Money Orders Purchased with Cash Rewards are Taxable

Renee Foshee, J.D., CPA-San Angelo

Taxpayers who use cash-back rewards cards should take notice of a new Tax Court decision.

In Anikeev v. Commissioner, T.C. Memo 2021-23, taxpayers who used American Express Blue Cash Rewards cards in 2013 and 2014 to purchase money orders and reload debit cards using credit card cash rewards had to include those rewards in income.

In this unique case, the taxpayers deposited more than $4 million in money orders to their bank accounts over a two-year period by charging $1.2 million in 2013 and more than $5 million in 2014 for Visa gift cards, reloadable debit cards and money orders on their American Express cards. They received cash rewards although purchases of prepaid cards and cash equivalents were not eligible for purposes of the Rewards program.

Taxpayers used their American Express cards to purchase Visa gift cards from local grocery stores and pharmacies. The gift cards were then used to purchase money orders that were deposited into the taxpayers’ bank accounts.

Taxpayers also used their American Express cards to load cash into reloadable debit cards. The debit cards were used to pay the taxpayers’ American Express balances directly and sometimes by using the MoneyGram service at Walmart.

The court agreed that the purchases of money orders and debit card reloads were includible in income because those transactions were not product purchases, but infusions of cash.

The purchases of the Visa gift cards, on the other hand, were different. The IRS argued that the purchases of Visa gift cards were cash equivalents includible in income, forgoing the argument that the Visa gift cards were products subject to purchase price adjustments. The court did not agree with the IRS and determined that the rewards associated with those purchases were not included in income.

2021-23-anikeev.pdf (thetaxadviser.com)

TXCPA Committee Issues Urgent Request to Commissioner Rettig for Partnership Tax Basis Reporting Relief

In light of burdensome changes and the ongoing pandemic, TXCPA’s Federal Tax Policy Committee asked the IRS to immediately reconsider, eliminate or delay the requirement and procedures for reporting partners’ capital accounts on a tax basis as stated in the IRS Form 1065 instructions.

The committee also requested additional guidance as to what constitutes “ordinary and prudent business care” for IRS Notice 2021-13 purposes, expanded penalty relief beyond the current notice provision and a special rule to allow amending 2020 CPAR returns within the three-year period of assessments.

Review letter:

https://www.tx.cpa/docs/default-source/comment-letters/federal-tax-policy/2021/partnership-tax-basis-reporting-feb-2021.pdf?sfvrsn=aa1d8b1_2

Does the Texas Severe Winter Storm Relief Apply to Farmers and Fishermen with the March 1 Filing?

There has been some discussion in the professional community about the application of Texas' severe winter storm tax deadline relief until June 15 to the tax situation of farmers and fishermen.  

Farmers and fishermen who file their returns and pay their tax by March 1 can avoid penalties for the underpayment of estimated tax. Since this is not actually a tax filing deadline, the application of the relief to this has been the subject of that discussion. Apparently, the relief does apply but does not appear to be automatic. The instructions indicate that eligible taxpayers (and presumably their representatives) must call the IRS at 866-562-5227 to apply for the relief.

This information comes from the instructions to Form 2210-F:

Federally Declared Disaster

Certain estimated tax payment deadlines for taxpayers who reside or have a business in a federally declared disaster area are postponed for a period during and after the disaster. During the processing of your tax return, the IRS automatically identifies taxpayers located in a covered disaster area (by county or parish) and applies the appropriate penalty relief. Don’t file Form 2210-F if your underpayment was due to a federally declared disaster. If you still owe a penalty after the automatic waiver is applied, the IRS will send you a bill.

An individual or a fiduciary for an estate or trust not in a covered disaster area but whose books, records, or tax professionals' offices are in a covered area is also entitled to relief. Also eligible are relief workers affiliated with a recognized government or charitable organization assisting in the relief activities in a covered disaster area.

If you meet either of these eligibility requirements, you must call the IRS disaster hotline at 866-562-5227 and identify yourself as eligible for this relief. For information about claiming relief, see IRS.gov/DisasterTaxRelief. For more information on disaster assistance and emergency relief for individuals and businesses, see IRS.gov/DisasterTaxRelief. See Pub. 976 Disaster Relief.

The Final Word on Nondeductible Parking Expenses

Tom Ochsenschlager, J.D., CPA

The Tax Cuts and Jobs Act of 2017 enacted a new Section 274(a)(4) that generally eliminates the deduction for qualified transportation fringe benefits. The final regulations in TD 9939 provide the information necessary for the application of this section. This guidance is effective for tax years beginning on or after Dec. 22, 2020.

