Highlights of the Coronavirus Response and Relief Supplemental Appropriations Act

President Trump has signed the stimulus bill passed by Congress on Dec. 27, 2020.  It includes $1.4 trillion to extend expiring tax measures and $1 trillion for new tax benefits. Some of the more important provisions are the following:

  • Permits a tax deduction for expenses paid for by a forgiven Paycheck Protection Program loan (reversing the previous position taken earlier this year by the IRS stating that these expenses were not deductible)
  • Extends the employee retention credit for the first two quarters of 2021
  • Retroactively permits the employee retention credit for businesses receiving PPP loans
  • Permits businesses to deduct 100% of restaurant meals in 2021 and 2022
  • Extends and expands the sick pay and paid family leave credits through 2021
  • Permits taxpayers who do not itemize to claim up to $600 in charitable contributions on their 2021 returns
  • Continues through 2021 the provision that permits corporations to deduct 25% of taxable income for charitable and food inventory contributions
  • Provides $600 checks for each taxpayer and their qualified children subject to income limitations

Final Regs Expand Property Eligible for Like-Kind Exchanges

By Tom Ochsenschlager, JD, CPA

Last month, the IRS issued final regulations (TD 9935) explaining the limitations on like-kind exchanges that were imposed in the Tax Cuts and Jobs Act (TCJA). The TCJA limited the ability to qualify for a tax-free exchange under Section 1031 to exchanges of real property. Accordingly, exchanges of personal or intangible property that qualified for tax-free exchange prior to the TCJA no longer do.

In addressing the TCJA limitation, the proposed regulations limited the definition of real property to land, buildings and their permanent structural components and provided a “purpose or use test” that excluded incidental property located within the real property that was unrelated to the use or occupancy of the property such as machinery and equipment.

The final regulations revoke the purpose or use test, thereby expanding the definition of real property to include property held for the productive use in a trade or business. Additionally, the proposed regulations provide that even property not considered real property under state law may qualify based on the facts and circumstances. However, it is clear in the regulations that regardless of state law definition of real property, intangibles such as artwork, patents, intellectual property, stock in a corporation and a partnership interest do not qualify as assets eligible for tax-free exchange.

The final regulations are generally effective for exchanges of real property completed after Dec. 31, 2017. An amended return may be necessary to take advantage of the expanded definition of property now eligible for exchanges that occurred in 2018 and 2019 that did not qualify under the proposed regulations.


100% Depreciation Rules

By Tom Ochsenschlager, JD, CPA

The bonus depreciation rules were passed as part of the Tax Cuts and Jobs Act (TCJA). These rules generally permit a 100% deduction on Form 4562 for most depreciable assets the year they are placed in service beginning after Sept. 27, 2017 and before Jan. 1, 2023. After 2022, the rate for bonus depreciation phases out. It will drop to 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026.

Applicable Property

To be eligible for the write-off, the property must have a useful life of 20 years or less. That includes vehicles, equipment, furniture and fixtures, machinery, computer software and qualified improvement property such as improvements to the interior of nonresidential property. Special rules are provided for self-constructed property.

If the property is used for both personal and business purposes, such as a vehicle, it is eligible for the bonus depreciation write-off only if it is used in the business more than 50% of its total use.

The deduction can be claimed in the year the applicable asset is placed in service, which in some instances may be later than the year the property is acquired.

Special rules apply to limit the availability of the bonus depreciation for passenger vehicles such as automobiles, SUVs, pickups and vans with a vehicle weight of 6,000 pounds or less. For these vehicles, if “bonus” depreciation is elected, the depreciation deduction is limited to $18,100 in the year placed in service ($10,000 “normal” depreciation plus $8,100 bonus depreciation). In years after the vehicle is placed in service, the depreciation deduction is the same as depreciation would be without the bonus election, which is $16,100 in the second year, $9,700 in the third year, and $5,760 in the later years. See the tables in Rev. Proc. 2020-37.

