The IRS announced broad-based penalty relief for taxpayers affected by the COVID-19 pandemic. The relief applies to failure to file penalties and certain international information return (IIR) penalties with respect to tax returns for tax years (TY) 2019 and TY 2020, filed on or before September 30, 2022.

The IRS announced broad-based penalty relief for taxpayers affected by the COVID-19 pandemic. The relief applies to failure to file penalties and certain international information return (IIR) penalties with respect to tax returns for tax years (TY) 2019 and TY 2020, filed on or before September 30, 2022. Relief is also provided to banks, employers and other businesses from certain information return penalties with respect to TY 2019 returns filed on or before August 1, 2020, and with respect to TY 2020 returns that were filed on or before August 1, 2021.

The relief will also help the IRS focus resources on processing backlogged tax returns and tax correspondence.

In response to the COVID-19 pandemic, the IRS issued a series of notices and other guidance to provide relief to affected taxpayers, including:

• postponing the due date for certain Federal income tax payments ( Notice 2020-17, I.R.B. 2020-15, 590);
• expanded relief postponing the due date for filing Federal income tax returns originally due April 15, 2020, to July 15, 2020, among other things ( Notice 2020-18, I.R.B. 2020-15, 590); and
• postponing the due date for filing Federal income tax returns in the Form 1040 series and making certain Federal income tax payments that were originally due on April 15, 2021, due on May 17, 2021 ( Notice 2021-21, I.R.B. 2021-15, 986.

Waiver and Abatement of Certain Penalties

The IRS will not impose penalties with respect to specifically identified tax returns for TY 2019 and TY 2020, filed on or before September 30, 2022. The relief will be automatically applied-taxpayers do not have to request relief.

The IRS will not impose additions to tax under Code Sec. 6651(a)(1) for failure to file the following income tax returns:

• Form 1040, U.S. Individual Income Tax Return, and others in the series;
• Form 1041, U.S. Income Tax Return for Estates and Trusts, and others in the series;
• Form 1120, U.S. Corporation Income Tax Return, and others in the series;
• Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return; and
• Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation and Form 990-T, Exempt Organization Business income Tax Return (and Proxy Tax under Code Sec. 6033(e)).

Further, certain penalties will not be imposed under Code Secs. 6038, 6038A, 6038C, 6038F [ 6039F] and 6677 for failure to timely file several IIRs, such as Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.

Comment. Note that the Notice refers to Code Sec. 6038F, which does not exist. The context indicates that the reference should be to Code Sec. 6039F. The IRS may issue a correction.

Certain penalties will not be imposed under Code Sec. 6698(a)(1) and (2) for failure to timely file and show the required information on a Form 1065, U.S. Return of Partnership Income.

Certain penalties will not be imposed under Code Sec. 6699(a)(1) and (2) for failure to timely file and show the required information on a Form 1120-S, U.S. Income Tax Return for an S corporation.

In addition, the IRS will not impose the penalties under Code Sec. 6721(a)(2)(A) for failure to timely file any information return as defined under Code Sec. 6724(d)(1) that includes (1) 2019 returns that were filed on or before August 1, 2020, with an original due date of January 31, 2020, February 28, 2020 (if filed on paper) or March 31, 2020 (if filed electronically) or March 15, 2020; and (2) 2020 returns that were filed on or before August 1, 2021, with an original due date of January 31, 2021, February 28, 2021 (if filed on paper) or March 31, 2021 (if filed electronically) or March 15, 2021.

Exceptions

The penalty relief does not apply to any penalties not listed. Additionally the penalty relief does not apply to returns for which the penalty for fraudulent failure to file under Code Sec. 6651(f) or the penalty for fraud under Code Sec. 6663 apply. The penalty relief also does not apply to penalties in an accepted offer in compromise under Code Sec. 7122 or any penalty settled in a closing agreement under Code Sec. 7121 or finally determined in a judicial proceeding.

NTA Applauds IRS Move To Provide Late Filing Penalty Relief

National Taxpayer Advocate Erin Collins applauded the Internal Revenue Service’s decision to provide late-filing penalty relief to taxpayers who filed late tax returns for tax years 2019 and 2020.

"The IRS has taken a major step in providing broad, taxpayer-favorable relief from late-filing penalties for 2019 and 2020 tax years," Collins said in an August 24, 2022 blog post, adding that the agency " deserves substantial credit for its willingness to listen to Congress, stakeholders, and TAS [Taxpayer Advocate Service], and undertake a bold step requiring significant administrative effort and resources to benefit all taxpayers affected by the pandemic".

