Updated List of Forms the IRS will Temporarily Allow Digital Signatures That Cannot be E-Filed

As of April 29, 2021, the IRS will temporarily allow digital signatures on certain forms that cannot be filed electronically. The forms must be postmarked from Aug. 28, 2020, through Dec. 31, 2021:

• Form 11-C, Occupational Tax and Registration Return for Wagering
• Form 637, Application for Registration (for Certain Excise Tax Activities)
• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return
• Form 706-A, U.S. Additional Estate Tax Return
• Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions
• Form 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust
• Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations
• Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts
• Form 706 Schedule R-1, Generation-Skipping Transfer Tax
• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return
• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return
• Form 730, Monthly Tax Return for Wagers
• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations
• Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation
• Form 1120-H, U.S. Income Tax Return for Homeowners Associations
• Form 1120-IC DISC, Interest Charge Domestic International Sales – Corporation Return
• Form 1120-L, U.S. Life Insurance Company Income Tax Return
• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons
• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return
• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts
• Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies
• Form 1128, Application to Adopt, Change or Retain a Tax Year
• Form 2678, Employer/Payer Appointment of Agent
• Form 3115, Application for Change in Accounting Method
• Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
• Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner
• Form 4421, Declaration – Executor’s Commissions and Attorney’s Fees
• Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes
• Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues
• Form 8038-G, Information Return for Tax-Exempt Governmental Bonds
• Form 8038-GC Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales
• Form 8283, Noncash Charitable Contributions
• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms
• Form 8802, Application for U.S. Residency Certification
• Form 8832, Entity Classification Election
• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent
• Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement
• Elections made pursuant to Internal Revenue Code section 83(b)

IRS approves temporary use of e-signatures for certain forms | Internal Revenue Service

IRS Operations During COVID-19: Mission-critical functions continue | Internal Revenue Service

Delays in IRS’ Response Time

Tom Ochsenschlager, CPA, JD

A Washington Post article cited a discussion regarding delayed IRS responses with Erin M. Collins, the national taxpayer advocate for the independent Taxpayer Advocate Service of the IRS.

Collins indicated the response problems have been exacerbated due to the backlog of returns that require manual processing (apparently due to the reduction in active employees attributable to the COVID restraints) and the daunting task of issuing millions of stimulus payments. The following are some of the statistics Collins provided related to the correspondence backlog: 

• Only one out of every 50 calls to IRS customer service has gotten through;
• There has been a 300% increase in calls to the IRS’ Accounts Management help line;
• The IRS has answered just 2% of the more than 70 million calls to the 1040 help line;
• The IRS has identified 29 million returns for manual processing;
• 8 million 1040 returns were in suspense due to the recovery rebate credit or the earned income tax credit; and
• 7 million 1040s are being held up due to processing or identification errors.

Collins made it clear that the IRS is suffering from limited resources, ergo, they need increased funding.

NTA Blog: 2021 Filing Season Bumps in the Road: Part I - Taxpayer Advocate Service (irs.gov)

Federal Tax Return Extension Issues for Texas Practitioners

If you did not file extensions at March 15 or April 15, you may be required to file them by paper. Extensions can still be e-filed for individual returns up through May 17, but as it stands right now, these will not be available for e-file after May 17. This is because the IRS has not programmed the disaster area ZIP codes into its system with a June 15 due date.

We have reached out to our IRS stakeholder liaison and asked that the IRS remedy this. The issue is being elevated, so hopefully it will be resolved. Our IRS contact has indicated that any incorrect penalties will be reversed if you are in the disaster area or have self-certified for the disaster. Whether the reversal is automatic has yet to be determined.

For now, if you need to get an extension filed for some reason, you should send a paper extension. Consider a notation at the top “Federally declared disaster area – filed under Section 7508A.”

We will keep you updated on any changes to this issue.

 

Employee Retention Credit Update

In accordance with the American Rescue Plan Act (ARPA) passed in March of 2021, Notice 2021-23 expands the benefits of the “employee retention credit” (ERC) for 2021.

The ERC available to an employer is claimed as a credit against the employer’s share of Social Security tax. There is also a refundable portion of this credit that can help offset other portions of the employer’s payroll tax liability.

Generally, the ERC is available to employers whose business gross receipts in 2020 and 2021 were at least 50% or 20%, respectively, less per qualified quarter for the same period in 2019 or that fully or partially suspended its operations due to government-imposed restrictions related to COVID-19. For 2021, eligibility can also be made for a quarter based on the gross receipts’ comparison for the previous quarter. As an example, a business may choose to qualify for the first quarter of 2021 based on a comparison of the fourth quarter 2020 gross receipts with the fourth quarter 2019 gross receipts.