Differences from Section 179 Depreciation

The 179 deduction is limited to the business’ taxable income before considering the deduction. The remainder can be subject to “regular” depreciation rules or can be carried forward. The TCJA bonus depreciation, however, is not limited to taxable income and accordingly can generate a loss to be carried back for a refund of prior taxes. 

The TCJA also increased the limit for the 179 deduction to $500,000 in 2017 and $1 million in the following years. However, the benefit of the 179 deduction is phased out if purchases that would otherwise qualify exceed $2.5 million. 

Unlike the 179 deduction, the TCJA bonus depreciation is applicable to used property if the taxpayer acquired the used property from an unrelated party and it was not acquired in a tax-free transaction.

Details for the application of the TCJA bonus depreciation are available in the 137 pages of regulations https://www.irs.gov.gov/pub/irs-drop/td-9916.pdf.


Expenses Covered by PPP in 2020 Are Not Deductible

The Payroll Protection Program (PPP) was enacted as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Section 1106 of the CARES Act provides forgivable loans to eligible businesses if they retain their employees for the covered period, and the funds from the loans are used for payroll costs, health care benefits, interest on debts related to the business, rents and utility costs. 

To the extent any of these costs are covered by a PPP loan, these expenses are not tax deductible if the loan is forgiven based on current IRS guidance. The CARES Act specifically states that the forgiveness of the debt is excluded from the business’ income. However, the IRS states that Section 265 denies a deduction for expenses attributable to tax-exempt income and that the forgiveness of the loan is the equivalent of tax-exempt income. Accordingly, the IRS’ position is that taxpayers that received PPP loans are not permitted to claim a tax deduction for expenditures related to the loan if the PPP loan is forgiven. (This is a controversial position that, in effect, diminishes or denies the benefit of the PPP program and may be challenged going forward.)   

This raises the question of how to treat these expenses incurred in 2020 if the loan is still outstanding at the end of the year. Rev. Rul. 2020-27 states that the expenditures covered by the PPP are not deductible on the business’ 2020 tax return even where the business has not applied for or received forgiveness of the debt if there is a reasonable expectation that the loan will be forgiven. Rev. Proc. 2020-51 does provide that the expenses covered by the PPP loan are deductible if and when the forgiveness of the loan is denied or the taxpayer decides not to request forgiveness.  



Year-End Planning for High-Income Individuals

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

The direction of federal tax legislation and policy for the next two years may depend on the outcome of the Georgia runoff election for its two U.S. senators on Jan. 5. If the Republicans win either of those seats, they will retain control of the Senate and likely prevent the unwinding of  provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) and the raising of the tax rates on higher-income individuals and businesses as have been proposed by President-elect Joe Biden.

If the Democrats win both seats, the Senate will have an equal number of Democratic and Republican senators, with Vice President-elect Kamala Harris having power to cast the tie-breaking vote to give Democrats a majority in the Senate. This would mean that if Democrats vote along party lines, they would:

  • Be able to pass any legislation requiring a simple majority,
  • Take over the Senate leadership,
  • Take over Senate committees (including the tax-writing Senate Finance Committee), and
  • Have a larger staff to support their work.

Taking over both chambers of Congress might also be seen as a mandate by Democrats for their tax legislative agenda.

Reflecting the fundamental importance of the Georgia runoff, it is likely to be the most expensive in U.S. history, with both parties initially planning to spend at least $200 million in the state. It is impossible to call the election with so much advertising and get-out-the-vote organization, so for year-end tax planning we should be prepared for possible changes. Also, from a political perspective, most of Biden’s proposals affect high-income taxpayers who constitute a very small portion of voters in relation to those with lower incomes who may want to reduce the disparity in wealth and to have higher-income individuals and businesses pay more to support government programs and reduce the deficit.

If the Republicans win either of the Georgia Senate seats, tax planning will be similar to planning in the past—generally accelerate deductions and defer income. Although their path is a narrow path, if the Democrats win both Georgia seats, then there are a number of possible tax law changes that could require prompt action by taxpayers and these will be covered in the rest of this article.