The IRS has issued guidance to taxpayers, who have inappropriately received forgiveness of their Paycheck Protection Program ('PPP') loan, and has encouraged them to take steps towards compliance, such as filing amended returns that include the forgiven loan amounts, as income.

The IRS has issued guidance to taxpayers, who have inappropriately received forgiveness of their Paycheck Protection Program ('PPP') loan, and has encouraged them to take steps towards compliance, such as filing amended returns that include the forgiven loan amounts, as income. The PPP loan program was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to assist small US businesses that were adversely affected by the COVID-19 pandemic in paying certain expenses and was further extended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act. The IRS has discovered that, some recipients received forgiveness of their PPP loan through misrepresentation or omission and either did not qualify to receive a PPP loan or misused the loan proceeds. Under the terms of the PPP loan program, lenders could forgive the full amount of the loan, if the loan recipient meets three conditions, namely:

• Eligible Recipient: The loan recipient was eligible to receive the PPP loan if they were a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity, and was in business on or before February 15, 2020, and had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.
• Eligible Expenses: The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.
• Application for loan forgiveness: The loan recipient had to apply for loan forgiveness, which requires a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.

The IRS has stipulated that, if the above conditions are not met, then the amount of the loan proceeds that were forgiven, must be included in income and any additional income tax must be paid. The IRS has also informed that, reporting tax-related illegal activities relating to PPP loans, may be done through submission of Form 3949-A, Information Referral.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country. September is declared as the National Preparedness Month. The IRS advised taxpayers to:

• secure critical documents such as tax returns, birth certificates, deeds, titles, and insurance policies inside waterproof containers in a secure space;
• duplicate and scan key documents for backup storage on electronic media that provide security and easy portability, such as a flash drive, a CD, or in the cloud;
• reconstruct records after a disaster for tax purposes, getting federal assistance or insurance reimbursement; and
• record all property, especially expensive and high value items—the IRS disaster-loss workbooks in Publication 584 and Publication 584-B can help individuals and businesses compile lists of belongings or business equipment.

In addition, the IRS recommends the following for employers:

• employers should create an Electronic Federal Tax Payment System account at EFTPS.gov to monitor their payroll tax deposits and receive email alerts; and
• employers who use payroll service providers should check the payroll service provider’s fiduciary bonds as they could protect the employer in the event of default by the provider.

Taxpayers who have lost some or all their records during a disaster can visit the IRS's Reconstructing Records webpage. In addition, taxpayers residing in a federally declared disaster can check for the available disaster tax relief on the IRS Tax Relief in Disaster Situations or Around the Nation webpages.

The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. Taxpayers affected by a disaster can contact the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues. Further, taxpayers affected by a disaster outside of a federally declared disaster area may qualify for disaster relief. This includes taxpayers who are not physically located in a disaster area but who have records essential for filing or payment deadlines postponed during the relief period that are located in a covered disaster area. In addition, a special rule allows both individuals and businesses to choose to deduct uninsured or unreimbursed disaster losses on either the tax return for the year the disaster occurred, or the return for the previous year.

The IRS has released information regarding the pre-screening and certification process for employers taking advantage of the Work Opportunity Tax Credit (WOTC). 

The IRS has released information regarding the pre-screening and certification process for employers taking advantage of the Work Opportunity Tax Credit (WOTC). The information relates to hiring designated categories of workers who face significant barriers to employment, including:

• Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients;
• Certain veterans, including unemployed or disabled veterans;
• Qualified long-term unemployment recipients; and
• Long-term family assistance recipients

The WOTC, which succeeded the Targeted Jobs Tax Credit (TJTC), included the requirement for employers to pre-screen job applicants. To pre-screen a job applicant, on or before the day a job offer is made, a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by the job applicant and the employer. After pre-screening a job applicant, the IRS requires the employers to make a request for certification by submitting Form 8850 to the appropriate state workforce agency, no later than 28 days after the employee begins work.

The Service also notified that, tax-exempt organizations can claim the WOTC against the employer’s share of social security tax for hiring qualified veterans, by filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. Further information can be found in the Form 8850 instructions or on the WOTC page on IRS.gov.

Businesses are still waiting for pandemic relief made available to them during the COVID-19 outbreak amid ongoing processing delays at the Internal Revenue Service, according to the Treasury Inspector General for Tax Administration.

Businesses are still waiting for pandemic relief made available to them during the COVID-19 outbreak amid ongoing processing delays at the Internal Revenue Service, according to the Treasury Inspector General for Tax Administration.

According to an August 31, 2022, report posted to the TIGTA web site, the IRS "did not begin processing claims for qualified Sick and Family Leave Credits and the Employee Retention Credit for 12 months and claims for the Social Security Tax Deferral for 16 months after the pandemic relief legislation was enacted."

