FinCEN Released BOI Guidance – Don’t be Confused About Accounting Firm Exemption

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) recently published the Beneficial Ownership Information (BOI) Small Entity Compliance Guide to assist small businesses with the upcoming reporting rules from the Corporate Transparency Act.

 

Page 4, Chart 2 – Reporting Company Exemptions of the guide includes #15, “accounting firms.” AICPA indicated in a recent meeting that the information is misleading. Large firms and public accounting firms registered under the Sarbanes Oxley Act will be exempt from the BOI reporting rules. However, generally, all other accounting firms are not exempt and do need to file a BOI report. Take a look at other exemptions, just in case.

 

AICPA appealed to FinCEN back in 2021 that CPA firms should have a blanket exemption to the requirement because CPA firms licensed or certified by state boards of accountancy already provide ownership information to the states. This effort was unsuccessful.

 

Unless Congress takes action to delay, entities required to report will do so on or after Jan. 1, 2024.

 

Most small accounting firms are subject to the Corporate Transparency Act’s BOI reporting rules | Wolters Kluwer

Beneficial ownership information (BOI) reporting | Resources | AICPA & CIMA (aicpa-cima.com)

Beneficial Ownership Reporting - TXCPA Federal Tax Policy Blog (typepad.com)

IRS Moratorium on ERC Claim Processing Until 2024

On Sept. 14, the IRS paused until 2024 the processing of newly filed claims for the Employee Retention Credit (ERC), a refundable tax credit for businesses and tax-exempt organizations with employees and were affected during the pandemic. The moratorium is in response to growing concern over the number of fraudulent and/or illegitimate claims still coming in for the relief program. The IRS believes most of the businesses that qualify have already submitted claims. See IR-2023-169 and IR-2023-170 detailing this process and ERC aggressive promotion warnings.

 

Why Now?

 

At an alarming rate, dubious ERC promoters continue to talk businesses into submitting claims because – in their spiel – there is nothing to lose. The IRS has finally taken serious steps to protect those small businesses, sending a very strong unmistakable message to the ERC mills.

 

The freeze was very well received by the CPA profession. The IRS heard from the tax professional community that anecdotally 95% of claims seen in recent months are ineligible. Our TXCPA members have been frustrated, understandably, with the lack of oversight. Many CPA firms lost work to the aggressive ERC shops accepting contingency fees and/or their clients received payments for bad claims that must be rectified.  

 

Pending Applications?

 

The IRS is still processing any ERC claims received prior to Sept. 14, albeit very slowly. There will be additional compliance scrutiny of the remaining claims. Legitimate claims will still be processed but take much longer, 180+ days to process. If a business has a pending claim, the IRS is asking that the claim be reviewed to ensure that it qualifies. See more below.

 

Withdrawal Program

 

The IRS is setting up procedures for a withdrawal program and encouraging all businesses with pending claims to go back and review the claim once again to ensure it is correct. As many of our members have commented in the TXCPA Exchange forum, the IRS specifically listed that supply chain issues as a basis are very rarely eligible. Businesses should reach out to a tax professional. (The IRS urges businesses to avoid seeking guidance from tax promoters or related marketing firms that generate applications for contingency fees.) Under any scenario, if the business has not received payment for a claim and now believes the claim was improper, they should consider withdrawing the claim. This includes cases already under audit or awaiting audit. This will be easier than going through settlement. Watch for more details.

 

Settlement Program Coming Soon

 

This fall, the IRS will also roll out details of a new initiative to help businesses who found themselves victims of aggressive promoters and/or do not qualify. Those businesses that have already received improper claims will need to go through the process of repayment. There may be penalties and interest. The IRS is aware that the statute of limitations has not run out.

 

Haven’t Filed the Claim Yet?

 

If your client or business is about to file a claim:

 

• IRS appeals to businesses to carefully review eligibility guidelines with a trusted tax professional, not an ERC promoter.
• Then, go ahead and file the claim.