Higher Tax Rates on High-Income Individuals

Biden has said that he will not raise tax rates on those with income of $400,000 or less, but that for taxpayers with incomes above that amount, marginal tax rates would increase from 37 to 39.6%. A 2.6% increase in income taxes does not sound like much, but that is not the end of it—there are other proposals that might increase effective tax rates for high-income individuals. Increased rates would probably apply from Jan. 1 and would be a blended rate for the full year, rather than having one rate for income before the legislative change and another for after the change.

Unfortunately, we will not know the results of the Georgia runoff until Jan. 5, after the current tax year ends. However, high-income individuals who can take bonuses or accelerate compensation might consider doing it before year end. Pass-throughs and sole proprietorships might want to accelerate income into 2020. Those with regular IRAs may want to consider converting them to Roth IRAs while the rates are lower. Note that this is the opposite of traditional year-end planning that emphasizes deferring income.

Social Security Tax Changes

Biden’s proposal would collect Social Security taxes on earnings over $400,000 for an additional 6.2% for an employee, adding to the 39.6% marginal rate in high-income earners for a total rate of 45.8%. For self-employed individuals and businesses with owner-employees, both the employer and employee parts of Social Security would have to be paid, adding another 6.2% and bringing the effective marginal tax rate to 52% on earnings.

This is an interesting proposal in that it would retain the current cap on Social Security earnings at $137,700 ($142,800 next year) but would then start collecting Social Security taxes again for those with earnings over $400,000. Benefits’ calculations would likely continue to be capped at the current level with no additional benefits from the additional taxes paid.  

Capital Gains Tax Rates

Biden has said that for individuals with incomes over $1 million, he would eliminate the preferential tax rate, currently at 20%. This would mean that for those high-income taxpayers, long-term capital gains would be taxed at 39.6%, plus the net investment income tax of 3.8%, for a total of 43.4% versus 23.8% total currently. Individuals with long-term gains in their portfolios might consider selling before the new rate applies. This may not require action by year end because the new rate would likely be structured to have separate rates on gains before and after a tax bill is introduced (or first considered by the House Ways and Means Committee or some effective date other than a retroactive application to Jan. 1). This effective date is speculative, but it could give taxpayers a chance to see the results of the Jan. 5 Georgia runoff before rushing to sell and ending deferral of tax on their unrecognized gains. Going forward, the incentive to invest for capital gains would be reduced by roughly 20% of the gain and might encourage some changes in investments.


The Biden plan would eliminate the preferential tax rate on qualified dividends, raising the tax rate from 20 to 39.6% for high-income individuals. This might cause rethinking of investment selections overall, with dividend stocks yielding roughly 20% less than currently.

Itemized Deductions

Biden has expressed a desire to restore the Pease limitation (cap on itemized deductions repealed by TCJA) for those with incomes over $400,000. A high-income taxpayer may wish to accelerate charitable contributions and other itemized deductions into 2020 rather than possibly losing them to Pease limits in 2021.

If the Democrats control the Senate and House, there will be a push to restore the full deductibility of state and local income taxes, which were capped at $10,000 in the TCJA. This could be a benefit to those with higher income and high-value real estate in states where high tax rates apply. Congressional leaders such as Senate Minority Leader Chuck Schumer and House Speaker Nancy Pelosi from New York and California have urged restoring full deductibility of state taxes and would likely add this to any major proposed tax legislation. This is not a sure thing, however, with some not wanting to skew benefits to high-income and wealthy individuals in other states. Also, if the Pease limit is enacted, this might limit the availability of the deduction for higher-income individuals.

Note that the strategy for accelerating or deferring deductions depends on the taxpayer’s circumstances; e.g., defer paying state and local taxes hoping to be able to deduct them next year, but accelerating other deductions into 2020 to avoid Pease limitations in 2021.