TIGTA attributed this delay to a "lack of updated programming and procedural guidance," as well as a "lack of training, erroneously suspended claims, and a lack of prioritization of claims" that contributed to the delays in processing claims.

Employers filing claims for these pandemic benefits would have filed a Form 941-X, which would have amended a previously filed Form 941 if they did not make the initial claim for these benefits on the Form 941 or if they needed to amend the amount of original claim on the already-filed Form 941.

"As of February 1, 2022, there were 447,435 Forms 941-X waiting to be processed," the report states. "Over 90 percent (402,814) of these Forms 941-X were over-aged, i.e. have not been processed within 45 calendar days. In addition, 60,885 (13.6 percent of the Forms 941-X were not processed within 180 calendar days."

TIGTA described the over-aged inventory as "an ongoing challenge for the IRS."

Additionally, the IRS watchdog found claims that should have been reviewed but were not resulted "in $45 million in potentially erroneous nonrefundable employer tax credits being allowed" when they otherwise might not have had proper reviews been conducted.

TIGTA recommends that IRS develop a plan to prioritize processing backlogged claims, update the examination referral process, and update training for IRS employees regarding referrals. IRS did not agree with the latter recommendations, but did all others stated in the report.

"Management stated they completed subsequent review of completed Form 941-X claims and determined no additional training was needed," the report states. "However, the IRS’s subsequent reviews do not address the concerns identified in our report. Accounts Management employees cited unclear guidance and training as to why 73 percent of claims were not referred when required."

The IRS has released a list of exceptions for the inclusion of a cancelled student loan debt in income. Generally, had a taxpayer's student loan been cancelled or repaid by someone else, the taxpayer was mandated to include the cancelled or repaid loan amount as part of their gross income, for tax purposes. 

The IRS has released a list of exceptions for the inclusion of a cancelled student loan debt in income. Generally, had a taxpayer's student loan been cancelled or repaid by someone else, the taxpayer was mandated to include the cancelled or repaid loan amount as part of their gross income, for tax purposes. However, the American Rescue Plan Act of 2021 has modified the treatment of student loan forgiveness for discharges in 2021 through 2025, wherein the taxpayer may be able to exclude the repaid or cancelled loan amount from his gross income, if the loan could be categorized as one of the following:

• A loan for post-secondary educational expenses.
• A private education loan.
• A loan from an educational organization described in Code Sec. 170(b)(1)(A)(ii).
• A loan from an organization exempt from tax under Code Sec. 501(a) to refinance a student loan.

Taxpayers can find more information about the list of exceptions to canceled student loan debt in income https://www.irs.gov/forms-pubs/modified-treatment-of-student-loan-forgiveness-for-discharges-in-2021-through-2025.

Upgrading the Internal Revenue Service’s antiquated information technology infrastructure will help honest taxpayers, especially those making $400,000 or less, from being audited, Department of the Treasury Secretary Janet Yellen said.

Upgrading the Internal Revenue Service’s antiquated information technology infrastructure will help honest taxpayers, especially those making $400,000 or less, from being audited, Department of the Treasury Secretary Janet Yellen said.

Speaking September 15, 2022, at an IRS facility in New Carrollton, Md., Yellen reiterated that the $80 billion in additional funds allocated to the IRS in the recent Inflation Reduction Act would not be used to increase audits on lower earning taxpayers.

"I’ve directed that enforcement resources will not be used to raise audit rates for households making under $400,000 a year relative to historical levels," Yellen said, according to the prepared remarks posted on the Treasury Department website. "In fact, we expect audit rates for honest taxpayers to decline, once the IRS has the right technological infrastructure in place. This means a simpler tax filing season for taxpayers who are doing everything right."

The Treasury Department’s focus on getting high income individual taxpayers and corporations to pay their fair share of taxes has been a consistent message Sec. Yellen and other Treasury and IRS officials have been sending since the funding was approved.

"In 2019, the top one percent of Americans was estimated to owe over a fifth of unpaid taxes – totaling around $160 billion," Yellen said, "Data shows that less than half of all taxes from more complex sources of income are paid. Yet nearly all taxes due from wages and salaries – which are earned by ordinary Americans – are paid," adding that "working families are shouldering a disproportionate burden of investing in our roads, schools, military, and more."

She called that inequity "unacceptable," and said that the funding from the Inflation Reduction Act "will go toward auditing more high earners who have not paid their full bill. With it, we are estimated to raise hundreds of billions of dollars in revenue."