 

However, AICPA has indicated that once the moratorium is lifted, there likely will be a completely new process. We do not know what that process will look like yet – it may impact any claims received after the moratorium start date.

 

Bad Actors

 

The IRS is working with the U.S. Justice Department to address fraud in the program as well as promoters or ERC mills that have been ignoring the rules and pushing businesses to apply. Hundreds of criminal cases are being worked and thousands of ERC claims have been referred for audit. In addition, the IRS Criminal Investigations unit has initiated 252 investigations involving more than $2.8 billion potentially false claims, some of which have resulted in federal charges and convictions.  

 

Congressional Action

 

Also on Sept. 14, Assistant Treasury Secretary Adewale Adeyamo issued a letter to Senate Finance Committee Chairman Ron Wyden expressing a potential need for legislation targeting contingent fee practices.

 

IRS ERC Eligibility Checklist

ERC suspended: What happens next - Journal of Accountancy

ERC: Full of Dilemmas for CPAs (icpas.org)

 

TXCPA Asks Lawmakers to Support Accounting STEM Pursuit Act

In another advocacy campaign, this week, TXCPA once again urged our Texas delegation to cosponsor bicameral legislation in H.R. 3541 (S. 1705), the Accounting STEM Pursuit Act of 2023. This bill aims to incorporate accounting education into the STEM (Science, Technology, Engineering and Mathematics) curricula for K-12 students, helping to reinforce the integral connection between accounting and technology while exposing students to potential careers in accounting. If passed, the legislation could contribute to the growth of the profession’s pipeline.

 

AICPA Policy Brief Accounting as STEM Legislation H.R. 3541_S. 1705

IRS Addresses Racial Bias Issues in Audit Selections

William Stromsem, CPA, J.D., George Washington University School of Business

 

The Issue

 

The IRS is seeking to address the issue of racial bias in selecting returns for audits and seems to be making commendable progress. A Stanford University study, released January 2023, estimates that Black taxpayers are audited at a rate three to five times the rate for non-Blacks. This study was widely covered in the press and U.S. Senate Finance Committee Chairman Ron Wyden asked the IRS for an explanation. IRS Commissioner Daniel Werfel responded in a May 15 letter to the Senate Finance Committee.

 

May 15 Initial IRS Response

 

Commissioner Werfel acknowledged the higher audit rate for Black taxpayers but said that the IRS does not collect information on the race of a taxpayer., Research shows that the disparity stems from more Black taxpayers disproportionately filing the kinds of returns that are targeted by algorithms that focus on problem areas, one of which is the high error rate on returns that claim the Earned Income Tax Credit (EITC) and other refundable credits. (EITC returns have an estimated error rate of approximately 25% and resulted in improper payments of $18.4 billion in 2018 according to the National Taxpayer Advocate's 2019 Annual Report to Congress.)

 

Many of these errors result from the complexity of the qualification rules for dependents, the documentation requirements and other factors affecting eligibility. Schedule EIC is one of the most complex forms in the individual return package, and this is visited upon low-income taxpayers who sometimes lack the language skills to cope with this complexity and generally do not use paid return preparers. The result is that those with incomes under $25,000 have the second highest audit rate, only behind those with incomes in excess of $500,000. Almost half the audits in 2022 were correspondence audits of families that made less than $25,000. (This is a larger number, but the rate is smaller than high-income taxpayers because the number of low-income taxpayers is much more than high-income taxpayers.)

 

This prior audit focus on EITC returns often delayed much needed refunds for low-income working families, money to support them that was intended by Congress in providing the refundable credit. Even though most of these audits were correspondence audits, they brought stress to those who sometimes lacked language skills, who did not understand the audit process and who could not afford professional help.

 

Commissioner Werfel promised to, “work to identify any disparities across dimensions including age, gender, geography, race and ethnicity.” He also said that reviewing the EITC audit selection algorithms would be a top priority in this effort.