Qualified Business Income Deduction for Pass-Through Entities

The qualified business income deduction (QBID) was created by the TCJA to give pass-through business owners a tax break somewhat commensurate with the corporate tax rate reduction from 35 to 21%.

However, Biden proposes that the QBID be phased out for those earning more than $400,000 a year. This would mean that the marginal tax rate for income from pass-through entities for high-income individuals would increase from an effective rate of 29.6% (the 37% top rate less the tax-free 20% QBID) to the maximum individual income tax rate of 39.6% with no QBID. This marginal rate can go up to 52% for high-income earners who own pass-throughs as described in Social Security tax changes above.

Biden’s proposal would increase the corporate tax rate from 21 to 28% and would also eliminate the preferential rate for qualified dividends, and this may create disparities in rates between corporations and pass-throughs that could affect future choice of business entity decisions.  

High-income individuals with QBID may wish to accelerate business income into 2020 to maximize the QBID rather than possibly losing it altogether in 2021.

Step-Up of Basis at Death

Biden would eliminate the tax-free step up in basis at death. Without this step-up, taxpayers may wish to consider selling appreciated investments by year end to take the gains at current rates rather than at the new higher rates for themselves or their heirs. If inherited assets have a built-in loss, the basis will likely not carry over, with the heir’s basis being fair market value at date of death, similar to treatment of depreciated gifts.

Although the president-elect may recommend carryover basis, this may be difficult to enact with several prior unsuccessful efforts, even having been enacted in the Tax Reform Act of 1976 and then repealed retroactively because of difficulties in determining the basis of a decedent who is not around to explain any possible adjustments.

Estate and Gift Taxes

Biden and Sen. Bernie Sanders worked with experts to develop Democratic Party policy recommendations that included addressing wealth redistribution. The policy position states that, “Estate taxes should also be raised back to the historical norm.” This has since been specified to set the unified credit offset amount to $3.5 million per taxpayer, roughly one third of the current amount. In addition, the offset for lifetime gifts would be limited to $1 million per taxpayer.  Biden would also increase the top estate tax rate to 45 from 40%. Some high-net-worth families might wish to make wealth transfers by taxable gifts while they can still use the unified credit to offset larger transfers. This proposal may be difficult to enact with a narrow majority in the Senate and with some senators voting across party lines to protect family businesses and farms in their states.

Wealth Taxes and Even Higher Rates?

During the Democratic primaries, Sanders and Sen. Elizabeth Warren made strong cases for redistribution of wealth through wealth taxes on high-net-worth individuals and for higher income tax rates on high-income individuals. If the Democrats take the Senate, there may be pressure for more aggressive tax policies to address perceived disparities in wealth. Although Biden has not embraced wealth taxes, Democrats may perceive the turnover of Congress as a mandate and might send the president-elect bills that go beyond what he may want. The Biden-Sanders Unity Task Force on Building a More Progressive Tax System pledged to, “Use taxes as a tool to address extreme concentrations of income and wealth inequality. As a means of strengthening tax progressivity and paying for investments in U.S. productivity, increase taxes on the wealthiest Americans by limiting unequal and unproductive tax expenditures. In addition, limit the ability of wealthy taxpayers to defer and avoid taxes on income (especially that relate to financial investments) … and expand payroll taxes on upper-income taxpayers to fund more generous Social Security benefits.”


High-income individuals and their tax advisers should watch the results of the upcoming Georgia election and be prepared to act quickly if necessary to reduce taxes, including taking some actions defensively before year end. With high debt from coronavirus and economic recovery, with proposals to provide added benefits for health care and education, and with major infrastructure plans and other possibly expensive programs, revenue will need to come from somewhere, and the president-elect’s proposals are aimed at raising roughly $3.33 trillion in taxes over the next 10 years primarily from high-income individuals and businesses. Year-end tax planning could be extremely important this year for your high-income clients.

