Transcript Faxing Service Has Now Ended

Kathy Ploch, CPA-Houston

 

Effective June 28, the IRS ended its faxing service for both individual and business tax transcripts. The third-party mailing options from the Form 4506, Request for Copy of Tax Return, also ended.

 

Unmasked and easily available transcripts presented risks to taxpayers. Thieves were stealing identities from taxpayers and tax professionals’ offices, then forging taxpayers’ signatures on Form 4506 to order transcripts. These are some of the reasons why the IRS began redacting the information on the taxpayer transcripts.

 

After many comments from the practitioner community, the IRS worked with various professional associations to devise a solution that would safeguard confidential taxpayer data and allow access to the information for tax return preparation.

 

As a reminder, attorneys, CPAs and enrolled agents (i.e., Circular 230 practitioners) can create an e-Services account and obtain access to the Transcript Delivery System (TDS) and the e-Services secure mailbox. Electronic Return Originators (EROs) also have access to TDS.

 

If you have not registered for e-Services (www.irs.gov/e-services), this is definitely the time to apply.

 

If you are an e-Services user, this is an excellent time to update your existing e-File data to ensure that all your personnel have access to the e-Services mailbox and TDS. Although firm employees may have received their IRS letter with the access information, they still must be included on your firm’s list to be fully authenticated.

 

In 2017, the IRS updated its process for creating an e-Services account. If you registered prior to 2017, but have not been using e-Services, you may need to re-register. The IRS does not inactivate an old e-Services account.

 

Below are the various types of transcripts that you can receive electronically:

 

Account transcripts: Summary of basic data, including marital status, type of return filed, adjusted gross income and taxable income. It also includes any adjustments that have been made after the return was filed.

 

Tax return transcripts: Summary of the original tax return, but does not reflect any changes made after the return was filed.

 

Record of account transcripts: Combines the account transcript and tax return transcript. The IRS suggests this transcript for any 1040X information.

 

Wages and income (W & I) transcripts: Summary of data from information returns, such as Forms W-2, 1099, 1098, etc. The IRS uploads this information on a weekly basis.

 

Verification of non-filing letters: Provides proof of no return on file.

 

With an e-Services account, you have several options to obtain tax transcripts for tax return preparation or representation:

 

  • Use TDS online to obtain individual or business transcripts.
  • Call the IRS to obtain either an individual or business transcript. If your Form 2848 is not on file, you can still fax it to the IRS and receive a transcript in your e-Services secure mailbox.
  • Note that the W & I transcript is the only unmasked transcript that will be available to tax practitioners.

 

To receive masked transcripts, go to the IRS website under “Get Transcript Online” or “Request by Mail,” or call an automated phone number to order the masked transcripts by mail.

 

To receive an unmasked W & I transcript, call the IRS, correctly answer a series of security questions and the IRS will mail it to you.

 

The IRS recently revised Form 4506-T and 4506T-EZ to eliminate the third-party mailing option. High-volume users, such as mortgage lenders, can become a participant or contract with an existing participant in the Income Verification Express Service (IVES) program. (www.irs.gov/individuals/international-taxpayers/income-verification-express-service). Use Form 13803, Application to Participate, in IVES. The requester assigns a 10-digit customer file number to identify the taxpayer rather than the Social Security number. Third-party software providers are receiving masked transcripts from the IRS; contact your provider directly if you have any questions on how to receive the unmasked transcripts.

 

Students’ verification of non-filing letters for FAFSA are mailed to the taxpayers’ address of record (www.irs.gov/individuals/irs-offers-help-to-students-families-to-get-tax-information-for-student-financial-aid-applications). Copies of tax returns from Form 4506-T are also mailed to the taxpayers’ address of record.

 

Listed below are various IRS resources:

 

 


Is the Section 199A Rental Real Estate Safe Harbor Really Safe?

Rick Allen, CPA-East Texas

 

IRC Section 199A provides a 20% qualified business income (QBI) deduction for certain trades or businesses. Congress included certain rental real estate enterprises in the definition of trades or businesses which qualify for the 20% deduction. One of the areas needing clarification was “what constitutes a rental real estate trade or business?”