Under prior law and IRS guidance, the employer (or any member of its controlled group) was not eligible for the ERC if it received a Paycheck Protection Program (PPP) loan. The new guidance, in accordance with the ARPA, retroactively revokes this limitation. However, limitations on the credit are imposed to the extent wages were used to qualify for forgiveness of a PPP loan.

The maximum credit amounts are:

• For 2020, the lesser of $5,000 or 50% of the first $10,000 of “qualified” wages per employee.
• For 2021, the ARPA increased the credit to the lesser of $7,000 or 70% of the first $10,000 per employee in each quarter of the year not to exceed $28,000 per employee per year.

The definition of “qualified” wages:

• For small employers, wages and expenses paid to qualified health plan expenses for all employees:
  • For qualification in 2020, a small employer is defined as having had 100 or fewer full-time employees in 2019 and 500 or fewer in 2021 to qualify in that year. Full-time employees are defined as those averaging 30 hours of service per week or 130 hours of service per month.
• For large employers, only the wages paid to a qualified health plan on behalf of an employee for periods the employee was not actively employed.

Additionally, the ARPA extended the qualification for credit to colleges, universities, hospitals and entities that provide medical care.

How to claim the employee retention credit for the first half of 2021 (journalofaccountancy.com)

N-2021-23 (irs.gov)

FAQs: Employee Retention Credit under the CARES Act | Internal Revenue Service (irs.gov)

Several IRS Payment P.O. Boxes Closing in 2022

The IRS is closing several individual payment post office boxes (or lockbox addresses) in San Francisco, CA, and Hartford, CT, areas beginning Jan. 1, 2022. Payments are currently being forwarded to Louisville, KY, and Cincinnati, OH, through Dec. 31, 2021. However, payments mailed to these closed payment locations after Jan. 1, 2022, will be returned to sender.

To help ensure timely receipt, the IRS encourages practitioners and taxpayers to avoid mailing to these closing addresses as there could be mail delays. Please check Where to File for active addresses before mailing your payments. If you receive an IRS payment letter, send your payment to the address located in the letter.

IRS Lockbox Addresses for 2021

Administration Considering Tax Increases

As discussed in our Nov. 20 blog, the Biden Administration is considering increasing taxes. Whether that will be accomplished is, of course, speculative. But given that the Democrats have a majority in the House and Senate, we are experiencing a historically high federal deficit and President Joe Biden is proposing a sweeping two-part “infrastructure, climate and jobs” plan estimated at $3 trillion, a tax increase is perhaps a bit more likely now.

To pay for this infrastructure package, the following are likely to be the proposed federal tax changes:

• Raise the corporate tax rate from 21 to 28%,
• End subsidies for fossil fuel companies,
• Require multinational corporations to pay the U.S. tax rate rather than the lower rate paid by their foreign subsidiaries,
• Increase the top individual income tax rate from 37 to 39.6%,
• For taxpayers reporting more than $1 million in taxable income, their capital gains would be subject to the 39.6% rate, and
• An increase in taxes for appreciated assets passed through an estate.

While obviously controversial, the plan does not necessarily need Republican support to become law.

Biden Announces Huge Infrastructure Plan to 'Win the Future'

Biden Wants to Pay for Infrastructure Plan With 15 Years of Corporate Taxes

PPP Deadline Extended

On March 30, President Joe Biden signed into law the PPP Extension Act of 2021, H.R. 1799 extending until May 31, 2021, the application deadline to participate in the “Second Draw” Payroll Protection Program loans.

The lender financial institution should have the appropriate forms for the application. The list of approved lenders is available online with the Small Business Administration’s lender match tool. Accounting firms can also prepare and process applications using the CPA.com CPA Business Funding Portal.

Generally, the Second Draw maximum amount is equal to 2.5x the average monthly 2019 or 2020 payroll costs up to $2 million. For businesses in the Accommodation and Food Services sector, the 2.5x average monthly payroll is increased to 3.5x (based on NAICS 72 classification).

It is important to remember that the PPP loans can be forgiven if the employee and compensation amount are maintained and at least 60% of the proceeds are spent on payroll costs. The borrower must apply through the financial institution that managed the loan for the forgiveness within 10 months after the final day of the covered period.

Biden signs PPP deadline extension into law - Journal of Accountancy

Paycheck Protection Program (sba.gov)

Second Draw PPP loan (sba.gov)

Federal Tax Filing Relief

IR-2021-59, issued in response to the continuing pandemic, extends the filing due date for all individual returns (1040 forms), regardless of residence of the taxpayer, and payment of any balance due with the return until May 17. It is important to note that this extension does not apply to estimated tax payments, nor to any other type of return other than Form 1040.

