Federal Tax Posts





If you’ve paid or accrued foreign taxes to a foreign country and are subject to U.S. tax on the same income, you may be able to claim a foreign tax credit. Generally, only income, war profits and excess profits taxes qualify for the credit. The IRS recently issued final regulations relating to the foreign tax credit. Among other things, the regs provide guidance on the disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a dividends-received deduction. The regs also discuss the allocation and apportionment of interest expense, foreign income tax expense, and certain deductions of life insurance companies. Contact us with questions.

#TaxSeason #CPA #ForeignTaxeCredit

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How do you determine if a worker is an employee or an independent contractor? The IRS Office of Federal, State, and Local Government recently held a webinar to answer that question. Worker classification is determined by the relationship between a worker and the business, and whether the business can control how tasks are performed. A business controls a worker if it can place restrictions on what equipment can be used and what protocols to follow. The IRS considers several issues, such as: the substance of a relationship (not its label); whether a worker receives fringe benefits; the permanency of the relationship; and whether a worker’s services are a key aspect of the business.

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Businesses should use Form 1099-NEC, “Nonemployee Compensation,” to report payments of $600 or more to nonemployees during 2021. Be aware that such payments could be subject to backup withholding in certain cases. Payers of nonemployee compensation during 2021 generally are required to file these forms by Jan. 31, 2022. Backup withholding could apply if the recipient of compensation hasn’t provided a Taxpayer Identification Number (TIN) to the payer or if the IRS notifies a payer that a TIN doesn’t match the name in IRS records. A TIN can be a Social Security, employer identification or individual taxpayer identification number. #TaxSeason #CPA To learn more: http://bit.ly/31o6q5S 

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The U.S. Tax Court ruled that a married couple’s miniature donkey breeding activity was conducted with a profit motive. The IRS had earlier determined it was a hobby and the couple was liable for taxes and penalties for the two tax years in which they claimed losses of more than $130,000. However, the court found the couple had a business plan, kept separate records and conducted the activity in a businesslike manner. The couple operated the venture with the intent of turning it over to their adult daughter to help supplement her income. The court stated they were “engaged in the breeding activity with an actual and honest objective of making a profit.” (TC Memo 2021-140)


If you received Economic Impact Payments (EIPs) or advance Child Tax Credit (CTC) payments in 2021, expect to hear from the IRS in January. Letters will be mailed, listing the total EIPs or CTC payments you received. Keep the letters with your tax records. Depending on your eligibility, you may be able to claim an additional EIP, called a Recovery Rebate Credit, on your 2021 tax return (even if you don’t usually file). If you received advance CTC payments, compare the amount received with the total you qualify to claim. If you were overpaid or underpaid, you may have to repay the excess on your return or claim a credit for the difference. Here’s more: https://bit.ly/3GlPawW 

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The Treasury Inspector General for Tax Administration (TIGTA), has issued its “Semiannual Report to Congress.” For the second half of fiscal year 2021, TIGTA conducted audits and investigations of the IRS resulting in “recovery, protection and identification of monetary benefits totaling more than $9 billion,” the report said. The report noted concern about the processing of advance Child Tax Credit (CTC) payments, stating that TIGTA seeks to ensure the payments “are accurate and made to only those taxpayers who meet eligibility requirements.” TIGTA is also reviewing how the IRS is addressing “the backlog of unworked returns and inventories.” Here’s the report: https://bit.ly/3pM088j 

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In a report, the Congressional Budget Office (CBO) provides a budget overview for fiscal year 2021. The federal budget deficit in 2021 totaled nearly $2.8 trillion, almost $360 billion less than the deficit in 2020 but about triple the shortfall incurred in 2019. “During the past two years, deficits were much larger than they have been historically because of the economic effects of the coronavirus pandemic and legislation enacted in response,” the CBO said. Notably, in 2021, federal revenues totaled $4 trillion, which was $626 billion (or 18%) more than receipts recorded in 2020. “That increase was the largest recorded in five decades,” the CBO said. Read the report: https://bit.ly/3rbnmqu 

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The National Taxpayer Advocate (NTA) is reporting that as of late October, the IRS had a backlog of more than 2.7 million unprocessed amended tax returns. The IRS claims the processing time for these returns is about 20 weeks. The NTA, however, says that Taxpayer Advocate Service (TAS) cases indicate that it’s taking the IRS “considerably longer than 20 weeks” to process the returns. This affects the ability of the TAS to help taxpayers receive their refunds. Generally, the TAS can’t expedite case resolutions for amended returns that haven’t been processed. Thus, the TAS isn’t accepting new cases if the only issue is amended return processing. For more information: https://bit.ly/3DHcGU6 