 

September 18 Update Response

 

In a September 18 letter to Chairman Wyden, the Commissioner said that the IRS will realign resources for the next filing season to substantially reduce the number of correspondence audits focused specifically on refundable credits, including the EITC, the American Opportunity Tax Credit, the Health Insurance Premium Tax Credit and the Additional Child Tax Credit. He indicated that the IRS would focus on helping taxpayers submit accurate filings upfront. The IRS has implemented changes in the EITC case selection processes to reduce erroneous audit flags for EITC returns. It will also pilot a free, IRS-run direct filing option for the 2024 filing season that may alert taxpayers promptly to potential issues so that they can self-correct returns claiming refundable tax credits.

 

Conclusion

 

The IRS should be commended for addressing the issue of racial bias in audits. However, CPAs and their clients should be concerned that as the IRS shifts audit resources, it may be able to focus even more on our high-income clients and possibly even on more moderate-income taxpayers. Also, with the IRS announcing that low-income taxpayers will be less likely to be audited, compliance may be less diligent for those taxpayers, particularly if they do not fully understand the complex laws that apply to their returns.   

Requirement for Roth Catch-up Contributions Delayed

Tom Ochsenschlager, CPA., J.D.

 

The SECURE 2.0 Act expanded the ability for some individuals to make “catch-up” contributions to their retirement plans. Beginning in this year, 2023, individuals ages 50 or older can contribute up to $7,500 extra each year to their 401(k) or 403(b) and 457(b) accounts. Starting in 2025, for individuals ages 60-63, that amount is increased to $10,000 or 150% of what the standard catch-up limit is for that year. These amounts are in addition to the “standard” limit for employee deferral, currently $22,500 (indexed to inflation).

 

The SECURE 2.0 Act provided a requirement that, for individuals who reported wages from their employer in the prior year of more than $145,000, the catch-up contribution must be an “after tax” contribution to a Roth account. However, the IRS recently issued Notice 2023-62 that delayed for two years, until 2026, the requirement that catch-up contributions for these higher income individuals be made to a Roth account. This delay is apparently in recognition that many employers have not already established Roth accounts for their employees or modified their retirement plan documents to provide for these changes. Until 2026, employees with wages in excess of the $145,000 amount can make tax deductible catch-up contributions to their 401(k), 403(b) and 457(b) accounts.

 

The IRS is expected to provide additional guidance that will clarify the Roth requirement will not apply to individuals who do not have FICA wages, such as those with income from a partnership or self-employment and that the $145,000 wage threshold is only determined by the wages from the employer at the end of the tax year and does not include wages earned from a previous employer earlier in the year.

 

IRS delays Roth catch-up contribution rule until 2026 | Grant Thornton

Distribution Requirements for Inherited IRAs - TXCPA Federal Tax Policy Blog (typepad.com)

Artificial Intelligence and IRS Audits: Who is in Control?

William Stromsem, CPA, J.D., George Washington University School of Business

 

We knew it was coming, but we did not know when or what it was going to look like. The IRS clearly will use artificial intelligence (AI) in selecting tax returns for audits and in analyzing more complex returns. With its accelerating level of knowledge, we do not know where AI will be in a month, six months or a year, but we have some temporary indications.

 

The IRS has been using computers to select returns for many years and has been contracting with data-mining services for several years to identify unreported income. In the past, the discriminant income program—the DIF—looked for returns that were out of the ordinary for potential audit, but AI is qualitatively different in its power and scope. It has the potential for intrusive queries in selecting taxpayers for audit, such as inquiries into social media or other databases.

 

For example, social media might show lavish vacations and other databases might be queried for online money transfers, virtual currency transactions, foreign investments and bank accounts, online vacation home rentals or purchases of luxury items like cars, yachts, private planes or vacation homes. This information could be used to identify individuals who are living expensive lifestyles that are out of line with their reported incomes. In effect, AI will allow the IRS to do a “lifestyle audit” in selecting a return without an auditor having to do an actual field exam. We do not know what databases will be used and more data is being absorbed by AI daily.