For residents of Texas, IRS Publication 2194 "Disaster Resource Guide" provides a longer extension to file returns and make payments, until June 15, for individuals and businesses located in areas identified by the Federal Emergency Management Agency as a winter storm disaster area. These areas in Texas are identified at Texas Severe Winter Storms (DR-4586-TX) | FEMA.gov. This extension also applies to individuals and businesses not necessarily located in a disaster area that utilize a tax preparer located in a disaster area.

Many states have provided relief similar to the pandemic and winter storm relief. The following is the relief offered by Texas and states adjacent to Texas:

• Texas has extended its franchise tax deadline from May 15 to June 15.
• Oklahoma has extended the due dates for individual and business returns and first quarter estimated payments to June 15.
• Louisiana extended individual, corporate, franchise, fiduciary and partnership returns and payments to June 15.
• New Mexico extended its deadline for filing and payment of personal income taxes to May 17. The state tax exemption does not apply to business tax returns or estimated payments.

Three-Year Holding Period for Partnership Interests Acquired for Services

By Tom Ochsenschlager, J.D., CPA

Section 1061 enacted with the Tax Cuts and Jobs Act (TCJA) generally requires that a taxpayer, other than a C corporation, must hold a “carried interest” in a partnership for three years to be treated as a long-term capital gain. On Jan. 7, the IRS issued final regulations in TD 9945 providing the details for implementing the three-year requirement. The final regulations are effective for tax years beginning on or after Jan. 19, 2021, but taxpayers have the option to apply them the effective date of the TCJA.

The three-year holding period applies regardless of whether the receipt of the carried interest is not subject to tax in accordance with Rev. Proc. 93-27. The guidance is effective when the regulations are made final, but taxpayers have the option to apply them to tax years beginning after Dec. 31, 2017, the effective date of the TCJA.

A carried interest is described as an interest in a partnership received by an “applicable trade or business” (ATB) in exchange for having provided “substantial services” for the partnership. Under Section 1061, a service is substantial if it consists of raising or returning capital, or investing in, disposing of, or developing specified assets. For example, such an interest is relatively common in real estate partnerships where an individual receives a partnership interest for having negotiated the terms and conditions for the purchase of, say, an apartment complex on behalf of the partnership. The proposed regulations provide a detailed definition of an ATB that generally comports with an entity that is engaged in providing substantial services as described above.

It is important to note that the three-year holding period continues to be applicable to any individual or entity, other than a C corporation, to whom the ATB transfers its interest in the partnership. The proposed regulations’ preamble clarifies that where the services are provided through a tiered structure, each passthrough entity in the tiered structure is subject to the three-year holding period requirement for long-term capital gain treatment. Transfers of a carried interest to a related or unrelated entity are subject to revaluations at the date of the transfer. If the transfer is a gift to a related person within the three-year holding period, it is subject to tax at the donor level – an exception to the general rule that gifts are not taxable. The three-year holding period cannot be avoided by utilizing an installment sale of the carried interest. The holding period is based on the date of the sale regardless of when the cash is received.

The three-year holding period requirement not only applies to a disposition of the partnership interest by the ATB, it also applies to that partner’s share of the partnership’s long-term capital gain other than the partnership’s Sections 1231 and 1256 gains (and losses), qualified dividends under Section 1(h)(11) and mixed straddle rules described in Section 1092(b). The proposed regulations provide an exception referred to as “partnership transition amounts” whereby the partnership can elect an exception for the disposition of assets that were held by the partnership for more than three years as of Jan. 1, 2018. The partnership can make this election for its taxable year beginning in 2020 or later but, once the election is made, it is applicable to all subsequent years.

The proposed regulations provide complex rules for a few exceptions whereby, in general, the three-year holding period does not apply to distributions from the partnership related to the amount of capital that was contributed to the partnership by the ATB and/or distributions that are subject to tax under Section 83. However, it does apply to the distributive share of gain from the sale of any asset held less than three years by the underlying partnership.  

The proposed regulations explain that the entity receiving the substantial services must provide the carried interest taxpayer with information required to comply with Section 1061 and, similarly, the carried interest taxpayer must provide similar information for any recipient of its transfer of any portion of the carried interest.

The final regulations clarify several issues that had been raised with the proposed regulations:

• Where an ATB partner has a capital interest in the partnership that is in addition to the partner’s interest from providing services;
• Situations where the ATB partner makes a loan to the partnership and the loan is repaid by another partner;
• The rules applicable where the partnership interest is transferred to a taxpayer related to the ATB; and
• The tax treatment where an ATB partner that holds its interest more than three years in a partnership where 80% or more of the partnership’s assets would be characterized as short-term gain if disclosed of in a taxable transaction.

This has been a very general summary of 162 pages of the final regulations that should be read in detail in situations that include carried interest.

td-9945.pdf (irs.gov)

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)