TXCPA Committee Comments on Tax Capital Reporting

TXCPA’s Federal Tax Policy Committee issued a comments letter on IRS Notice 2020-43 on proposed requirements for partnerships to use only one of two alternative methods to satisfy tax capital account reporting on Form 1065. The committee’s primary view continues to be that individual partners should ultimately be responsible for tracking their own basis using amounts reported on Schedules K-1. This is not a responsibility that should be placed on partnerships as Notice 2020-43 seeks to do.

https://www.tscpa.org/docs/default-source/comment-letters/federal-tax-policy/2020/tax-capital-reporting-july-2020.pdf?sfvrsn=12d4dcb1_2

https://www.irs.gov/pub/irs-drop/n-20-43.pdf

 


Refund of 2018 and 2019 Kiddie Tax Available

Historically, to prevent parents from shifting income to their children with lower tax rates, the “kiddie tax” applied the parents’ marginal tax rate to unearned income in excess of a de minimis amount ($2,100 in 2018 and $2,200 in 2019) for children under age 18 (24 if a full-time student).

 

The Tax Cuts and Jobs Act (TCJA) changed this computation for 2018 and subsequent tax years, simplifying preparation of kiddie tax returns, but subjecting the child’s unearned income to higher taxes. The rates for individuals and estates and trusts are the same, but they are reached at lower income thresholds for estates and trusts, so the kiddie tax rate on net unearned income was 10% for amounts up to around $2,500, 24% for income up to around $9,000, 35% for income up to around $12,500 and 37% for anything over that. This resulted in the minor being taxed at approximately $6,000 on $20,000 of net unearned income or approximately $30,000 on net unearned income of $90,000. These amounts were much higher than would have been paid previously because the rate brackets were much broader for individuals than for estates and trusts.  

 

The Further Consolidated Appropriations Act, 2020 (FCAA) enacted at the end of 2019 retroactively repealed this provision of the TCJA and reinstated the “historic” computation subjecting the child’s unearned income in excess of the threshold to the parents’ marginal tax rate. This was done to prevent the unintended heavy tax on military death benefits paid to children of Gold Star families, on non-tuition scholarships paid to low-income students and on tribal distributions to Native American children.

 

Accordingly, the FCAA permits taxpayers to apply the parents’ marginal rate provisions retroactively to a child’s 2019 and 2018 unearned income under the pre-TCJA rules. This can be accomplished by filing a Form 8615, Tax for Certain Children Who Have Unearned Income, with an amended return or an initial return if the child’s 2019 return has not been filed. The savings would depend on the parents’ marginal tax rate, with no savings if the parents were at the highest income tax rate because the individual and trust tax rates would be the same.

 

https://www.journalofaccountancy.com/issues/2020/jul/kiddie-tax-rules-restored.html

https://www.irs.gov/pub/irs-pdf/i8615.pdf

 

 

 


2019 Estimated Tax Underpayment Penalty Calculations Stop at April 15, 2020; Interest on Overpayments of Income Taxes Runs from April 15

Taxpayers normally calculate and pay any penalty for underpayment of estimated taxes with their individual income tax return. However, this year the due date of the individual income tax return was postponed until July 15, 2020, so many taxpayers could not calculate and pay the penalty by April 15. TXCPA’s Federal Tax Policy Committee asked the IRS to provide penalty relief for 2019 estimated tax underpayment penalties in a letter dated March 26, 2020. In response, the IRS did not extend the penalty calculation past April 15. If the 2019 estimated taxes are not paid by July 15, 2020, the penalty will be calculated as a failure to pay penalty, so no matter when 2019 estimated taxes are paid, the underpayment penalty calculation stops as of April 15.

For overpayments of income taxes, the IRS will pay interest on refunds from April 15, even if the return was filed after that. This could be a significant amount because processing times have been delayed, particularly for paper returns, with millions of unopened envelopes containing returns and payments piling up at service centers. Normally, refund checks include any interest due to the taxpayer, but this year the interest payment may be sent separately.


IRS Mail Backlog and Penalty Abatement Requests

By Kathy Ploch, CPA-Houston

 

The IRS has recently disclosed that it has approximately 11 million pieces of unopened mail, primarily due to staffing reductions as a result of the pandemic. After the government shutdown in January 2019, the IRS had over five million pieces of unopened mail. It will probably take months for staff to sort through and respond to this correspondence.