 

The IRS is currently working on applying AI to selecting and analyzing large partnership returns for audit in 2024. By identifying common abuse facts and issues for AI, the computer can train itself to evaluate complex transactions and issues that may reflect abuses in such areas as partnerships with international connections that are identified in the new required K-2 and K-3 information returns. It can sift through thousands of pages of a complex partnership in seconds, work that previously might have taken many human work-years and might not have been undertaken because of limited resources. This will be a major augmentation of resources in the IRS’ Large Partnership Compliance program and in reviewing complex returns of hedge fund returns, private equity groups and REITs. In recent years, the IRS has been criticized for the low level of large partnership audits, and selection and analysis of returns by AI could rapidly expand these audits.     

 

On the Plus Side

 

• AI will provide the cover of science in the audit selection process, rather than possibly reflecting human value judgments that in the past have led to problems where audits have, at times, seemed to have been targeted for certain groups for political reasons.
• AI could help identify situations where less sophisticated selection processes might have incorrectly selected a return for an unnecessary audit when a closer look would have shown legitimately reported income and deductions. This will save time and trouble for the IRS and the taxpayer.

 

Concerns

 

• What will be the quality of information in the databases? The IRS is currently using money from the budget increase in the Inflation Reduction Act of 2022 to hire or contract with AI experts and data managers. We do not know to what extent it will develop its own AI software and databases, and whether it will also use external AI programs.
• Using external AI has the risk of taxpayer information being absorbed by the AI program being used.
• What if there are errors in the database that target incorrect returns for audits?
• Will humans structure the queries for searching these databases or will AI learn to structure its own queries?
• What will be the level of human review (and control) of the audits selected using AI?
• Who will direct or redirect programs, and to what extent will humans be involved rather than the AI evolving on its own?
• What if AI targeting sweeps in too many compliant taxpayers?
• Will AI conduct actual audits in the future, corresponding back and forth with taxpayers?

 

This may make you feel like you are somehow trapped in a frightening dystopian science fiction novel where machines run society. But the future will come and we can only try to be as prepared as possible. The AI cat is out of the bag and its use by the IRS is inevitable, giving us all an uncomfortable feeling.

 

Quotes from the HAL 9000, the rogue computer that takes over the ship in “2001 A Space Odyssey”—

 

• “No 9000 computer has ever made a mistake or distorted information. We are all, by any practical definition of the words, foolproof and incapable of error.”
• “This mission is too important for me to allow you to jeopardize it.”

 

IRS Using AI to Identify Sophisticated Schemes to Avoid Taxes

ChatGPT—Your Firm’s Best New Employee

FASB Moves to Finalize ASU on Income Tax Disclosures

Michael Vinson, CPA-Houston

 

At a recent meeting, the Financial Accounting Standards Board (FASB) discussed its Improvements to Income Tax Disclosures project. In summary, the Board affirmed and clarified many of the items in the Proposed Accounting Standards Update (ASU) that was released in March 2023 and decided to move forward with the drafting of a final standard. 

 

The Board is issuing the amendments in this proposed update to enhance the transparency and decision usefulness of income tax disclosures. Investors, lenders, creditors and other allocators of capital (collectively, “investors”) have indicated that the existing income tax disclosures should be enhanced to provide information to better assess how an entity’s worldwide operations and related tax risks, tax planning, and operational opportunities affect its tax rate and prospects for future cash flows. Investors currently rely on the rate reconciliation table and other disclosures, including total income taxes paid in the statement of cash flows, to evaluate income tax risks and opportunities. While investors find these disclosures helpful, they suggested possible enhancements to better (1) understand an entity’s exposure to potential changes in jurisdictional tax legislation and the ensuing risks and opportunities, (2) assess income tax information that affects cash flow forecasts and capital allocation decisions, and (3) identify potential opportunities to increase future cash flows.

 

The amendments in this proposed update would address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information.