New Rules for Reporting Tax Basis Partner Capital Accounts

By David Donnelly, CPA-Houston; Carr, Riggs & Ingram, LLC

On Oct. 22, 2020, the IRS released draft Form 1065 instructions for 2020. These instructions clearly require that partnerships and LLCs taxed as partnerships report their partners’ capital accounts on the tax basis of accounting. (For the remainder of this explanation, please understand that “partner” and “partnership(s)” refer to both traditional partnerships as well as LLCs taxed as partnerships, and their partners and/or members). Please note that these rules do not apply to partnerships that do not have to present Schedules L, M-1 or M-2 (receipts under $250,000, assets under $1 million, timely filed Schedule K-1s and no requirement to file M-2). 

Although the instructions include the methodology to be used by publicly traded partnerships, the discussion below does not address those rules.

The predecessor requirement originally appeared in the Form 1065 instructions for 2018 returns and caused much consternation in the tax preparation community—many practitioners with small to mid-sized partnerships have clients with somewhat dubious accounting methods that are not tax basis. Determining the tax basis capital accounts for those clients would be difficult and time consuming at best and, for some clients, practically impossible. 

TXCPA’s Federal Tax Policy Committee was one of the commentators raising this issue. The newly released draft instructions address the professional community’s concerns and provide some solutions to determine the partners’ capital accounts in those instances where the historical records do not support a readily ascertainable balance. 

The instructions provide relief for two situations that are problematic for practitioners. 

In the first situation, where the beginning capital account is on the tax basis, the instructions state: “If you figured the partner's capital account for last year using the tax basis method, enter the partner's ending capital account as determined for last year on the line for beginning capital account. If you reported a negative ending capital account to a partner last year and a different amount is figured for the partner's beginning capital account using the tax basis method this year, provide an explanation for the difference.” 

This seems to provide a mechanism for correcting a previously incorrect tax basis capital account and should benefit those clients where the previous year capital account was incorrect. However, the instructions do not address correction of the previous year ending capital account where the capital account was positive.   

For the second situation, the instructions state if the partnership, “...did not report partners’ capital accounts using the tax basis method last year and did not maintain capital accounts under the tax basis method in your books and records, you may refigure a partner's beginning capital account using the tax basis method, modified outside basis method, modified previously taxed capital method, or Section 704(b) method, described below, for this year only [emphasis added].”

There are now essentially four methods for determining tax basis capital accounts. It is helpful to be aware of the different methods and their applicability in order to understand the new instructions.

The four methods are the transactional method, the modified outside basis method, the modified previously taxed capital method and the Section 704(b) method. The descriptions below are greatly simplified and are only intended to provide a framework for understanding the instructions. These methods are explained in both the new instructions and, with the exception of the 704(b) method, in Notice 2020-43; practitioners should review both sources when determining how each method works and which one might be preferable for each partnership.

Transactional Method 

This is the traditional method of determining the partner’s capital account under Section 705—simplistically, the tax basis capital account is calculated by starting with cash plus the tax basis of assets contributed, less any liabilities assumed by the partnership, plus income or loss allocated to the partner, less withdrawals and distributions. This has many adjustments, such as depletion, Section 734(b) adjustments, tax exempt income, etc., which are beyond the scope of this discussion.

It is clear in the instructions that the transactional method is the method the IRS wants practitioners to use. The other three methods are only to be used to arrive at a beginning tax basis capital account for 2020, if necessary.

Modified Outside Basis Method

According to the instructions, the beginning tax basis capital account is “equal to the partner's adjusted tax basis in its partnership interest as determined under the principles and provisions of subchapter K, and subtracting from that basis the partner’s share of partnership liabilities under Section 752 and the sum of the partner’s net 743(b) adjustments.” The instructions further state that practitioners “may rely on the adjusted tax basis information provided by your partners.” The instructions are silent regarding a situation where partners provide new adjusted tax basis information which, in total, exceed the partnership’s tax basis capital account. 