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The IRS is sending out refunds averaging $1,189 to 430,000 taxpayers. This is the latest batch of refunds based on American Rescue Plan Act (ARPA) changes made after many taxpayers had already filed their 2020 returns. Generally, unemployment benefits are taxable income. But, for 2020, the ARPA allows taxpayers with modified adjusted gross income under $150,000 to exclude unemployment benefits of up to $10,200 from taxable income. Rather than requiring taxpayers who had already filed to amend their returns, the IRS has been adjusting returns and automatically issuing refunds as appropriate. To date, 11.7 million refunds have been issued. For most qualified taxpayers, no action is required.

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In a recent audit, the Treasury Inspector General for Tax Administration (TIGTA) evaluated the Taxpayer Advocate Service’s (TAS’s) response to CARES Act issues. “TAS has taken numerous actions to assist taxpayers in response to the enactment of the CARES Act,” the audit said. However, the audit determined that “TAS accepted cases that did not meet its criteria and did not properly track CARES Act issues.” TAS developed criteria specifying the types of issues it would accept. However, a statistical sample of TAS cases showed that 18% of the cases accepted didn’t meet TAS criteria. Read the audit: https://bit.ly/3bDYNJO 

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Ten months into the 2021 fiscal year, the estimated federal budget deficit soared to $2.5 trillion, the Congressional Budget Office (CBO) reported. Estimated revenues rose 17% over the same period last FY, which “largely reflects the general strength of the economy over the past year,” the CBO stated. Estimated outlays rose 4%, due to programs related to the pandemic response that “substantially boosted spending” in FY21 and FY20. Notable expenses included recovery rebates, expanded unemployment benefits and the Paycheck Protection Program. If tax and spending laws aren’t changed, the deficit will reach $3 trillion by the end of this FY. Here’s the report: http://bit.ly/3yRPErq 

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The deadline for the third 2021 estimated tax payment is rolling up on Sept. 15. Changes in the economy brought by COVID-19 include a new crop of self-employed persons, such as gig-economy workers. Like most people with income that isn’t subject to withholding, these workers may need to make estimated tax payments for the first time. Generally, estimated tax payments are required for those who expect to owe a net tax of $1,000 or more on their 2021 federal tax returns. Underpayments or late payments could result in penalties, even if you expect a refund. To calculate payments, use Form 1040-ES (Estimated Tax for individuals). Contact us with questions. Here’s more: http://bit.ly/2Xh7y8Q 

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The National Taxpayer Advocate (NTA) is providing information about what to do if the IRS erroneously assesses tax after a taxpayer petitions the U.S. Tax Court. As a result of recent IRS and Tax Court administrative delays, the IRS has erroneously closed cases and assessed taxes because it wasn’t aware that a taxpayer had petitioned the court with regard to the taxes at issue. The NTA determined that in 2021, it’s taking approximately 75 days for the court to process most of the petitions it receives and to serve notice to the IRS (a period that exceeds the 15-day period IRS procedures have allotted for this process.) To learn more from the NTA about how to proceed: https://bit.ly/3yVfyKK 

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The IRS and the U.S. Treasury Department have announced that the August advance Child Tax Credit (CTC) payments have begun to reach eligible families. This second batch of advance monthly payments, worth about $15 billion, are reaching about 36 million families. The IRS is stressing that it’s not too late for low-income families to sign up for advance CTC payments. Anyone who normally isn’t required to file a tax return can use the online tools at IRS.gov to determine eligibility for the advance CTC. These tools can help individuals file a simplified tax return to sign up for CTC payments as well as Economic Impact Payments. For additional information: https://bit.ly/2W1DRYI 

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What happens when a tax-exempt agency seems to be skirting tax laws? On its website, the IRS explains the process of filing a complaint when violations of laws or IRS rules are suspected. Agencies that apply for and are granted a tax-exemption can generally operate free of most tax as long as they meet the criteria and operate according to restrictions. The agencies must avoid actions including: lobbying activities; commercial activities unrelated to their exempt purpose; and the use of agency money to benefit private people. If violations are suspected, you can contact the IRS Tax Exempt and Government Entities Division to file a complaint. Here’s more: https://bit.ly/3hmP3HK 

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