 

As a tax professional, you should begin thinking about the audit and non-audit clients for which you help prepare or review tax provisions under ASC 740. Many clients will need to assess the impact of the changing disclosure requirements and determine whether they may want to adopt the ASU early.

High Income IRS Audits—An Unnecessarily Divisive Topic

William Stromsem, CPA, J.D., George Washington University School of Business

 

Increased IRS Audits on Higher-Income Returns

 

TXCPA supported increased IRS funding for taxpayer services and systems modernization, and some additional money for compliance. Our clients generally comply with the tax law at a high level and believe everyone should pay their fair share through well-targeted compliance efforts. However, the Inflation Reduction Act of 2022 provided $80 billion for increased funding, with $45 billion of the added funds scheduled to go for increased enforcement activities heavily focused on higher-income individuals only. To counter political claims that everyone would face more audits from 87,000 new IRS employees, Treasury Secretary Janet Yellen said that the historical audit rate would not change for those with incomes under $400,000. President Biden also used this threshold in promising that his proposed tax increases would not affect those with incomes below that level. Even so, the high level of funding for a limited number of taxpayers will cause many of our clients to be unfairly swept up in this audit boom. 

 

Divisive Rhetoric

 

Rhetoric around the $400,000 threshold has been divisive; higher-income taxpayers are sometimes being characterized as tax cheats who use tax professionals and sophisticated financial devices to avoid paying their fair share of taxes and causing average working families to bear a greater tax burden. Chairman of the Senate Finance Committee Ron Wyden criticized Republican House members who wanted to cut the IRS budget, saying that they, “want to allow wealthy tax cheats to continue business as usual, paying little to no tax and asking middle class taxpayers to foot the bill.” Richard E. Neal, ranking minority member of the House Ways and Means Committee, said, “The IRS’ new operating plan fulfills an Inflation Reduction Act goal by eliminating the two-tiered tax system that has allowed the wealthy and well connected to play by one set of rules and everyone else by another.”

 

IR-2023-148 (Aug. 16, 2023) stated that the IRS is “…working to ensure high-income filers pay the taxes they owe. Prior to the Inflation Reduction Act… budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share.” President Biden said, “No billionaire should be paying a lower tax rate than a schoolteacher or a firefighter. I mean it.”  

 

With similar disingenuity, lower-income taxpayers might be disparaged, claiming that they cheat more because they cannot afford to pay taxes and they only expect to get audited, on average, about every 200 years. It could be claimed that there are more tax cheats in lower tax brackets simply because there are more taxpayers in that category—this is the same type of flawed logic that claims that higher income taxpayers underpay more tax dollars but only because they have more income. Yet, while the IRS stepped up enforcement efforts for high-income taxpayers, lower-income returns that claim the earned income tax credit will be scrutinized less despite having an IRS-estimated error rate of approximately 25% and improper EITC payments of $18.4 billion in 2018 according to the National Taxpayer Advocate. 

 

But these characterizations on both sides are unfair and counterproductive, dividing us unnecessarily for what often seem to be political reasons. 

 

Higher Income Taxpayers Pay the Greatest Share of Our Income Taxes

 

The idea that wealthy taxpayers are not paying their fair share is not supported by the facts. From 2020 statistics of income, the highest earning 1% of taxpayers pay 42.31% of federal individual income taxes and the highest-earning 10% of taxpayers pay 73.67%, while the bottom 50% of earners pay just 2.32% of federal income taxes. These relative burdens are determined by Congress using its political judgment to represent constituents and to serve the nation’s economy. It is clear that most higher-income individuals correctly pay the greatest share of our income tax revenue.

 

Equal Honesty

 

There is no evidence to claim that higher-income taxpayers are less honest than lower-income taxpayers. Higher-income taxpayers often use tax professionals to help them take advantage of tax incentives that Congress has provided, but this is not cheating. In Helvering v. Gregory (69 F.2d 809 (2d Cir. 1934)), Judge Learned Hand said, “There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands.” Clearly, there are some high-income taxpayers who go beyond tax avoidance, but there are also some lower-earning taxpayers who do not pay their fair share, for example, by working more in the cash economy. 