 

In January 2019, the IRS released Notice 2019-07, which included a safe harbor rule for rental properties that would allow taxpayers to claim the QBI deduction and not have to worry that any of their rental properties might be disqualified as a trade or business. However, the safe harbor rule comes with its own complications and taxpayers need to use caution if electing this rule.

 

Safe harbor rules often provide a safe, more streamlined way to claim certain income tax deductions. These safe harbor rules may do just the opposite.

 

In Notice 2019-07, the IRS outlined three requirements that taxpayers must meet in order to claim the rental safe harbor:

  1. Taxpayers must keep separate books and records for each rental real estate enterprise.
  2. They or their agents must spend at least 250 hours performing services on the rental enterprise.
  3. They must maintain contemporaneous records, which include time logs that report all services, the dates on which they were performed and who performed the services.

 

Just briefly reading the list shows the difficulty most clients would have in meeting these requirements. Taxpayers who own more than one rental property must decide whether to treat each property as a separate “real estate enterprise” or combine them. If they own both residential and commercial real estate, they cannot combine them and thus must have at least two real estate rental enterprises. Taxpayers must then keep separate books and records for each rental enterprise.

 

In addition, taxpayers or others must spend at least 250 hours performing services on the rental enterprise. These hours do not have to be personally performed by the owner, but may include maintenance performed by contractors or services provided by a property manager. This does not include financial or investment management services, such as procuring financing or reviewing financial statements. Nor does it include time spent traveling to or from the property. Detailed records must be kept to show that at least 250 hours of service were performed on the rental enterprise, which means contemporaneous records must provide contractors’ hours worked. (Note, the contemporaneous records requirement goes in effect for tax years beginning on or before Jan. 1, 2019.) Most safe harbor rules simplify the record keeping involved, but the rental safe harbor rules seem to actually increase the burden. 

 

Finally, taxpayers who opt for the safe harbor election must sign the following statement:

“Under penalties of perjury, I (we) declare that I (we) have examined the statement and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure and such facts are true, correct and complete.”

 

Taxpayers need to fully understand the implications of signing this statement, which appears much more rigorous than the usual tax return sworn statement. In contrast, taxpayers who do not meet or elect the safe harbor rules can still claim the QBI deduction on rental real estate enterprises. 

 

Notice 2019-07 did provide some clarification for taxpayers wishing to claim the 20% QBI deduction for their rental real estate enterprises. Due to the additional requirements found in the safe harbor rules, many taxpayers and practitioners will choose to not elect the safe harbor and will rely on being able to support their deduction and position under the Section 162 rules.

 

I am sure it will take a few years of IRS challenges to clarify what will be required when the safe harbor is not elected. Practitioners should be aware of the options and insure their clients are aware of ramifications of choosing the safe harbor. Time will tell what the best route will be. In the meantime, use caution here.

https://www.irs.gov/pub/irs-drop/n-19-07.pdf


Final Rules Permit Truncated TINs on W-2s

In its continuing effort to reduce identity theft, the IRS issued final regulations that permit employers to use truncated taxpayer identification numbers (TTINs) on Forms W-2, Wage and Tax Statement, issued to employees (T.D. 9861). The regulations finalize proposed rules issued in September 2017 with no substantive changes in response to comments. Permissible TTINs are Social Security numbers (SSNs) with the first five digits of the nine-digit number replaced with asterisks or XXXs in the following formats: ***-**-1234 or XXX-XX-1234.

https://www.journalofaccountancy.com/news/2019/jul/irs-truncated-taxpayer-id-on-w-2-forms-201921559.html

https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-11500.pdf

 


IRS Audits 2018—Audit Credibility?

William R. Stromsem, CPA, J.D., Assistant Professor, George Washington University

 

While volunteering at a low-income taxpayer clinic, I observed a client whose prior-year return had been completed by a commercial preparer. When we refused to include her claim of 21,000 business miles for which she had no records and for a job that seemed unlikely to generate this mileage (occasional catering server working almost entirely in one city), she was indignant. She said she would go back to her old preparer who understood how the system works. When we cautioned her about penalties, she said that everyone does this and at low income levels, no one ever gets audited. Clients at all income levels can be tempted to play the audit lottery and with lower audit rates, the game is getting better for the players! 

