A Holiday Must: Protect Those Digits

It is the holiday season – goodwill to all, right? Unfortunately, it is also the favorite time of year for scammers, identity thieves and other cybercriminals. Whether you prefer the convenience of e-commerce shopping or spending a day at the mall with the family, your personal digits are at risk.

This week, Nov. 28 – Dec. 2, is National Tax Security Awareness Week. TXCPA, the IRS and the Security Summit encourage everyone to watch out for holiday scams and guard your personal financial information during the heightened threat of fraudulent activity.  

The global information services company, Experian, reminds consumers to be vigilant when shopping online, safeguard your passwords, check for skimming devices, not shop on public Wi-Fi and verify requests for donations. Other helpful tips are to say “no thanks” to department store cards that arrive in the mail, check your banking and card transactions often, verify app authenticity, and do not click unfamiliar email or “smishing” text links. Children, teens and young adults with access to credit cards or shopping accounts are especially vulnerable and often targets for scams – have a family meeting to gauge their awareness.

Enjoy the season with family and find that special gift but remember to protect those digits.

6 Tips to Avoid Holiday Scams and Protect Your Identity in 2022 - Experian

IRS Publication 5461, Protect Personal and Financial Information Online

Fraud and scams | Consumer Financial Protection Bureau (consumerfinance.gov)

TXCPA Committee: Taxpayers' Rights are Best Served Through In-Person Appeals Conferences

This week, TXCPA’s Federal Tax Policy Committee replied to the IRS Independent Office of Appeals’ invitation on best practices for conducting video conferences with taxpayers and tax professionals. Although virtual conferences are a viable alternative when everyone is familiar with the technology tools, the committee strongly believes that taxpayers’ rights are best served by continuing to conduct in-person appeals as a preference. If, however, the taxpayer and representative choose a virtual meeting, the committee recommends that the names and roles of all participating parties – on or off camera – be prominently disclosed to ensure transparency and fairness.


Considerations When Making a Trust the IRA Beneficiary

By Tom Ochsenschlager, J.D., CPA

“Regular” or traditional IRAs (as opposed to Roth IRAs) must make annual distributions (withdrawals) to its beneficiaries once they reach the age of 72. The amount of the required annual distribution is based on the IRS Required Minimum Distribution Worksheet. In effect, the worksheet specifies a percentage of the remaining IRA asset value that must be distributed each year. The required percentage is never 100% even if the beneficiary lives to be 115 years old. Of course, the IRA can make greater distributions than the minimum amount required by the worksheet (required minimum distribution or RMD), but in many situations there will be a balance in the IRA account when the individual who owned the account passes away.

Typically, the deceased owner of the IRA will have completed documentation that specifies the beneficiaries of the remaining IRA balance. However, there are circumstances where the IRA owner should consider naming a trust as the IRA beneficiary rather than individuals, such as:

  • Where the beneficiary is a minor who cannot legally own an interest in an IRA.
  • Where the beneficiary receives government disability benefits and might lose the government support if they receive ownership of assets in excess of the limitations on the benefit.
  • Where the IRA owner has remarried, they might name the latest spouse as the primary recipient of the IRA benefits but have children from the first marriage receive the remainder of the IRA upon the passing of the second spouse.
  • A beneficiary receiving an interest in an IRA would have the opportunity to draw down from the IRA as much as they want in excess of the RMD. Where the IRA owner is concerned that one or more of the IRA beneficiaries might be financially irresponsible, having a trust own the IRA could limit the beneficiary’s capability of making such a choice as the trustee of the trust would be in control of all distributions.
  • The owner of an IRA can designate whomever they want to receive the remainder interest in their IRA. If the initial owner of the IRA wants to have some control over who is to receive this remainder interest, that control can be accomplished by the initial owner giving specific instructions to the trustees of the trust.
  • The assets of an inherited IRA may be subject to claims from creditors (see Supreme Court ruling in Clark v. Rameker). Retaining the IRA assets in a “spend thrift trust” will not constitute an asset of the beneficiary and should protect the IRA from creditors’ claims against the IRA assets.

It should be noted that the SECURE Act generally requires that the IRA be distributed within a certain number of years after the IRA owner’s death except where the recipient of the distribution is a surviving spouse, the deceased owner’s minor children, a beneficiary who is disabled or chronically ill, or any beneficiary who is not more than 10 years younger than the original IRA owner.