 

A Fairer Case for Higher Income Audits

 

Finger-pointing about dishonesty is unnecessary on both sides. If taxpayers at all levels have the same propensity to be honest (or dishonest), then there is no point in castigating one group or another. The political rhetoric should be calmed, and the higher-income return audits should be justified using more honest and less inflammatory terms. Proponents should simply state that they are focusing on raising revenues and that higher-income audits are more cost-effective because they report the most income and are taxed at higher marginal rates. If increased audit credibility raises the level of compliance by 10%, this would only bring in about .25% in increased revenue for returns for the bottom half of income earners but would bring in over 7% (28 times as much revenue) from returns with the top 10th of reported incomes. (This assumes that the current audit rates do not really encourage compliance.) 

 

Justifying higher-income audits based on supposed greed and dishonesty is unfair and is counterproductive by providing a possible rationalization to tempt others to cheat. Disparaging rhetoric is unnecessary and divisive, and we would all benefit from more civil dialogs and less rancor in discussing important national issues.         

Without Congressional Action, Many Taxpayers Will Receive 1099Ks in 2024

Yes, it is still looming. Congress has not addressed the onerous Form 1099K tax reporting rule.

 

The original legislation governing 1099Ks – the Housing Assistance Tax Act of 2008 – set the threshold for filing 1099Ks by third-party settlement organizations (TPSOs such as Venmo, PayPal, Square or CashApp) at an aggregate above $20,000 “and” exceeding 200 transactions. In an effort to close the tax gap on third-party reporting, the American Rescue Plan of 2021 (ARP) lowered the threshold to $600 regardless of the number of transactions. Even a single transaction can trigger the form.

 

As TXCPA has expressed in previous blogs to our members, TPSOs are frequently used for personal transactions outside of the context of a trade or business. The IRS understands the unintended consequence of the ARP that would have required filing an enormous number of 1099Ks for non-taxable personal transactions.

 

After Congress failed to act last December, the IRS provided a “transition period” delaying the implementation of the $600 Form 1099K threshold until tax year 2023. See IR-2022-226 and Notice 2023-10.

 

The threshold is not intended to apply to personal transfers on apps, for instance, sending a friend or family member gifts or money. In reality, however, millions of casual sellers and others using these platforms will likely receive 1099Ks, in error, and may over report their income. One example is a taxpayer selling the family’s slightly used sectional in an online marketplace because the sofa does not fit in the new home and receiving a $700 payment (a loss) through Venmo. The IRS Form 1099K FAQ requires that the taxpayer keep accurate records for the personal item to show proof no profit was made and report the nondeductible personal loss on their Form 1040. Are we really going down that rabbit hole?

 

Lawmakers are aware that the 1099K reporting change is a problem and there is a fair amount of bipartisan interest in raising the $600 threshold. Since we have entered the season of federal shutdown watches and continuing resolutions, we can only hope that Congress will include a 1099K fix in a year-end legislative package.

TXCPA Committee Urges Congress to Defer Section 174 R&E Amortization Requirement

This week, TXCPA’s Federal Tax Policy Committee is asking leadership of the U.S. Senate Finance and House Ways & Means committees to immediately defer the Internal Revenue Code Section 174 amortization requirement of the research and experimental expenditures provision. We believe certain revisions to IRC Section 174, which became effective in 2022 from the Tax Cuts and Jobs Act of 2017, are detrimental to taxpayers and tax practitioners as there are many unanswered questions. The law, as written, requires the capitalization of previously deductible R&E expenses. A deferral of the effective date would allow time for consideration of the effect on small businesses and for further guidance to be issued before implementation.

Read letter.

txcpa-ltr-to-sen-finance-house-w-m-to-defer-sec-174-amortization-provision-9-7-23.pdf