Sec. Yellen also suggested that tax filing could become simpler as the agency updates its IT infrastructure. She cited a statistic that it takes an average American 13 hours to file a tax return, while in Sweden, some can simply file with a text message.

"The Inflation Reduction Act finally provides the funding to transform the IRS into a 21st century agency," she said. "While all the improvements won’t be done overnight, taxpayers can expect to feel real differences during the next filing season."

The most immediate difference will be with those seeking assistance. Yellen said Tax Assistance Centers will be fully staffed for the next tax season, allowing for the IRS to help "at least 2.7 million Americans," up from 900,000 Americans helped in the previous year.

Similarly, the IRS is increasing staffing at its call centers and is targeting an 85 percent level of service (meaning between 8 and 9 of every 10 calls is answered) up from the current level of 10 to 15 percent during the most recent tax filing season. It is also targeting a reduction of wait times to less than 15 minutes from the near 30 minutes of wait time during the 2022 tax filing season.

Sec. Yellen also committed to the digitization of paper tax returns through some form of scanning and moving away from the current use of manual transcribing, something both tax professionals and the National Taxpayer Advocate have been calling for.

"For taxpayers, this means faster processing and faster refunds," she said. "The IRS will also build online capabilities to enable taxpayers to fully interact with the agency digitally. Currently, when taxpayers receive a notice from the IRS, they generally must respond via mail. During this coming filing season, millions of taxpayers will be able to receive and respond to notices online."

NTA Offers Suggestions on How New IRS Funding Should Be Allocated

National Taxpayer Advocate Erin Collins offered suggestions on how the Internal Revenue Service should spend the $80 billion in additional funding it received from Congress in the Inflation Reduction Act, signed into law earlier this year.

In the first of two blog posts on the subject posted September 14, 2022, Collins focused on the immediate needs of the agency.

She wrote that before the IRS moves forward in plans to improve its overall operations, "it is imperative that it fulfills its core filing season mission by eliminating the backlog of unprocessed original and amended paper-filed tax returns, pay all pending refunds, and work through its backlog of overaged correspondence."

To achieve this, she outlined the following recommendations:

• hire or re-assign employees to process the backlog of paper-filed tax returns and correspondence;
• hire enough employees to answer 85 percent of taxpayer phone calls and institute “customer callback” technology on all toll-free lines;
• improve services for taxpayer professionals;
• continue to suspend automated collection notices until the backlog is eliminated; and
• hire enough employees to fully staff Taxpayer Assistance Centers and extend walk-in capabilities.

The recommendations preceded remarks made by Department of the Treasury Secretary Janet Yellen on September 15, 2022, in which she highlighted a number of these recommendations as priorities for the IRS, including fully staffing Taxpayer Assistance Centers and improving call center service levels.

Longer Term Recommendations

In her second blog post on the subject, posted September 15, 2022, Collins focused more on long-term initiatives the IRS can embark on to improve the taxpayer experience.

The recommendations ranged from the basic, such as hiring more human resource employees and ensuring proper training for all IRS employees to updating antiquated information technology infrastructure, improving transparency and issuing clear notices and guidance.

On the IT side, Collins’ recommendation topics touched on some of the usual suspects, including improving online functionality and access to tax records and automating the scanning process for paper filings. She also called for implementing technology to allow taxpayers and tax professionals to upload documents for auditors, as well as improving the readability of transcripts, and enabling all taxpayers to have the ability to electronically file their tax returns.

Other technology recommendations include improving the voicebots and chatbots as well as overhauling the IRS website to make it more user friendly.

In the area of improving transparency, Collins noted that during the 2020 and 2021 filing seasons, the IRS "failed to provide weekly reports proving tax return processing timeframes so that taxpayers would know what to expect when they filed their returns or submitted correspondence. This lack of proactive transparency and timely information left taxpayers confused and frustrated, reaching for the phones, searching the Internet, and looking for tax professionals to help."

As for improving notices and guidance, Collins noted that despite improvements over the years, "some critical notices remain confusing and vague, and don’t provide taxpayers with adequate IRS contact information. In some cases, the IRS limits the number of characters and words in its notices."

She noted that under the Taxpayer Bill of Rights that taxpayers have the right to be informed. If the IRS knows something, "it needs to timely, accurately, and clearly say it," Collins wrote. "Failure to do so may well lead to more complications and problems for taxpayers, requiring additional time and resources by taxpayers, tax professionals, and the IRS to resolve them."

Finally, Collins called for an increase to the Taxpayer Advocate Service funding, noting that its "case advocacy operations are already stretched thin, and we will need to hire additional employees if the IRS ramps up its compliance activities, as that inevitably will lead to more TAS cases."