The regulations discuss a variety of “transportation” fringe benefits. However, this blog will only address the situation where an employer provides parking for its employees. Generally, where an employer incurs costs to provide parking for its employees, that cost is not deductible by the employer.

Exceptions Where the Cost is Deductible

Special Rule if Employer Reimburses Employee

The amount an employer reimburses an employee for parking expense is generally not deductible by the employer except to the extent it exceeds the monthly reimbursement limitation for fringe benefits, currently $270. If that amount is exceeded, the excess is deductible by the employer and added to the employee’s taxable compensation reported on Form W-2.

For example, if the cost of providing a parking space for an employee is $290, the $20 in excess of $270 is added to the employee’s W-2 and deductible by the employer.

Parking Space Available to the General Public

A special rule applies to an employer located in, say, a strip shopping center or a multi-tenant building and a portion of its lease payment covers the cost of the parking spaces. If more than 50% of the actual or estimated use of the parking is by the general public, then, except for spaces reserved for the employees, the employer is entitled to a deduction for the full amount of the lease and is not required to allocate any portion of the cost of the lease to the taxable income of its employees. If use by the general public is less than 50%, the nondeductible amount is the employees’ use percentage times the cost of the lease. For this purpose, the term “general public” includes residents or employees of other employers in a multi-tenant building, customers, clients, visitors and vehicles used to deliver goods or services. 

Parking Expense Proportional to Owners

The cost an employer incurs to provide parking for 2% S-corporation shareholders, partners, sole proprietors and independent contractors is deductible by the employer because under Section 132, those taxpayers must include the value of the parking on their tax returns.

Determining the “Cost” of Parking Spaces

Employer’s Property Lease Includes Parking Spaces

Where the employer’s property lease does not break out the portion of the cost attributable to the parking space, the regulations permit the employer to use a “reasonable method” or use a 5% safe harbor provided in the regulations. Using the safe harbor involves multiplying 5% times the total lease expense that includes expenses for property tax, interest, insurance and utilities.

 

Qualified Transportation Fringe, Transportation and Commuting Expenses Under Section 274

Final rules govern disallowed transportation fringe benefits - Journal of Accountancy

 

IRS Statement About CP59 Notices

Earlier in February, the IRS issued notices to approximately 260,000 taxpayers stating they have not filed their 2019 federal tax return. These notices, referred to as CP59 notices, are issued yearly to identified taxpayers who have failed to file a tax return that was due the prior calendar year (tax year 2019).

Due to pandemic related shutdowns, the IRS has not completed processing all 2019 returns at this time. Therefore, the CP59 notices should not have been sent because some portion of the recipients may actually have filed a return that is still being processed. Taxpayers who filed their 2019 return but nevertheless received the CP59 notice can disregard the letter and do not need to take any action. There is no need to call or respond to the CP59 notice because the IRS continues to process 2019 tax returns as quickly as possible. The IRS regrets any confusion caused by this mailing.

The IRS encourages those who have yet to file their 2019 return to promptly do so.

 

 

Congressional letter to IRS Commissioner Rettig to cease mailing erroneous notices to taxpayers: 

COMMITTEE ON WAYS AND MEANS (house.gov)

Partnerships and Practitioners Wrestle with New Outside Basis Reporting Requirement

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

Partnership returns for 2020, due on March 15, will have a new requirement that partnerships report and analyze each individual partner’s capital account. This presents partnerships and their representatives with a challenge to obtain or develop information that they likely have not previously maintained and that may not even be available. Partnerships and their representatives are scrambling to decide how to comply with this late-breaking requirement. Outside basis has always been – and will continue to be – the responsibility of individual partners. In the past, the IRS generally preferred that partnerships use their book method of reporting partner capital accounts rather than tax, so records may not have been maintained at the partnership level for the required reports. 

Four “creative” and potentially complex and possibly unrealistic methods for complying are suggested in two pages of the draft instructions to Form 1065. Item L, Partner’s Capital Account Analysis, and Schedule M-2, Analysis of Partners’ Capital Accounts, in the draft Form 1065 instructions (still in draft form as of Feb. 9) describe the four methods. There is also a suggested method for complying for publicly traded partnerships. Following one of these methods can help avoid penalties for errors in reporting partners’ capital accounts (see below).

The methods provided may not give an accurate number for outside basis because there may be basis adjustments that only the partner knows. The partnership, for example, would not know the partner’s initial basis, which could vary depending on whether it was acquired by purchase, gift, inheritance or exchange. Outside basis needs to be maintained annually to recognize distributable income, distributions, capital contributions and withdrawals, recognized gains and so forth. An example of information unknown to the partnership that could affect outside basis is where elections are made at the partner level, like cost or percentage depletion, where percentage depletion allows deductions in excess of basis. The calculation of tax capital also requires the partnership to exclude the outside basis differences it is aware of in the form of Section 743(b) adjustments. So, the basis information the IRS is requesting be developed by partnerships at great trouble and expense may not serve IRS needs and could cause unnecessary administrative controversies.  