Modified Previously Taxed Capital Method

Under this method, the partnership assets are marked to fair market value (FMV) and deemed sold. The partners’ beginning tax basis capital accounts are calculated by determining the amount of cash allocated to each partner and removing any gain or loss allocated to each partner to arrive at an approximation of their basis. The instructions and Notice 2020-43 have a more detailed explanation of how this mechanism works; this method essentially allocates the tax basis of the partnership’s assets, net of liabilities, to each partner based on their ownership percentage.

Section 704(b) Method

The beginning tax basis capital account is the partner’s 704(b) capital account less any 704(c) built-in gain plus any 704(c) built-in loss.  

All three of the new methods will present practical problems in their application. Some that seem apparent are:

  • There could be winners and losers as a result of adjusting the capital accounts.
  • Under the modified previously taxed capital method, determining the amount of imputed cash allocated to each partner could be difficult if the allocation percentages change due to the return of capital to the partners (a ”waterfall”).
  • It is unclear how to adjust the balance sheet for outside basis adjustments.
  • It is unclear how to adjust the balance sheet where the practitioner relies on the tax basis information provided by the partners.

Some commentators, including TXCPA’s committee, suggested to the IRS that each partner should be responsible for maintaining the records of their tax basis in the partnership, similar to the rules for S corporation shareholders. The IRS has seemingly rejected this concept (although the instructions do state that, “each partner is responsible for maintaining a record of the adjusted tax basis in its partnership interest”).

Regardless of the potential problems and the unaddressed issues, the new draft instructions do provide a framework for ”fixing” a client’s books to reflect an approximate tax basis capital account. This framework should make life easier for practitioners after the books are fixed—after the 2020 returns are completed. 




Anticipate Tax Increase for Large Estates

By Tom Ochsenschlager, J.D., CPA

The Tax Cuts and Jobs Act (TCJA) increased the federal exemption for estate, gift and generation–skipping transfers to $11.18 million for singles and twice that ($22.36M) for married couples. The exemption amount is indexed to inflation and currently stands at $11.58 million per taxpayer ($23.16M for married couples). In effect, all but the wealthiest taxpayers are excluded from the federal “estate” tax. However, it is important to note that this provision of the TCJA expires Jan. 1, 2026, and the exemption amount then reverts back to $5.6 million per individual (indexed to inflation since 2018) – roughly less than half the current amount.

Regarding the presidential candidates, the Trump administration has indicated it will seek to extend the TCJA exemption amount. However, the Biden campaign has indicated it will propose two alternatives that would, in effect, tax the amount of the appreciation in assets passing through the estate. One alternative would be to reintroduce a proposal made by the Obama administration that would tax the estate for the appreciation of assets passed through the estate. The other alternative would be for the recipient of the assets from the estate to receive the estate’s basis in the property, in effect eliminating the stepped-up basis of current tax law.

Regardless of who is elected as our next president, given the historically high level of the federal deficit, there will be pressure on Congress to permit the higher exemption amount to expire in 2026 or perhaps even pass legislation to expire it earlier. Accordingly, wealthy clients should develop a plan to utilize the current exemption amount, as this could become a “use-it-or-lose-it” situation earlier than expected.

Taxpayers who are likely to be affected by the possible reduction in the exemption amount might consider making gifts directly to “descendants” who would be a beneficiary in the taxpayer’s will or, where the taxpayer desires to continue to maintain some control over the assets, set up a trust for the benefit of the descendants.

As under current law, in choosing what gifts to make or which assets to pass into a trust, it is important to identify assets that have a relatively low basis and assets that are expected to appreciate significantly in the future.

The taxpayer might consider retaining the “low basis” assets given that passing these assets through the estate will give the recipient a “stepped-up basis” at date of death whereas gifting the asset results in a “carryover” basis. However, if the taxpayer anticipates selling these low basis assets, it is also important to note that former Vice President Biden has suggested that he would propose to increase the tax on long-term capital gains to 39.6% for taxpayers with over $1 million of taxable income. Accordingly, significant taxes might be saved if high income taxpayers gift this appreciated property to a recipient subject to the lower capital gains rate prior to the possible change in the tax law.