"IRS leaders often tell us they agree with our recommendations in concept, but they lack the resources to implement them," Collins wrote in the second blog post. "With the supplemental funding it has received, these initiatives can now be undertaken."

The 2016 filing season has closed with renewed emphasis on cybersecurity, tax-related identity theft and customer service. Despite nearly constant attack by cybercriminals, the IRS reported that taxpayer information remains secure. The agency also continued to intercept thousands of bogus returns and prevent the issuance of fraudulent refunds.

The 2016 filing season has closed with renewed emphasis on cybersecurity, tax-related identity theft and customer service. Despite nearly constant attack by cybercriminals, the IRS reported that taxpayer information remains secure. The agency also continued to intercept thousands of bogus returns and prevent the issuance of fraudulent refunds.

Cybersecurity

Concerns about cybersecurity and the confidentiality of taxpayer information were paramount during the filing season. According to the IRS, its basic systems are attacked “millions of times” every day by cybercriminals looking for weaknesses. In April, IRS Commissioner John Koskinen told Congress that the agency’s basic systems are secure. However, cybercriminals did breach its Get Transcript app in 2015 and other applications are under constant probing and attack by cybercriminals.

Koskinen assured Congress that the agency is beefing up its cybersecurity staffing. The IRS has hired 55 new cybersecurity experts. However, he acknowledged that the agency’s cybersecurity head has left and the position is open. This has drawn criticism from lawmakers who have questioned why such an important job is open. Koskinen said that the lengthy government hiring process is a deterrent to hiring cybersecurity professionals and urged Congress to reinstate the agency’s fast-track hiring process.

Identity theft

Closely related to cybersecurity is tax-related identity theft. The breach of the Get Transcript App in 2015 resulted in $50 million in fraudulent refunds paid to cybercriminals, according to a government watchdog.

Because the filing season has just ended, final statistics will not be released until later this year. However, interim statistics give a snapshot of the vastness of the problem of tax-related identity theft. As of March 5, 2016, the IRS had successfully prevented the issuance of some $180 million in fraudulent refunds.

To help prevent tax-related identity theft, the IRS has enhanced its return processing filters. Many of these enhancements, the IRS has explained, are invisible to taxpayers. Other enhancements have been made working with return preparers and tax software providers.

Customer service

The IRS’s level of customer service hit historic lows during the 2015 filings season. Almost two-thirds of all calls to the IRS went unanswered and the agency disconnected millions of callers (so-called “courtesy disconnects.”) There were also long lines for in-person assistance at IRS service centers nationwide. The IRS blamed the poor customer service on budget cuts and its inability to hire more employees to answer taxpayer questions.

In December 2015, Congress gave the IRS an additional $290 million and instructed the agency to use the money to improve customer service, along with boosting cybersecurity and combating identity theft. Koskinen told Congress in April that the agency spent more than $100 million of the $290 million on customer service. As a result, the agency’s level of customer service reached as high as 65 percent during the filing season. However, that level will fall to around 50 percent for all of 2016, Koskinen said. The additional employees hired during the filing season were merely temporary employees and their employment ended with the close of the filing season, Koskinen explained.

Return processing

The IRS expects to receive some 150.6 million returns this filing season. That number includes an estimated 13.5 million returns on extension. Taxpayers on extension have until October 17, 2016 to file.

If you have any questions about the 2016 filing season, please contact our office.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended:

Section 179 expensing. The PATH Act permanently extended the Code Section 179 dollar of investment limitations at the higher $500,000 and $2 million, levels, which are adjusted for inflation for tax years beginning after 2015 (it is $500,000 and $2,010,000 for 2016). In addition, starting only in 2016, the $250,000 limitation on the amount of section 179 property that can be attributable to qualified real property has been eliminated. Further, for tax years beginning after 2015, the Code Section 179 expense deduction is now allowed for air conditioning and heating units.

Bonus depreciation. In addition to the big news that the PATH Act extended Code Section 168(k) bonus depreciation to apply to most qualifying property placed in service before January 1, 2020, it made a number of modifications, including:

• replacement of the bonus allowance for qualified leasehold improvement property with a bonus allowance for additions and improvements to the interior of any nonresidential real property, effective for property placed in service after 2015; and
• allowance to farmers of a 50 percent deduction in place of bonus depreciation on certain trees, vines, and plants in the year of planting or grafting rather than the placed-in-service year, effective for planting and grafting after 2015.

Section 181 expensing. Special Section 181 expensing for qualified film and television productions is extended for two years to apply to qualified film and television productions commencing before January 1, 2017. However, the expensing rule is also expanded to apply to qualified live theatrical productions commencing after December 31, 2015.