The objective of the new reporting requirement is apparently for the IRS to ensure that partners are reporting gains on distributions in excess of basis and are limiting losses that exceed basis. However, if the IRS uses incomplete information, the notices may be erroneous. If the IRS uses tax capital information from the partnership that is lower than the outside basis records maintained by the partner, this can result in an erroneous notice and can require some complex correspondence to resolve the issue. It should be noted that the new partnership requirement to report tax capital method does not relieve the partner of responsibility for retaining his/her own records, and the separate and possibly different records seem to invite controversy with the IRS.

Recognizing the complexity and possibly imprecision of reporting results, on Jan. 19, 2021, the IRS issued Notice 2021-13 that provides that, “A partnership will not be subject to a penalty under Sections 6698, 6721 or 6722 due to the inclusion of incorrect information in reporting its partners’ beginning capital account balances on the 2020 Schedules K-1 if the partnership can show that it took ordinary and prudent business care in following the 2020 Form 1065 instructions to report its partners’ beginning capital account balances using any one of the following methods, as outlined in the instructions: the tax basis method, modified outside basis method, modified previously taxed capital method or Section 704(b) method.”

Some Possible Actions for This Year

Some practitioners are recommending that their partnership clients extend their returns. The determination of basis may be time consuming at a busy time of the year, including possible correspondence with individual partners. An extension could allow a partnership to better understand and comply with the new requirement and to correct any errors that might be made in the rush to March 15. If a partnership is subject to the partnership audit regime and an error is discovered after the return is submitted, the return cannot be amended and must go through a more complex administrative adjustment process.

Extending would not keep the partnership from filing earlier but allows it to file or correct a return later. The extension must be filed before the return. A superseded return is a return filed after the original return but before the extended due date of the return. 

Practitioners should also consider alerting clients about possible increased fees, extended returns and the possible need to contact individual partners. 

Urgent EFIN Scam Alert to Tax Professionals

The IRS and its Security Summit partners are warning the tax community of a new scam email that impersonates the IRS and attempts to steal Electronic Filing Identification Numbers (EFINs).

The latest scam email says it is from “IRS Tax E-Filing” and carries the subject line, “Verify your EFIN before e-filing.” The IRS warns tax professionals not to take any of the steps outlined in the email, especially responding to the email. Instead, send the email as an attachment to phishing@irs.gov and notify TIGTA.

View an example of the bogus email:

https://www.irs.gov/newsroom/irs-summit-partners-issue-urgent-efin-scam-alert-to-tax-professionals

Educators Can Now Deduct Out-of-Pocket Expenses for COVID-19 Protective Items

Eligible educators can deduct unreimbursed expenses for COVID-19 protective items to stop the spread of the virus in the classroom. The protective items include, but are not limited to:

• Face masks,
• Disinfectant for use against COVID-19,
• Hand soap,
• Disposable gloves,
• Tape, paint or chalk to guide social distancing,
• Physical barriers (e.g., clear plexiglass),
• Air purifiers, and
• Other items recommended by the CDC to be used for the prevention of the spread of COVID-19.

The new law clarifies that unreimbursed expenses paid or incurred after March 12, 2020, by eligible educators qualify.

https://www.irs.gov/pub/irs-drop/rp-21-15.pdf

Rough Tax Season Ahead for the Resource-Starved IRS!

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

 

The IRS budget has been reduced over the last 10 years while legislation and circumstances, including the pandemic, have added greatly to its workload. The IRS seems stretched and this may result in a rough tax season ahead. It is still backlogged from last year and is about to start this year’s filing season while it is likely to be tasked with a third round of COVID-19 relief and stimulus payments.

This article makes the case for increased funding for the IRS for the upcoming filing season and the future and also provides a link to tell practitioners the timing and what to do for various backlogged interactions with the IRS from last year. The IRS is critical to implementing various aspects of relief and stimulus programs, is critical to raising much needed revenue, and is probably the closest link most individual citizens have with the government – a smooth operation is important to restoring faith in government service during this difficult time.