Regarding the category of assets where significant future appreciation is anticipated, retaining these assets in the estate will enable the beneficiaries of the estate to receive a “stepped-up” basis as of the date of the taxpayer’s passing. 

IRS Issues Draft Form 1065 Instructions; Tax Basis Capital Accounts Will be Required for 2020

On Oct. 22, the IRS issued an early draft of the instructions for Form 1065. The instructions require tax basis capital account reporting for each partner, unless the partnership meets all four requirements to not complete the Schedule L. 

If a partnership did not maintain tax basis capital accounts for 2019, they may determine each partner’s tax basis capital account by using one of three methods: the modified outside basis method, the modified previously taxed capital method or the Section 704(b) method. These methods are described in the instruction. Although the three allowed methods may be problematic, this is a better solution than tracking a partner’s capital account from the inception of the partnership using the transactional method.

TXCPA’s Federal Tax Policy Committee commented on the proposed requirements in July, expressing to the IRS that individual partners should ultimately be responsible for tracking their own basis.



FBAR Deadline Extended to Oct. 31 After Confusion

On Oct. 14, Treasury’s Financial Crimes Enforcement Network (FinCEN) posted an inaccurate message on its Bank Secrecy Act E-Filing webpage that may have caused some FBAR filers to miss their Oct. 15 deadline. To correct this error, FinCEN has indicated that 2019 calendar year FBARs filed by Oct. 31, 2020, will be deemed as timely filed. The Dec. 31 extension is only available for victims of recent natural disasters.



Due Diligence in a Pandemic World

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

Tax professionals have been through one busy season with COVID and it’s hard to tell the direction of the pandemic, but at least early in the upcoming tax season we will likely still be preparing most returns remotely. In general, we have been able to set up protective procedures for ourselves and our clients while working remotely; these include safety from the virus and maintaining privacy of client tax information. We have implemented processes for virtual client meetings, document drop offs or electronic transmission of documents. We have also added extra safeguards such as passwords for virtual platforms, and encryption or VPN protection for electronically transmitted documents and for securing mail. However, some due diligence provisions in the tax law may require us to have increased personal contact with the client.

In addition to avoiding negligence penalties, the tax law provides a separate penalty for failing to apply “due diligence” for returns claiming certain benefits, including the child tax credit, additional child tax credit, the American opportunity credit, the earned income credit, and since the Tax Cuts and Jobs Act, the head of household filing status. For returns with these claims, preparers must complete Form 8867, the Paid Preparer's Due Diligence Checklist. You might review the form to refresh your knowledge of what is required. If your records do not support your compliance with the due diligence requirements, the penalty is $530 per credit for 2020 returns.

For current clients, you should have sufficient information in your files from prior due diligence inquiries (remember the three-year document retention requisite), but for new clients you may need to set up additional intake procedures and may be required to have greater interaction with the taxpayer. Many firms require that new clients show government-issued proof of identity and a Social Security card or ITIN to determine eligibility for the dependent-based benefits. Copies of these may be retained by the preparer as support for satisfying the due diligence requirements reported on Form 8867.

In a remote preparation environment, due diligence poses some particular problems. There is likely some leeway in accepting scanned or faxed copies of documents to avoid contact, but some clients may not have this technology. This may require mailing and returning original documents by certified mail – although mail has its own problems – so possibly the preparer could have the client drop off and pick up the required documents. Telephone and video conferences with clients to discuss specific issues should be documented to support positions taken in the return that require due diligence.

The preparer must be satisfied (and be prepared to satisfy the IRS) that the due diligence requirements of the various provisions have been met. Preparers should establish procedures for taking in new clients and should review Form 8867 to ensure compliance in all situations where taxpayers are seeking tax benefits with specific due diligence requirements.

We understand that the IRS is working on some new guidance on how preparers can show diligence in a pandemic world. These are expected later in October or early November to help us plan for the upcoming busy season. We will keep you informed.