WOTC. The Work Opportunity Tax Credit (WOTC) has been extended five years through December 31, 2019. In addition, the credit has been expanded and made available to employers who hire individuals who are qualified long-term unemployment recipients who begin work for the employer after December 31, 2015.

Research credit. The PATH Act permanently extended the research credit that applies to amounts paid or incurred after December 31, 2014. However, a new allowance of the research credit against alternative minimum tax liability applies to credits determined for tax years beginning after December 31, 2015. In addition, a new payroll tax credit associated with the research credit applies only to tax years beginning after December 31, 2015 (Act Sec. 121(d) (3) of the PATH Act).

Military differential pay. The PATH Act extended the employer tax credit for differential wage payments made to qualified employees on active military duty has been made permanent and applies to payments made after December 31, 2014. Effective only for tax years beginning after December 31, 2015, however, the credit may be claimed by all employers regardless of the average number of individuals employed during the tax year. The credit is also no longer limited to eligible small business employers with less than 50 employees.

Teachers' classroom expense deduction. The PATH Act permanently extended the above-the-line deduction for elementary and secondary school teachers' classroom expenses. Additionally, for tax years after 2015, the Act includes "professional development expenses" within the scope of the deduction. These expenses include courses related to the curriculum in which the educator provides instruction.

Nonbusiness energy property credit. The PATH Act extended the nonrefundable nonbusiness energy property credit allowed to individuals under Code Sec. 25C for two years, making it available for qualified energy improvements and property placed in service before January 1, 2017. For property placed in service after December 31, 2015, the standards for energy efficient building envelope components are modified to meet new conservation criteria. 

If you have any questions about these new “extenders,” please contact our office.

The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18^th in 2016 because of the intersection of a weekend and a District of Columbia holiday).

The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18^th in 2016 because of the intersection of a weekend and a District of Columbia holiday). 

One alternative is to enter into an installment payment agreement with the IRS, where taxpayers agree in writing to make monthly payments to the IRS and to reduce their tax liability to zero over a reasonable period of time. The IRS may also agree to an installment payment arrangement for back taxes. Penalties and interest may continue to accrue, although the IRS may reduce the penalties. While the IRS is authorized to enter into a partial payment installment agreement for a portion of the taxpayer’s liability, the agency has been reluctant to do this.

Form 9465 

Taxpayers who cannot pay the tax liability reported on their current income tax return should submit Form 9465, Installment Agreement Request, to the IRS, to request a monthly installment plan. A taxpayer who owes more than $50,000 should provide Form 433-F, Collection Information Statement, along with the request. Taxpayers can enter into different types of agreements, including:

• A traditional agreement, where they agree to make their monthly payment by check, money order, or credit card;
• A direct debit installment agreement, to make automatic payments from a bank account; or
• A payroll deduction agreement, with payments made by the employer from a paycheck.

The IRS charges a user fee for entering into an agreement: $120 for a traditional agreement; or $52 for a direct debit agreement. Qualifying low-income taxpayers pay a fee of $43, regardless of the type of agreement. If the agreement is restructured (because of a change in the taxpayer’s financial condition, for example), or if the IRS terminates the agreement and then agrees to reinstate it, the IRS will charge a fee of $50.

Different agreements

The IRS’s procedures include different kinds of agreements, depending on the taxpayer’s circumstances:

• Taxpayers can use Form 9465 to apply for a streamlined agreement. The taxpayer must owe $50,000 or less and must pay all their taxes within 72 months or by the expiration of the collection statute of limitations (generally 10 years).
• Instead of using Form 9465, taxpayers can apply for an online payment agreement, provided the taxpayer owes $50,000 or less in taxes, interest and penalties, or provided the taxpayer owns a business and owes $25,000 or less in total. A taxpayer cannot apply online for this agreement if the taxpayer owes more than $50,000.
• Taxpayers who owe $10,000 or less (without interest or penalties) can enter into a guaranteed installment agreement if the taxpayer agrees to pay all taxes within three years. The taxpayer must have filed all returns and paid all taxes due for the past five years, and cannot have entered into an installment agreement in the same period.
• A taxpayer who can make full payment within 120 days should not use Form 9465 but should instead call the IRS phone line to make arrangements. There is no user fee.

Yes, the IRS can impose penalties if a tax return is not timely filed or if a tax liability is not timely paid. As with all IRS penalties, the rules are complex. However, a taxpayer may avoid a penalty if he or she shows reasonable cause.

Yes, the IRS can impose penalties if a tax return is not timely filed or if a tax liability is not timely paid. As with all IRS penalties, the rules are complex. However, a taxpayer may avoid a penalty if he or she shows reasonable cause.