Number of Audits Declines Again

On May 18, the IRS released its Data Book containing information about audits conducted in 2018 and again the IRS’ audit credibility has to be considered. Of the approximately 150 million individual returns filed in 2017, the IRS audited just under 900,000 in 2018 for an average of .6%. Or, looked at another way, the average individual filer should expect to be audited only once every 167 years. This does not include CP-2000 notices for math errors or matching problems. Most of the audits (74.6%) were correspondence audits, which generally cover a very limited set of issues. The Data Book does not include information about civil and criminal penalties resulting from audits, but these have always been statistically low and provide little deterrence from playing the lottery.

Individual Audits

For high-income individuals with adjusted gross income over $10 million, there is a 6.66% chance of being audited, and for those with income of under $25,000, it is .69%, raised somewhat by returns that claim an Earned Income Tax Credit (EITC), where the audit rate is 1.4% because of the complexity of the credit and IRS concern about fraud. In between the high and low, the audit coverage doesn’t exceed .53% until income rises to $500,000. It then goes to 1.1% for incomes from $500,000 and up to $1 million and jumps to 2.21% for incomes from $1 million to $5 million.  Depending on level of income, taxpayers who filed a Schedule C had between .9% and 2.4% rate of audit. There are a variety of other factors analyzed in the links below.

Business Returns

Audit rates are embarrassingly low. C corporations had an average audit rate of .9%, although corporations with assets of $5 million or more had a much higher audit rate, from 4.6% to 49.3% depending on level of income. Average S corporation and partnership audits plunged to .2% in 2018, meaning that an average S corporation or partnership might expect to be audited approximately once every 500 years! (Note: this rate will likely increase with the new partnership audit rules.)

Detailed Information

Tables in the Data Book cover specific issues:

·         Recommended and Average Recommended Additional Tax After Examination, by Type and Size of Return

·         Individual Income Tax Returns Examined, by Size of Adjusted Gross Income

·         Returns Examined with Unagreed Recommended Additional Tax After Examination, by Type and Size of Return

·         Returns Examined Involving Protection of Revenue Base, by Type and Size of Return

·         Returns Examined Resulting in Refunds, by Type and Size of Return

·         Returns of Tax-Exempt Organizations, Employee Retirement Plans, Government Entities, and Tax-Exempt Bonds Examined, by Type of Return

Conclusion

Late in 2018, the IRS published the Comprehensive Taxpayer Attitude Survey that showed the level of taxpayer concern about an IRS audit when deciding whether to report and pay taxes honestly. Fear of an audit did not at all influence 19% of taxpayers to be honest and it was of very little influence for another 16% of taxpayers. Applying these percentages to the 196 million tax returns filed in 2017, 37 million were filed by taxpayers with no concern about audits, and 31 million were filed by taxpayers with little concern about audits. Only 34% of taxpayers were greatly influenced to be honest by the fear of an audit. 

Most taxpayers are honest, and this is basic to our self-assessment system of taxation. The Comprehensive Taxpayer Attitude Survey showed that 85% of Americans continue to say that it is not at all acceptable to cheat on taxes. However, for those who might be tempted, the IRS needs to have a credible audit potential, and we see this being eroded year after year. CPAs have a great stake in maintaining a credible audit potential. To the extent that we ask our clients to follow the law, they may be paying a disproportionate share of taxes. If clients perceive us as requiring a higher level of compliance, they may at some point prefer to self-prepare or go to a return preparer who is less competent (or ethical). If audits are reduced, our representation and controversy work is also reduced.   