The SECURE Act generally requires the IRA to, in effect, liquidate and distribute its assets to the trust within 10 years of the death of the IRA owner. While the trust will be subject to whatever the appropriate tax will be on the distributed amount, it can utilize its discretion and the terms of its trust agreement as to when to make these distributions to the trust beneficiaries. Qualifying trusts (see-through trusts) can be designed to distribute IRA funds to trust beneficiaries immediately or gradually over time.

If you plan to name a trust as the beneficiary of an IRA, it is important to work with a knowledgeable estate planning attorney to ensure the language in the trust document gives the trust the ability to use the new SECURE Act IRA distribution provisions.   

Additional Form W-4 Revision or Guidance Still Needed

By Julie Dale, CPA-Austin

The IRS redesigned the 2020 Form W-4 in an effort to provide more accurate withholding from wage income. This was a worthwhile goal since tax professionals had seen that there were many cases where too little was being withheld under the old system and were regularly advising clients to withhold extra to help deal with this issue. The IRS FAQs on the new form indicate that it was also an effort to reduce the complexity, but I personally feel that they did not succeed on this goal. I believe many other taxpayers and accountants agree that the new Form W-4 is more complex and difficult to complete correctly.

Taxpayers rarely had questions on the previous version of the Form W-4. There was a tendency for too little to be withheld in many cases, but this was fairly easily rectified with some quick calculations. If the taxpayer owed $5,200 in a given tax year, then the Form W-4 for one spouse could be modified to request additional withholding of $200 per pay period assuming a bi-weekly pay cycle.

The previous version of the Form W-4 was so simple that most pay stubs would include information on the details of what was provided on the Form W-4, such as a notation of “M/2/$50” to indicate that the taxpayer is claiming married with two allowances and $50 of additional withholding per pay period. With this additional information included on the pay stubs, it helped us advise taxpayers on how to appropriately change withholding because we knew the starting point for preparing a Form W-4 and we simply had to increase the additional withholding amount. The 2020 version of Form W-4 added so many different inputs that pay stubs no longer contain the information on what the taxpayer submitted on Form W-4. We now must ask taxpayers for a copy of the Form W-4 submitted to know our starting point. Payroll software has not found a good standard method of providing this information on the pay stubs.

If we have no starting point on a taxpayer since the job is entirely new, then it is difficult for us to calculate what the employer will withhold on the first paycheck. The IRS provided a Tax Withholding Estimator tool, but this tool requests much more information than is included on the Form W-4. For example, one of the early questions is the spouse’s most recent pay period end. As a CPA trying to advise our clients, it isn’t possible for us to use this tool unless we ask the client for a lot of information.

I believe that the current complexity of the Form W-4 leads to more uncertainty on how to complete the form and how much will be withheld each paycheck. I would encourage the IRS to revisit the Form W-4 to see if there is a better method. The income tax laws are so complex that it is impossible for a taxpayer to understand the terms of art used even in the Form W-4 instructions. It seems like there should be a better method to handle income tax withholding that does not require reading and understanding an entire publication to do so correctly.

Our clients also seek our guidance on how to complete the Form W-4 and even with our knowledge and understanding of the tax laws, it sometimes feels like a futile endeavor. Taxpayers tend to prefer correct income tax withholding from paychecks, but in many cases are relying on quarterly estimated tax payments or paying the tax owed with the return filing due to the lack of guidance and understanding of the newer Form W-4. In the worst circumstances, it may be possible that the IRS is not collecting the full tax owed because the taxpayer submits an offer in compromise to reduce the tax burden when the return is filed. It is crucial that the IRS helps taxpayers comply with the tax laws by providing an intuitive Form W-4.

2022 Form W-4 (irs.gov)

Reminder—Food and Beverage Industry Businesses May Be Eligible for an Income Tax Credit for FICA Taxes Paid on Tips

By William R. Stromsem, J.D., CPA, Assistant Professor, Department of Accountancy, George Washington University School of Business

Now that customers are back in restaurants and bars, a reminder might be in order of a tax break for these businesses. Many employers that sell food and beverages (in a bar or restaurant or delivered) may be unaware that they may have a substantial income tax credit for the employer’s share of Social Security and Medicare taxes paid on reported tips above the minimum wage.

Tipped workers report their tip income to employers, and employers pay FICA taxes on tip income even though technically the compensation was paid by the tipper, not the restaurant or bar. This credit is intended to provide relief for payment of FICA taxes on income over the minimum wage, the amount that the employer would have had to pay FICA taxes on if there were no tips. On the cynical side, some might say that this credit is intended to discourage businesses from underreporting tips to avoid paying the FICA taxes.