Failure to file

The penalty for failure to file a timely return is five percent of the net amount of tax due for each month or partial month of the delinquency, up to a maximum of 25 percent. The penalty runs from the due date of the return until the date the IRS actually receives the late return. If the failure to file an income tax return extends for more than 60 days, the penalty may not be less than the lesser of $135 (subject to annual inflation adjustments) or 100 percent of the tax due on the return. The penalty applies to the net amount due, which is the tax shown on the return and any additional tax found to be due as reduced by any credits for withholding and estimated tax payments.

Failure to pay

The failure-to-pay tax penalty is generally one-half of one percent of the amount of the unpaid tax for each month of the delinquency, up to a maximum of 25 percent for 50 months. For failure to pay tax shown on the return, the penalty is imposed on the amount shown on the return, less amounts that have been withheld, estimated tax payments, partial payments and other applicable credits. For failure to pay a deficiency within the number of days allotted after the date of a notice and demand, the penalty is imposed on the tax stated in the notice, reduced by the amount of any partial payments.

Overlap

Complexity enters when a taxpayer is subject to both the failure-to-file and the failure-to-pay penalty. In this case, the failure-to-file penalty is generally reduced by the amount of the failure-to-pay penalty. Every taxpayer’s situation is unique, so please contact our office for more details.

Reasonable cause

The failure-to-pay penalty does not apply if the taxpayer shows that the failure-to-pay was due to reasonable cause and not to willful neglect. Generally, the taxpayer must pay the tax due before the IRS will abate a failure-to-pay penalty for reasonable cause.

Certain entities

The Tax Code authorizes the IRS to impose specific penalties on certain entities that fail to file returns. These include a partnership that is required to file a partnership return but does not timely do so, or files a return that does not contain the required information; and an S corporation that is required to file its information return but does not timely do so, or files a return that does not contain the required information, and certain persons with certain interests or stock in a foreign partnership or corporation, among other entities.

Penalties are one of the most complex areas in the Tax Code. If you have any questions about penalties, do not hesitate to contact our office.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

Tax-related identity theft

Tax-related identity theft most often occurs when a criminal uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Often, criminals will claim bogus tax credits or deductions to generate large refunds. Fraud is particularly prevalent for the earned income tax credit, residential energy credits and others. In many cases, the victims of tax-related identity theft only discover the crime when they file their genuine return with the IRS. By this time, all the taxpayer can do is to take steps to prevent a recurrence.

Being proactive

However, there are steps taxpayers can take to reduce the likelihood of being a victim of tax-related identity theft. Personal information must be kept confidential. This includes not only an individual's Social Security number (SSN) but other identification materials, such as bank and other financial account numbers, credit and debit card numbers, and medical and insurance information. Paper documents, including old tax returns if they were filed on paper returns, should be kept in a secure location. Documents that are no longer needed should be shredded.

Online information is especially vulnerable and should be protected by using firewalls, anti-spam/virus software, updating security patches and changing passwords frequently. Identity thieves are very skilled at leveraging whatever information they can find online to create a false tax return.

Impersonators

Criminals do not only steal a taxpayer's identity from documents. Telephone tax scams soared during the 2015 filing season. Indeed, a government watchdog reported that this year was a record high for telephone tax scams. These criminals impersonate IRS officials and threaten legal action unless a taxpayer immediately pays a purported tax debt. These criminals sound convincing when they call and use fake names and bogus IRS identification badge numbers. One sure sign of a telephone tax scam is a demand for payment by prepaid debit card. The IRS never demands payment using a prepaid debit card, nor does the IRS ask for credit or debit card numbers over the phone.

The IRS, the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Tax Commission (FTC) are investigating telephone tax fraud. Individuals who have received these types of calls should alert the IRS, TIGTA or the FTC, even if they have not been victimized.

Tax-related identity theft is a time consuming process for victims so the best defense is a good offense. Please contact our office if you have any questions about tax-related identity theft.

There are three main types of IRS audits: correspondence audits, office audits, and field audits (listed in order of increasing invasiveness). Correspondence audits are initiated (and generally conducted) by postal mail. Office audits require a taxpayer and/or its representative to appear in an IRS office; and a field audit involves IRS examiners paying a visit to the taxpayer's place of business.

There are three main types of IRS audits: correspondence audits, office audits, and field audits (listed in order of increasing invasiveness). Correspondence audits are initiated (and generally conducted) by postal mail. Office audits require a taxpayer and/or its representative to appear in an IRS office; and a field audit involves IRS examiners paying a visit to the taxpayer's place of business.