Charitable Contributions from a Required Minimum Distribution

With the increase in the standard deduction and the decrease in available itemized deductions ($10,000 limitation on state and local taxes and miscellaneous itemized deductions no longer available), many taxpayers are choosing to take the standard deduction. Choosing the standard deduction means taxpayers will not receive a deduction for charitable contributions. However, for taxpayers aged over 70 ½ and receiving a required minimum distribution (RMD) from their IRA, there is an alternative that is even more tax beneficial than taking an itemized deduction. These taxpayers can reduce their RMD by the amount of charitable contributions made from their IRA. This is known as a qualified charitable distribution (QCD). A QCD is particularly beneficial because it not only reduces the amount of tax paid regarding the RMD, but the deduction reduces adjusted gross income rather than just taxable income if the amount were to be claimed as an itemized deduction.

But there is a “catch” for many IRA beneficiaries. Unlike an itemized charitable contribution that is deductible in the year the charity receives the check, where the taxpayer has checks that they can use to make a QCD, the deduction from the RMD is only available for the year the charity cashes the check. Many taxpayers make their charitable contributions at the end of the calendar year and many charities will not be depositing the checks until the following year. This contrasts with the situation where the taxpayer authorizes the IRA custodian to send a charitable contribution check directly to the charity, in which case the deduction from the RMD is available on the date the custodian mails the check.

Taxpayers also need to ascertain the annual date when the RMDs are distributed by contacting their IRA custodian or checking their deposit records. Many, if not most, IRA custodians distribute the RMDs at a date during the year, rather than at calendar year end. So, for instance, if the distribution date for the taxpayer’s RMD is June 30, 2019, and the taxpayer arranges with the IRA custodian to make charitable contributions in December 2019, the 2019 RMD has already been transmitted and therefore the contributions cannot reduce the 2019 RMD. Furthermore, because the charitable contributions were made in 2019, it is unlikely that they would qualify for a reduction in the 2020 RMD. In such a circumstance, the contribution amounts will come out of the taxpayer’s IRA and will not be taxable to the taxpayer, but will not reduce the taxable amount of the RMD.

 


Transcript Faxing Service Ends June 28

Effective June 28, the IRS will end its faxing service for individual and business tax transcripts and, effective July 1, the IRS will end its third-party mailing options from the Form 4506 series. The IRS announced both changes last year, but the dates are now confirmed.

The IRS will be issuing a news release and updating IRS.gov pages shortly. The IRS also plans a webinar for tax professionals on June 19, 2 p.m. Eastern Time, to review alternatives to faxing and mailing. Practitioners can register for the webinar here.

Since the IRS last year announced numerous safeguards to protect taxpayer transcripts, it has worked with professional associations to assure that preparers still have access to the information needed for tax preparation.

These alternatives require preparers to register and have an e-Services account that is protected by two-factor authentication. Tax professionals also have several options to obtain tax transcripts necessary for tax preparation or representation as follows:

  • Use e-Services’ Transcript Delivery System (TDS) online to obtain individual transcripts and business transcripts, or
  • Call the IRS to obtain an individual transcript or a business transcript. If an authorization is not already on file, fax one to the IRS assistor and the assistor will place the transcript in the tax practitioner’s e-Services secure mailbox.

When needed for tax preparation purposes, tax practitioners may:

  • Obtain an unmasked wage and income transcript if authorization is already on file by using e-Services’ TDS.
  • Call the IRS to obtain an unmasked wage and income transcript. If an authorization is not already on file, fax one to the IRS assistor and the assistor will place the transcript in the tax practitioner’s e-Services secure mailbox.

The wage and income transcript is the only unmasked transcript that will be available to tax practitioners.

Reminder:

Attorneys, CPAs and enrolled agents (i.e., Circular 230 practitioners) can create an e-Services account and obtain access to the TDS and the e-Services secure mailbox. Unenrolled practitioners must either be responsible parties or delegated users on an e-File application.

The IRS urges tax professionals to register for e-Services or update existing e-File application information to ensure that all appropriate personnel have e-Services mailbox and TDS access.

The charts below indicate the types of individual and business transcripts available via TDS.

