Federal Tax Posts

Taxpayers who skirt tax rules could be banned by the IRS from claiming certain tax credits, according to the National Taxpayer Advocate (NTA). These taxpayers could lose the ability to claim: the Earned Income Tax Credit, the Child Tax Credit, the American Opportunity Tax Credit and the credit for other dependents. Most taxpayers act responsibly and some make simple errors. But if the IRS finds that the taxpayer improperly claimed credits “due to reckless or intentional disregard of rules and regulations,” he or she could be banned for up to two years. If fraud was involved, the ban could be for up to 10 years. Here’s more from the NTA: https://bit.ly/3gf4zW6  or contact us with questions.


Cybersecurity challenges continue at the IRS, according to a Government Accountability Office (GAO) report. The GAO noted that, in May 2019, they’d given the IRS eight recommendations for tightening cybersecurity, and the IRS agreed with them. But a more recent look showed “inaction” on six of those issues, including having a comprehensive cybersecurity strategy and protection of sensitive data. Third-party vendors, the GAO stated, should “provide assurance that information is being protected,” noting that while the IRS has developed standards for various third-party vendors, taxpayer information “generally falls outside of these requirements.” Here’s the report: https://bit.ly/3x0u9UD 


In April 13 testimony before the U.S. Senate Finance Committee, IRS Commissioner Charles Rettig said that he believes the annual “tax gap” may total $1 trillion annually. The tax gap is the difference between taxes owed the U.S. government and taxes paid. He noted that this amount was more than double the $441 billion amount that the IRS believed to be the gap from 2011 to 2013. He said that the principal causes of the gap include: the use of cryptocurrencies, income from illegal activities, foreign source income, underreporting by pass-through businesses and the loss of 17,000 IRS enforcement agents. The IRS’s official tax gap estimate will be announced next year.


Spouses filing a joint federal income tax return generally are both liable for the tax owed. But those who qualify may seek “innocent spouse relief” from joint liability. In one case, the ex-wife of an attorney-turned-physician was denied this relief relating to tax returns filed for 2008-2010. She signed the returns and said she assumed the taxes were paid. The 11th Circuit Court of Appeals found that she was aware of prior IRS problems, had actual knowledge of their finances and had reason to know he couldn’t pay the taxes. Her income fell below poverty level, but the court said she failed to show she’d suffer economic hardship if held jointly liable for the taxes. (Sleeth, CA11, 3/19/21)


More than $1.3 billion in unclaimed tax refunds from 2017 are waiting at the IRS, but they won’t be available much longer. Taxpayers generally have a three-year window to claim tax refunds, and for 2017 that window slams shut on May 17th. The IRS estimates that 1.3 million taxpayers are owed refunds, but they haven’t yet filed their Form 1040s for 2017. The midpoint for these refunds is $865. That is, half of unclaimed refunds are for more than $865, and half are for less. Refunds may “be applied to any amounts still owed to the IRS or a state tax agency and may be used to offset unpaid child support or past due federal debts, such as student loans,” the IRS stated. Contact us for help.


The IRS is reminding taxpayers that even though many federal tax deadlines were extended from April 15, 2021, to May 17, 2021, there are some April 15 tax deadlines still in effect. Among the April 15 deadlines that remain include paying first-quarter 2021 individual estimated taxes, filing calendar year 2020 trust and estate income tax returns and paying any previously unpaid tax, filing 2020 calendar year C corporation income tax returns (Form 1120) and paying any previously unpaid tax, and depositing calendar year corporation first installment of estimated income tax for 2021. If you’re unsure of the tax deadlines for your specific situation, please contact us.