Correspondence audits

Correspondence audits, as the name suggests, are conducted entirely through the U.S. mail. (The IRS never uses e-mail to correspond with taxpayers.) Correspondence examinations require less involvement from IRS examiners and are therefore used more frequently by the budget-strapped IRS. Because correspondence examinations make up such a large percentage of the total examinations the IRS conducts, they are considered the "work horse" of the IRS audit tools.

The IRS routinely uses correspondence examinations for issues that it generally deems more efficient and less burdensome to handle by mail, for example questionable claims for earned income tax credits (EITCs) or inconsistent line items.

Office audits

Generally, office examinations involve small businesses or individual income tax returns that predominantly include sole proprietorships. They involve issues that are too complex for a correspondence audit, which involves only the exchange of mail and (sometimes) a few telephone calls. Issues subject to an office audit, however, are usually not complex enough to warrant a full-scale field audit examination. Common issues include the substantiation of a business purpose, travel and entertainment expenses, Schedule C items, or certain itemized deductions.

In addition, if a taxpayer previously selected for a correspondence audit requests an interview to discuss the IRS's proposed adjustments, the case may be moved to the taxpayer's district office. Conversely, an examiner may sometimes determine that a tax return selected for an office audit examination would be better handled through a correspondence audit.

Office examinations generally take place at the IRS office located nearest to where taxpayer maintains its financial books and records, which is generally its residence or place of business. However, on a case-by-case basis the IRS will consider written requests from taxpayers or their representatives to change the office examination location. A request by a taxpayer to transfer the place of an office examination will generally be granted if the current residence of the taxpayer or the location of the taxpayer's books, records, and source documents is closer to a different IRS office than the one originally designated for the examination. Additionally, Treasury Reg. 301.7605-1(e)(1) directs the IRS to consider several factors including whether the selected office audit location would cause undue inconvenience to the taxpayer.

Field audits

The IRS initiates a field exam audit usually by sending either a letter that lays out the issues to be examined and lists a specific IRS agent as the point of contact. Taxpayers must contact the revenue agent within 10 days of receiving the initial contact letter in order to schedule an interview. Generally an Information Document Request (IDR) also accompanies the initial contact letter and contains the IRS examiner's description of the audit-related documents it wants to review.

Conducting a field examination of a tax return requires the agent to have far greater knowledge of tax law and accounting principles than do correspondence or office audits, and therefore, field examiners are generally much more experienced than other examiners. Field audits almost always take place where the taxpayer's books, records, and other relevant data are maintained, which generally means the taxpayer's residence or place of business. However, if a business is so small that a field examination would essentially require the taxpayer to close the business or would unduly disrupt the operation of the business, the IRS examiner can conduct the field examination at the closest IRS office or at the office of the taxpayer's representative.

Employers and other organizations must obtain an employer identification number (EIN) to identify themselves for tax administration purposes, such as starting a new business, withholding taxes on wages, or creating a trust. Entities apply for an EIN by filing IRS Form SS-4. Page two of the form advises whether an applicant needs an EIN.

Employers and other organizations must obtain an employer identification number (EIN) to identify themselves for tax administration purposes, such as starting a new business, withholding taxes on wages, or creating a trust. Entities apply for an EIN by filing IRS Form SS-4. Page two of the form advises whether an applicant needs an EIN.

Other entities that need an EIN include corporations, partnerships, estates, trusts, state or local governments, and churches and other nonprofit organizations. Unincorporated entities (sole proprietorships) that establish a retirement plan or that file certain tax forms will also need an EIN for filing the relevant forms.

Application process

The IRS does not charge for obtaining an EIN and has sought to simplify the application process. Taxpayers may apply by mail, by fax, or online. International applicants may also apply by phone. In all cases, if the IRS determines that the applicant needs an EIN, the IRS will issue the EIN and transmit it to the taxpayer in the same manner as the application was made.

Applications by mail generally take four weeks, the IRS indicates, once the SS-4 is properly and completely filled out. Entities located in the U.S. or a U.S. territory can apply online. For online applications, the IRS validates the information and issues the EIN immediately. The IRS notes that the principal officer or other relevant party must have a valid taxpayer identification number, such as a Social Security Number, to use the online application process. The IRS will respond to a completed fax application within four business days, if the applicant provides a fax number.

Filing without EIN

The IRS states that it will only issue one EIN per day per responsible party, regardless of the means of applying. If the taxpayer needs to file a return but lacks an EIN because of this limitation, the IRS advises that the taxpayer should attach a completed Form SS-4 to the completed and signed tax return. The IRS will assign an EIN and then process the return.