This credit is claimed on IRS Form 8846 and the instructions give calculation details. https://www.irs.gov/pub/irs-access/f8846_accessible.pdf

Remember that PTIN Holders Need a Data Security Plan

Practitioners, you can now obtain or renew your IRS preparer tax identification number (PTIN) for the upcoming filing season. Since TXCPA is receiving inquiries, it is a good time to highlight that the PTIN application includes a checkbox for practitioners to attest to having a Written Information Security Plan (WISP) on file – a document that details a firm’s security controls, processes and policies to protect client data. The WISP requirement is in accordance with the Federal Trade Commission’s Safeguards Rule.

Fortunately, the IRS has released a template for tax preparers to use, Creating a Written Information Security Plan for your Tax & Accounting Practice. If you have additional questions or application issues, call the IRS’ PTIN Account Information Line at 877-613-7846, available 8 a.m. – 5 p.m. (CT).

Current PTINs expire Dec. 31.

More information:

Security Summit releases new data security plan to help tax professionals; new WISP simplifies complex area

Here’s what tax professionals should know about creating a data security plan

Contact the Return Preparer Program

Publication 4557, Safeguarding Taxpayer Data

Publication 5293, Data Security Resource Guide for Tax Professionals

Identity Theft Information for Tax Professionals

Schedules K-2 and K-3 Filing Requirements Update

By Tom Ochsenschlager, J.D., CPA

The Tax Cuts and Jobs Act enacted in 2007 required taxpayers to provide more information relevant to international tax matters. The IRS believed there was significant inconsistency reporting the items of international tax relevance on the Form K-1 and therefore is now increasing the detail required for the reporting.

To comply with this legislative requirement and to clarify items of international tax relevance, in June 2021, the IRS released Schedules K-2 and K-3 that are, in effect, a replacement (enhancement) of line 16a-r and line 20 of the K-1. The K-2 and K-3 must now be included in the filing of Forms 1065 and 1120-S. Generally, the Schedule K-2 will be filed with the partnership or S corporation return while the K-3 will be included with the individual partner’s or shareholder’s K-1s. Although these schedules relate to international tax matters, in January 2022, the IRS announced it would require the forms to be filed even in circumstances where the entity does not have foreign partners, foreign source income, foreign assets that generate income or foreign taxes paid or accrued. The rationale for this seemingly unnecessary requirement is that, in some circumstances, a partner or shareholder is claiming a foreign tax credit that would require specific information from the partnership or S corp.

The IRS has clarified that partnerships and S corps did not need to file the Forms K-2 and K-3 for the 2021 tax year if none of the partners were foreign partnerships, corporations, individuals, or estates or trusts, and the S corporation or partnerships had no foreign activity, foreign taxes or ownership of assets that did or could be expected to generate foreign source income.  

On Oct. 25, 2022, the IRS released drafts of the partnership and partners’ instructions for Schedules K-2 and K-3 and requested comments regarding the drafts be submitted by Nov. 8.

The IRS has submitted responses on its website to 27 of the questions it has been receiving:  Schedules K-2 and K-3 Frequently Asked Questions (Forms 1065, 1120S, and 8865).

The draft forms are available at 2022 Partnership Instructions for Schedules K-2 and K-3 (Form 1065).

IRS Publishes Draft of 2022 Form 1065 K-2 and K-3 Instructions With Revised Exemptions from Filing — Current Federal Tax Developments

Beware of Employee Retention Credit Scams

By David Donnelly, CPA-Houston, and Anna Johnson, CPA-Houston

Judging by the calls that tax professionals have been receiving, many employers are receiving numerous solicitations from vendors to help the employer claim the Employee Retention Credit (ERC) as provided for in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Taxpayer Certainty and Disaster Tax Relief Act (the “Relief” Act).  

There are many reputable vendors offering these services; however, there appear to be some disreputable vendors offering questionable services. Their scam follows the traditional format—sell the client a service that is flawed and disappear before the client finds out.

The basic scam is as follows:

  • The vendor convinces the employer that they qualify for the ERC even if gross receipts did not decline.
  • The vendor prepares the forms to apply for the tax credits for a fee that is a percentage of the claimed credit, usually 20% to 35%.
  • The payment to the vendor for the services is required when the forms are completed and filed.
  • The vendor will offer a guarantee that the credit will be received.

There are at least two flaws in this pitch—first, the employer may not qualify for the ERC and second, the guarantee only works if the vendor is still in business and can be found.

The basic requirement for qualification for the ERC is that there was a significant decline in gross receipts. For 2020, this decrease has to be 50% compared to the same quarter in the previous year; for 2021, this decrease has to be 20% compared to the same quarter in the previous year.   