The IRS has updated its FAQs on higher education emergency grants to address questions related to the CARES Act. Enacted in 2020, it allows institutions of higher education to use certain funds to support students with expenses and financial needs related to the COVID-19 crisis. For example, the IRS explains that emergency financial aid grants for unexpected expenses, unmet financial need, or expenses related to the disruption of campus operations (unexpected expenses for food, housing, course materials, technology, health care or childcare) aren’t included in a student’s gross income for income tax purposes. Read the FAQs: https://bit.ly/3dDDDwh 


The IRS’s Get My Payment tool provides taxpayers with information about the status of their 2021 Economic Impact Payments. So, what information can you expect to receive when using the tool? Among other things, a payment status will inform you of whether your payment has been processed and whether it will be sent by direct deposit or mail. It will also provide a payment date if available. If you receive a message saying the IRS needs more information, your payment likely was unable to be delivered. To have your payment reissued as a direct deposit, provide routing and account numbers for a bank account. For more information, visit the Get My Payment FAQ web page: https://bit.ly/3dEu9kj 


U.S. Secretary of the Treasury Janet Yellen has called for a global corporate minimum tax rate. “We’re working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom,” said Yellen. “Together, we can use [the minimum tax rate] to make sure that the global economy thrives based on a more leveled playing field in the taxation of multinational corporations, and spurs innovation, growth and prosperity.” Yellen made the remarks in an April 5 speech to the Chicago Council on Global Affairs. Also that day on a related topic, three Democratic Senate Finance Committee members published “Overhauling International Taxation” (https://bit.ly/3rTlWxB ).


The IRS has announced that the purchase of personal protective equipment (PPE), such as masks, hand sanitizer and sanitizing wipes, purchased for the primary purpose of preventing the spread of the COVID-19, is a deductible medical expense. Amounts paid by an individual taxpayer for PPE for use by the taxpayer, the taxpayer’s spouse or dependents that aren’t compensated for by insurance are otherwise deductible so long as the taxpayer’s total medical expenses exceed 7.5% of adjusted gross income. In addition, the IRS said that the amounts paid for PPE are also eligible to be paid or reimbursed under flexible spending arrangements or health savings accounts. (Announcement 2021-7)


With many taxpayers working from home due to COVID-19, you may be wondering about the possibility of claiming home office deductions on your tax return. Unfortunately, employees aren’t currently eligible. However, self-employed homeowners and renters who are otherwise eligible can claim deductions. Deductible expenses include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent. Taxpayers must meet certain requirements to deduct home expenses, and the deductions may be limited. Recordkeeping is important. If you think you may qualify, we can discuss it when we prepare your tax return.


When filing your tax return, is it better to take the standard deduction or claim itemized deductions? It depends. The standard deduction changes yearly and is based on filing status and age. Itemizing requires more calculations but can save taxes if the total deductions exceed the standard deduction. Those most likely to benefit from itemizing are those who pay state and local income tax, mortgage interest, mortgage insurance, real estate or personal property tax; suffered a large eligible casualty loss; make significant charitable donations; and/or have high medical deductions. We can help choose your best path.


If your business accepts large cash transactions, you may have to report them to the IRS. Generally, a business that receives more than $10,000 in one cash transaction or related transactions must file Form 8300 (Report of Cash Payments over $10,000). Though many cash transactions are legitimate, information on Form 8300 can help the government thwart those who would evade taxes, profit from drug trading, finance terrorism or engage in other crimes. Taxpayers can save time and paperwork by e-filing Form 8300. Businesses can also voluntarily report suspicious transactions below $10,000, with anonymity. Here’s more from the IRS: https://bit.ly/2ZXza0O 


In Notice 2021-20, the IRS provides guidance on claiming the employee retention tax credit for calendar quarters in 2020. The guidance clarifies details about the credit and describes retroactive changes made under a law enacted recently. Among other things, the guidance explains whether an employer that received a Paycheck Protection Program loan can also claim the employee retention credit for 2020. The notice also explains what constitutes an “eligible employer” for the credit and how that employer can claim it. Contact us with questions about your situation. You can read Notice 2021-20 here: https://bit.ly/3babw7G 


The tax filing season is in full swing and a new report is predicting potential problems. A Government Accountability Office (GAO) report has concluded that the IRS “has not fully identified and assessed all risks to the 2021 filing season consistent with enterprise risk management (ERM) practices.” As described in the report, the essential elements of ERM are aligning the ERM process to goals and objectives, identifying and assessing risks, selecting risk responses, and monitoring and communicating risks. The GAO found that the IRS’s 2021 filing season planning documents and ERM documents failed to reflect all of the essential elements of ERM. To read the report: https://bit.ly/3bZs5Cy