IRS Needs More Funds to Address 2021 Tax Season Issues and to Deliver COVID Relief and Stimulus Payments

Because additional coronavirus relief legislation was enacted at the end of the year, the IRS has had to reprogram computers and modify tax forms, causing a delayed start to the tax filing season. The IRS normally allows tax returns to be filed late in January each year, but for the current filing season, the IRS announced that it cannot receive returns until Feb. 12 (returns can be prepared earlier but cannot be received until then). This delayed start will be particularly harmful to low-income families who rely on refunds from the Earned Income Tax Credit and Additional Child Tax Credit that will not be received until early March.  

Commissioner Charles Rettig stated: “Planning for the nation's filing season process is a massive undertaking, and IRS teams have been working nonstop to prepare for this as well as delivering economic impact payments in record time. Given the pandemic, this is one of the nation's most important filing seasons ever. This start date will ensure that people get their needed tax refunds quickly while also making sure they receive any remaining stimulus payments they are eligible for as quickly as possible."

The IRS has processed two stimulus payments, sending out approximately 300 million checks or direct deposits to provide relief for families and a stimulus to the economy. It will likely be tasked with delivering a third round of stimulus payments in the coming months. Just as the filing season is starting, the IRS will require substantial resources to reprogram computers, handle taxpayer inquiries and correct errors that are inevitable in sending out so many payments. Taxpayers do not need glitches in our tax system as they cope with other issues related to the pandemic. The IRS needs additional funding immediately to make the upcoming tax season go smoothly. 

IRS Needs More Funds to Address Its Work Backlog from Last Year

While the new tax season is here, the IRS is still working on issues backlogged from the last tax season. Because of the pandemic, the IRS had to delay the tax filing due dates in 2020. IRS offices were closed for much of the year, mail processing was delayed for many months and much important work had to be placed on hold. Many IRS employees are still not in offices and although the IRS has now opened its mail and processed payments, many substantive taxpayer issues from the 2019 filing season have not been addressed. Incorrect notices were sent to many taxpayers because the taxpayer’s mail responses were not properly received and processed by the IRS due to pandemic closures, including:

• If a taxpayer e-filed a return and sent a check in the mail, the check may not have been received until much later, causing the IRS to issue erroneous notices to collect taxes, interest and penalties. Although the IRS has ceased sending some notices, many substantive issues remain.
• Some taxpayers received notices of default on installment agreements for checks that were mailed but not timely received because of mail delays, and this has resulted in some notices cancelling the installment agreements and proposing charges to reinstate the agreement.
• Many returns cannot be filed electronically and the paper returns have not been processed with refunds delayed.
• Taxpayers who have not received refunds from last year’s returns often cannot reach an IRS assistor to explain the problem and have generally been told not to file again or call to ask about their refunds.
• Offers-in-compromise are not being entered by the IRS because agents do not have time to process them.
• In addition to erroneous notices that were sent, in many instances the IRS has not sent notices to properly inform the taxpayer of the error.

The IRS has listed specific transactions that are currently delayed and provided information on how long they are delayed and what taxpayers or their representatives should do.

IRS Needs More Funds to Improve Taxpayer Service

Although the lack of adequate taxpayer communications was exasperated by the COVID pandemic, this was also a significant problem in prior years. The IRS serves taxpayers as they comply with the tax law, but without adequate resources the IRS is unable to effectively serve this function. The IRS has tried to address taxpayer-service problems, but the problems are continuing and may become worse with the added issues of this tax season relating to stimulus payments, delayed credits and refunds, catching up its workload, etc.

The National Taxpayer Advocate indicated in her 2021 Purple Book that the IRS received over 100 million telephone calls in fiscal 2020, but was only able to answer 24%. With 150 million stimulus checks going out, even if there is just a 2% error rate from things like changed addresses or bank accounts, that means 3 million unhappy citizens calling the IRS with questions that will require research and response. Often, taxpayers who call the IRS to try to comply with our complex tax law spend hours on hold and sometimes end up with a “courtesy disconnect.” Taxpayers are told that lines are busy and to call back later. This undermines taxpayer faith in the tax system and reduces the level of taxpayer compliance.

IRS Needs More Funds to Interact with Tax Professionals

In our complex tax system, many taxpayers engage professionals to assist with compliance issues and, like taxpayers, preparers have serious problems engaging with the IRS on substantive issues. Although practitioners have a “hotline,” due to underfunding it is understaffed. Practitioners should not have to spend hours of scarce professional time on the telephone or trying to reach understaffed departments. Clients and professionals who bear the cost of this inefficiency are badly served by our tax system, and the IRS needs immediate funding to be able to work more efficiently and effectively with taxpayer professional representatives.    