TDS: Individual transcripts

Tax Return Transcript

Record of Account Transcript

Account Transcript

Wage and Income Transcript

Verification of Non-Filing Letter

 

TDS: Business-related transcripts

CIVIL PENALTY

CT-1

11C

706GS(T)

720

730

940

940EZ

941

943

944

945

990

990C

990EZ

990PF

990T

1041

1041A

1041QFT

1042

1065

1065B

1066

1120

1120A

1120C

1120F

1120FSC

1120H

1120L

1120ND

1120PC

1120POL

1120REIT

1120RIC

1120S

1120SF

2290

4720

5227

8288

8752

8804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

https://www.irs.gov/newsroom/irs-takes-additional-steps-to-protect-taxpayer-data-plans-to-end-faxing-and-third-party-mailings-of-certain-tax-transcripts  

 


Elected Farm Income May be Used to Figure QBI

The IRS has explained how farmers and fishermen who use the income averaging method compute their Section 199A qualified business income (QBI) deduction. One of the requirements for qualified items of income, gain, deduction and loss is that the item is "included or allowed in determining taxable income for the tax year.” In a post on its website on April 19, the IRS said in figuring the QBI deduction, income, gains, losses and deductions from farming or fishing should be taken into account, but only to the extent that the deduction is attributable to your farming or fishing business and is included in elected farm income on line 2a of Schedule J (Form 1040).

https://www.irs.gov/forms-pubs/elected-farm-income-may-be-used-to-figure-qualified-business-income-deduction-19-apr-2019

 


Advising SALT “Economic Refugees”—Buy Boots and a Hat!

William Stromsem, Assistant Professor, George Washington University

The April 15 tax filing deadline brought home the reality of the state and local tax (SALT) deduction limits to many high-income, high-net worth individuals in California, New York, New Jersey, Connecticut, Maryland, D.C. and other high tax states. With SALT rates sometimes exceeding 10% of income and real estate taxes around 1% of assessed value, the $10,000 limit on federal SALT deductions has resulted in additional federal income taxes of $10,000 or more. (The average SALT deduction for citizens of the states mentioned above is around $20,000, but those with higher income and real estate taxes could easily top $50,000 where a 30% federal tax rate could cost $15,000 for the year.) Many who had not used the standard deduction for decades took the higher federal standard deduction rather than itemizing, adding “salt” to the wounds as charitable contributions and other deductible expenses yielded no tax benefit. 

Several states have sued the federal government. Their representatives in Congress are seeking to change the law and governors have proposed workarounds, such as state deductions for charitable contributions to state universities. However, the lawsuits do not seem to be progressing. In addition, the proposed legislation has political complications. The IRS shot down some of the proposed workarounds in IR-2018-172 by alerting taxpayers and the various states they would be policing quid pro quo arrangements that seek to substitute charitable contributions for SALT deductions. The states are facing pressure to cut taxes now that the SALT taxes are only partially deductible for many taxpayers. Real estate markets are softening, with formerly hot markets in the New York area cooling so much that realtors are seeking buyers rather than buyers seeking houses. States are losing revenue as the caravan of “SALT refugees” grows.

The added cost of taxes, coupled with virtual work arrangements becoming more common, has caused some to pack up and move to a better life in the few states that do not tax individual income—Texas, Florida, Nevada, South Dakota, Washington, Alaska and Wyoming—with Texas and Florida receiving the most SALT refugees.

The states are not giving up their tax base easily. Some states—particularly New York and California—are aggressively performing residency audits to ensure taxpayers have sufficiently severed nexus. High tax bracket taxpayers are more likely to be impacted by such an audit. Preparers advising a recently settled SALT refugee should provide advice on how to evidence their severance with their former state, particularly if they retain a home there or commute there. Regardless of the new state of residence, taxpayers will still have to pay tax on income sourced within their former states.

In general, the former state will look at time spent in the new state versus the old one. Some states aggressively claim that if you cannot prove you were out of the state for a day, you are presumed to be in the former state for that day. Emigres should keep records of days in Texas versus the former state, including airline tickets, gas receipts and calendars with notations or other evidence to show when they were in Texas. Get a clean cutoff date of when residency is established in Texas, since you will need to allocate prior income to the former state. Save documents to help prove your Texas residency. 