There are many other factors that determine qualification, a discussion of which is beyond the scope of this article.

There is a provision in the guidance that allows the credit if “the operation of the trade or business…is fully or partially suspended due to orders from an appropriate government authority limiting commerce, travel or group meetings…due to COVID-19… .” (see Notice 2021-20).

The dubious vendors will advise the employers that they qualify under this “government authority” clause regardless of the effect the pandemic had on their business. An argument that they make is that “if your employees had to work remotely, you qualify.” This is not the case. There has to be specific governmental orders restricting commerce. An example of a specific order is when a state or local government requires bars or restaurants to be closed. 

The IRS is examining many of the claims for refund. Presumably, those filed under the “appropriate government authority” will attract extra scrutiny.

In order to protect themselves from this scam, employers should be alert for the following:

  • A newly formed or newly organized vendor,
  • A vendor with no professional qualifications, or
  • A vendor claiming that the employer qualifies under the “appropriate government authority” clause.

The IRS has addressed these scams in the Oct. 19, 2022 news release IR-2022-183.

CPAs can help their clients avoid these scams by properly advising them about their qualification for the ERC and, if necessary, researching the vendors that the client may be considering.

IRS Tax Year 2023 Inflation Adjustments

By Chris Keegan, CPA-Austin

The IRS recently released annual inflation and cost of living adjustments for the upcoming 2023 tax year. 

Inflation adjustments were released in Revenue Procedure 2022-38 and they impact over 60 tax provisions. Many of these adjustments are significantly larger than usual this year given the current high rate of inflation.

These changes impact many common income tax items, including:

  • An increase in the standard deduction to:
    • $27,700 for married couples filing jointly
    • $13,850 for single taxpayers and married individuals filing separately
    • $20,800 for heads of household
  • Adjustments to the marginal tax brackets with the highest bracket of 37% now beginning at $578,125 for single filers and $693,750 for joint filers
  • An increase in the lifetime estate exclusion to $12,920,000
  • An increase in the annual gift exclusion to $17,000

For a full listing of all changes visit:

In addition to the inflation adjustments noted in Rev. Proc. 2022-38, the IRS has issued guidance for pension related cost of living adjustments. These adjustments include:

  • An increase of the limit on deferrals into 401(k) and 403(b) plans to $22,500
  • An increase of the 401(k)/403(b) catchup contribution amount to $7,500
  • An increase in the IRA deferral limit to $6,500

Details on the pension related cost of living adjustment can be found here:

Good News – The IRS Delayed New Guidance in Inherited IRAs

Under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), non-spousal beneficiaries of IRAs inherited after 2019 had to receive the entire balance in the account within 10 years. In regulations proposed by the IRS on Feb. 24, 2022, the IRS said that a non-spousal beneficiary who inherited an IRA from someone who died before reaching the age of required minimum distributions (RMDs) would have to start taking distributions annually, presumably calculated like RMDs, to deplete the account ratably over 10 years. Before these proposed regs, many practitioners and taxpayers had read the fairly clear language of the SECURE Act to say the payments just had to be completed by the end of 10 years and had decided to defer payment until the end of the period. The proposed regs would have resulted in many taxpayers retroactively not being in compliance with a provision for 2020 and 2021 distributions, before the February 2022 regulations were proposed.

The IRS received plenty of comments, including those from TXCPA’s Federal Tax Policy Committee, asking the IRS to defer the effective date so that taxpayers would not be penalized by a retroactive requirement contrary to a reasonable interpretation of earlier guidance.

In recent Notice 2022-53, the IRS gave a status of the proposed rules, announcing that it is changing the proposal to allow payments to be made on a schedule determined by the taxpayer so long as the IRA is depleted within 10 years. The notice provides transition relief from the RMD proposed rules for qualified designated beneficiaries of decedents dying after 2019. There is no penalty for 2021 and 2022 RMD failures. The IRS announced that RMDs are not required to commence until at least 2023. 

The IRS indicated: "To the extent a taxpayer did not take a specified RMD (as defined in Section IV.C of this notice), the IRS will not assert that an excise tax is due under Section 4974. If a taxpayer has already paid an excise tax for a missed RMD in 2021 that constitutes a specified RMD, that taxpayer may request a refund of that excise tax." This provides necessary relief for taxpayers with RMDs previously due under the proposed regulations for 2021 and 2022.

The IRS is still working on finalizing the proposed regulations.    

TXCPA Comments Letter on Proposed Regs on RMDs for Inherited IRAs 7-15-22