IRS Needs More Funds for Its Increasing Workload

In the past 10 years, funding of the IRS has been reduced by $11.5 billion or a reduction of 20% after adjusting for inflation. In this same period, more returns are being filed, resulting in additional work being placed on the IRS with no additional resources, such as:

• Reprogramming of computers and developing new or changed tax forms for law changes;
• Issuing stimulus checks or making direct deposits to taxpayer bank accounts—timely payments are essential to help citizens and to achieve the intended stimulus to the economy;
• Implementing COVID relief measures such as deductions of expenses covered by the Payroll Protection Program (PPP) and forgiveness of indebtedness income for PPP loans; and
• Preventing or dealing with the national problem of identity theft, particularly attempts to steal taxpayer refunds—the IRS must quickly verify the identity of taxpayers to avoid delaying these refunds. This function requires additional human capital.  

Some of the current issues relate to the IRS’ inability to update its information systems because of lack of funding. The Taxpayer First Act of 2019 identifies improvements to be made, but these are to be phased in through 2025.

IRS Needs More Funds to Collect Unpaid Taxes

The IRS is incredibly efficient in collecting revenue, having collected $3.5 trillion in fiscal year 2020 when the government had a budget of $11.5 billion, a revenue/expense ratio of 300:1. Revenue collection is particularly important in a time of record debt and deficits to fund government relief and other programs, to stimulate the economy and to keep government borrowing as low as possible. Our self-assessment system of taxation relies on voluntary compliance by taxpayers, but this has to be backed up by a credible audit potential. In recent years, the audit rate has declined to around .5% of tax returns filed and for 2019 returns, this rate of audit has likely declined even more. Having a chance of being audited every 200 years on average does not provide much of a credible audit potential.

The most recent report of the tax gap (the amount of taxes that should have been paid but were not) was published in 2019, and for tax years 2011-2013 they averaged a net (after later collections) of $381 billion dollars or about 14% of total tax liability. This level of noncompliance is unacceptable when revenue is so badly needed. If the IRS is unable to collect taxes fairly due, compliant taxpayers may have to pay more than they should fairly have to pay. This may lead to disrespect for the tax system, growing noncompliance and lack of faith in our government.

IRS Immediate Needs

The IRS needs funds for:

• the current tax season and COVID-19 relief implementation,
• catching up on last season’s backlog,
• service to taxpayers,
• efficiently working with tax professionals,
• properly collecting taxes owed, and
• other new unfunded missions.

The IRS is one of the most important points of contact between the federal government and its citizens. Effective, efficient and fair administration are critical to maintaining faith in government during a time of crisis. 

Adios to California? Here’s What You Need to Know

By Torakichi Jesús Oba, EA, CPA

I apologize in advance to my CPA colleagues in Texas for the sudden influx of new clients who have entire conversations consisting of the word ”dude,” as leaving California for Texas has become quite popular of late. However, I urge a certain measure of caution with these monosyllabic types because breaking California tax residency brings to mind the famous line from Hotel California, ”You can check out anytime you’d like, but you can never leave.”

California tax residency entails worldwide taxation of one’s income to its state treasury. For purposes of California income tax, a tax resident is someone who is present in California for other than a temporary or transitory purpose, or someone who is domiciled in California but outside of the state for a temporary or transitory purpose. To successfully cease to be a tax resident, one must successfully establish a domicile outside of California and have their closest ties shift to their new jurisdiction of residence. These close ties are the specifics of day-to-day life that include, but are not limited to, where one’s spouse/children are located, location of principal residence, state where taxpayers are registered to vote and other criteria that give substance to the daily life led by any taxpayer. The State of California Franchise Tax Board (FTB) Publication 1031 gives a great overview to the subject and provides specific examples that are of use when determining tax residency.

However, just because someone successfully breaks tax residency does not mean they are done paying California tax, as nonresidents are taxed on income from California sources. California nonresidents are generally subject to withholding on sales of California real estate, income allocations or distributions from CA S-Corporations and CA partnerships. These withholding requirements are addressed in FTB Publications 1016, Real Estate Withholding Guidelines and 1017, Resident and Nonresident Withholding Guidelines.

I would boil all this down to the following key concepts and reinforce it with the specifics in the FTB publications:

1. Breaking CA residency – Make sure that a taxpayer really does live and go about their day-to-day life in Texas and does not go back to California with any regularity.

2. California sourced income = California tax due with the potential of backup withholding.

2020 Publication 1031 Guidelines for Determining Resident Status

Withholding on nonresidents | FTB.ca.gov

FTB Publication 1016 | FTB.ca.gov

T. Jesús Oba, EA, CPA, is an accountant based in San Diego, CA, who specializes in international taxation matters. He has written for Tax Notes International and CalCPAs and works collaboratively with TXCPA’s Federal Tax Policy Committee. When not in his office, Jesús is looking for delicious burritos.