported in February, have helped to deter tax-related identity theft but criminals continue to look for ways to trick taxpayers and the IRS.

Please contact our office if you have any questions about filing season tax scams.

The first step is to determine if you qualify for the federal fuel tax credit. The IRS has uncovered significant fraud associated with the fuel tax credit and is watching for fraudulent claims. The credit is not available to most taxpayers but only to qualified taxpayers, such as taxpayers engaged in farming. However, some ineligible taxpayers claim the credit in order to inflate their refunds. Fuel tax credit fraud can result in a penalty of $5,000.

The first step is to determine if you qualify for the federal fuel tax credit. The IRS has uncovered significant fraud associated with the fuel tax credit and is watching for fraudulent claims. The credit is not available to most taxpayers but only to qualified taxpayers, such as taxpayers engaged in farming. However, some ineligible taxpayers claim the credit in order to inflate their refunds. Fuel tax credit fraud can result in a penalty of $5,000.

Qualified taxpayers

The credit is available to qualified taxpayers for the amount of excise taxes included in the price of gasoline used on a farm for farming purposes, for other off-highway business use, by local transit systems, and by the operators of intercity, local or school buses  A special rule applies to diesel and aviation fuel.

Form 4136

Generally, eligible taxpayers may claim fuel taxes as a credit against income tax for the year in which the qualifying use occurred. A claim for credit is made on the taxpayer's income tax return and should be accompanied by Form 4136,"Credit for Federal Tax Paid on Fuels," which is used to compute the credit.

The credit may be claimed within three years after the due date for filing the return on which the credit may be claimed or within two years from the time the tax was paid, whichever is later. If the amount of the credit would be $1,000 or more for gasoline or for diesel and special motor fuels used during any of the first three quarters of the tax year ($200 for alcohol mixture), a taxpayer may elect to file a quarterly claim for refund.

Partnerships

A special rule applies to partnerships. Partnerships (other than electing large partnerships) cannot use Form 4136. Instead, they must include a statement on Schedule K-1 (Form 1065) showing the allocation to each partner specifying the number of gallons of each fuel used during the tax year, the applicable credit per gallon, the nontaxable use or sale, and any additional information required to be submitted.

Please contact our office if you have any questions about the federal fuel tax credit.

Tax-related identity theft spikes during the filing season. Many taxpayers discover for the first time that they are victims of identity theft when they receive a letter from the IRS.

Tax-related identity theft spikes during the filing season. Many taxpayers discover for the first time that they are victims of identity theft when they receive a letter from the IRS.

A taxpayer may receive a letter when the IRS stops suspicious tax returns that have indications of being identity theft but contains a real taxpayer’s name and/or Social Security number. Once the identity is verified, the taxpayers can confirm whether or not they filed the return in question. If they did not file the return, the IRS can take steps at that time to assist them

One communication that the IRS uses is Letter 5071C. This letter is mailed through the U.S. Postal Service to the address on the return. It asks the taxpayer to verify his or her identity in order for the IRS to complete processing of the return if the taxpayer did file it or reject the return if the taxpayer did not file it. The IRS will explain how taxpayers can contact the agency. The IRS has recommended that taxpayers should have available a copy of the letter they received, their prior year’s return (if one was filed) and the current year’s return (if one was filed), including supporting documents for each return. This would encompass Forms W-2’s, 1099’s, Schedule C, Schedule F, and other supporting documents.

Note. The IRS never asks a taxpayer to verify his or identity by email. If a taxpayer receives such an email, it is a scam, sent by criminals trying to trick the taxpayer into revealing personal and financial information.

Another communication that the IRS uses is Letter 4883C. This letter also is mailed through the U.S. Postal Service and asks taxpayers to verify their identities. The IRS will explain what steps to take.

If you have received a letter from the IRS related to possible identity theft, please contact our office. We can help you navigate the IRS and respond to the agency’s questions.

A new year may find a number of individuals with the pressing urge to take stock, clean house and become a bit more organized. With such a desire to declutter, a taxpayer may want to undergo a housecleaning of documents, receipts and papers that he or she may have stored over the years in the event of an IRS audit. Year to year, fears of an audit for claims for tax deductions, allowances and credits may have led to the accumulation of a number of tax related documents—many of which may no longer need to be kept.

A new year may find a number of individuals with the pressing urge to take stock, clean house and become a bit more organized. With such a desire to declutter, a taxpayer may want to undergo a housecleaning of documents, receipts and papers that he or she may have stored over the years in the event of an IRS audit. Year to year, fears of an audit for claims for tax deductions, allowances and credits may have led to the accumulation of a number of tax related documents—many of which may no longer need to be kept.

However, it is of extreme importance for tax records to support the income, deductions and credits claimed on returns. Therefore, taxpayers must keep such records in the event the IRS inquires about a return or amended return.

Return-related documents

Generally, the IRS recommended that a taxpayer keep copies of tax returns and supporting documents at least three years. However, the IRS noted, there are some documents that should be kept for up to seven years, for those instances where a taxpayer needs to file an amended return or if questions may arise. As a rule of thumb, taxpayers should keep real estate related records for up to seven years following the disposition of property.

Health care related documents

Although health care information statements should be kept with other tax records, taxpayers are to remember that such statements do not need to be sent to the IRS as proof of health coverage. Records that taxpayers are strongly encouraged to keep include records of employer-provided coverage, premiums paid, advance payments of the premium tax credit received and the type of coverage held. As with other tax records, the IRS recommended that taxpayers keep such information for three years from the time of filing the associated tax return.

Last year’s return

Taxpayers are encouraged to keep a copy of last year’s return. The IRS, in efforts to thwart tax related identity theft and refund fraud, continues to make changes to authenticate and protect taxpayer identity in online return-related interactions. Beginning in 2017, some taxpayers who e-file will need to enter either the prior-year adjusted gross income or the prior-year self-select PIN and date of birth—information associated with the prior year’s return—to authenticate their identity.