Here are some items that may be helpful in showing Texas residency:

  • Obtain a Texas driver’s license.
  • Consider selling your old home and using temporary quarters when you visit the old state. Consider buying in Texas instead of renting. Some states presume that if you retain a residence in the former state, you are only temporarily out of the state.
  • Stop state income tax withholding and estimated tax payments to the former state, if appropriate. This places the collection burden on the state, rather than placing the refund burden on the taxpayer.
  • Open a bank account, register to vote and register your car in Texas.
  • Charge items in Texas to create evidence of presence in Texas.
  • Change your billing address to Texas for other mail such as magazine subscriptions, even if you have mail forwarded from your former state.
  • Get a library card, and/or fishing or hunting license.
  • If you are a professional, get re-licensed in Texas or at least join local professional associations (such as TXCPA).
  • Hire a group of local professionals—CPA, doctor, dentist, lawyer, investment adviser, etc.
  • Join a local country club.
  • Consult residency audit guidelines for your former state, if available.
  • And finally, buy some Texas boots!

House Passes IRS Reform Legislation

 

On April 9, the House passed by a voice vote H.R. 1957, “Taxpayer First Act of 2019.” The bill had bipartisan support in the House and appears to have bicameral support, as well. The Senate Finance Committee is considering an identical bill in S. 928.

H.R. 1957 would modify requirements to the IRS’ organizational structure, customer service procedures and training, enforcement procedures, information technology and electronic systems. It includes the following provisions:

·         establish an independent IRS appeals office;

·         require the commissioner to appoint a chief information officer;

·         establish a response deadline to the National Taxpayer Advocate’s directives;

·         notify Congress 90 days before a proposed closure of a Taxpayer Assistance Center;

·         develop a comprehensive customer service strategy;

·         continue the IRS Free File Program;

·         exempt certain low-income taxpayers from offer-in-compromise payments and from referral to the IRS’ private debt collection program;

·         modify tax enforcement procedures on property seizures, summons, joint liability and third-party contact;

·         modify whistleblowers procedures;

·         update cybersecurity and identity protection requirements;

·         provide a single point of contact for tax-related identity theft victims;

·         within five years, offer identity protection personal identification numbers nationwide;

·         allow the IRS to require additional taxpayers to file electronically; 

·         require partnerships having more than 100 partners to file returns on magnetic media;

·         waive the electronic filing requirement for certain preparers in areas without internet access;

·         require mandatory e-file by exempt organizations, but provide notice before revoking an exempt status for failure to file return;

·         implement internet platforms for Form 1099 filings and for third-party income verification;

·         develop uniform standards for the acceptance of electronic signatures;

·         streamline critical pay authority for the IRS’ information technology positions;

·         ensure that contractors comply with confidentiality safeguards; and

·         prohibit the rehiring of certain IRS employees removed for misconduct.

 

As an offset, the legislation would increase the penalty for failing to file a tax return and for improper disclosure or use of information by return preparers.

 


Penalty Waivers for Underpayment of Tax

In Notice 2019-25, the IRS expands its penalty waiver for underpayment of 2018 withholdings and estimated tax payments if those payments equaled at least 80 percent of the tax due upon filing the federal return. In prior Notice 2019-11, the penalty was waived only if at least 85 percent of the tax was paid prior to filing.

Any taxpayer eligible for the additional relief who has already filed his/her return can claim a refund of the penalty amount by filing Form 843 and completing Line 7 with the statement, “80% waiver of estimated tax penalty.”

Late February, “qualified” farmers and fishermen also received an underpayment penalty waiver. Prior to Notice 2019-17, these taxpayers were required to make one estimated installment payment by Jan. 15 of the year following the taxable year or file their return by March 1. The notice waives the underpayment penalty for these businesses if they file their 2018 tax return and pay the full amount due by April 15.

https://www.irs.gov/pub/irs-drop/n-19-25.pdf

https://www.irs.gov/pub/irs-drop/n-19-17.pdf