 

When faced with an IRS notice assessing your client penalties and interest for whatever reason, the practitioner’s general course of action is to request abatement of the penalties and interest due to reasonable cause. Another tool in the toolbox may be requesting the first-time abatement penalty relief if facts support the position.

 

However, if the penalty assessment is due to the backlog of mail that the IRS is experiencing, practitioners are cautioned not to use either of these abatement requests and to always be careful when using the first-time abatement.

 

AICPA is working on a letter asking the IRS to automatically curtail collection of penalties and interest due to the backlog.

 

A best practice for mailing correspondence or documents to the IRS is to do so via Certified Mail, Return Receipt Requested and make a copy of your envelope before mailing.


PPP Loan Forgiveness: Status of Notice 2020-32

By Donna Wesling, CPA-Austin

 

The question of whether expenses paid with Paycheck Protection Program (PPP) loan proceeds can be tax deductible remains unsettled at this time. It seems clear that the intent of Congress was for these loans, if forgiven, to have no tax consequence. The language of the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 specifically says that the loan forgiveness will not be income from cancellation of debt. However, in Notice 2020-32, the IRS has taken the position that expenses paid with the PPP loan proceeds are not deductible and Treasury Secretary Mnuchin is standing by that notice.

 

Senator John Cornyn (R-TX) introduced S. 3612 in the Senate to specifically make the PPP expenses deductible, but the bill has not been enacted. At TXCPA’s Annual Meeting of Members, Senator Cornyn indicated that he is hopeful this will be wrapped into additional coronavirus relief legislation in July.

 

Senator Cornyn also indicated that he is hopeful that the legislation would include a simplified forgiveness application for smaller loans (under $250,000). The U.S. Small Business Administration (SBA) has issued a form for the forgiveness application with a revision date of June 16, 2020.

 

The PPP loan guidance has been changing at a rapid pace so stay tuned for further developments.

 

https://www.irs.gov/pub/irs-drop/n-20-32.pdf

https://www.congress.gov/bill/116th-congress/senate-bill/3612

https://www.sba.gov/sites/default/files/2020-06/PPP%20Loan%20Forgiveness%20Application%20%28Revised%206.16.2020%29.pdf


Coronavirus-Related Distribution and Loans Guidance Released

By Julie Dale, CPA-Austin

 

The IRS issued Notice 2020-50 to provide further guidance on the coronavirus-related retirement plan distribution and loan provisions included in the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020. The CARES Act provided for relaxed requirements for both receiving these distributions and the taxation or rollover of the distributions.

 

A coronavirus-related retirement plan distribution is limited to $100,000 and is available to a taxpayer who is diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19, or who experiences adverse financial consequences as a result of coronavirus-related reduced compensation, lack of childcare or business interruption. These retirement distributions are not subject to the 10% penalty and the income can be recognized over three years instead of a single year. The distribution can also be repaid during the three-year time frame to receive tax-free rollover treatment.

 

The notice includes detailed guidelines on how these distributions will be taxed if the taxpayer chooses to roll over a portion or all the distribution in the allotted time frame and provides examples. A taxpayer has until the extended deadline for the return to roll over funds to claim it on the original tax return. For example, if a taxpayer takes a $30,000 distribution in 2020 and chooses to recognize the income over three years, then the taxpayer has until Oct. 15, 2021, to roll over $10,000 to eliminate the income recognition for 2020 assuming an extension is filed. If the taxpayer reports the income and later recontributes the funds, then an amended return is required.

 

For those spreading the income over three years, the IRS has chosen to treat rollover contributions as coming from the most recently reported income first and then rolling back to past income recognized. For example, if a taxpayer takes a $60,000 distribution in 2020 and contributes $30,000 on April 15, 2022, then the $30,000 recontribution first offsets the 2021 income to be reported of $20,000 and the 2020 tax return would need to be amended to reflect the remaining recontribution of $10,000. To avoid amending a previous return, the taxpayer can choose to carry forward the additional recontribution of $10,000 to the year 2022.

 

If the taxpayer rolls over one-third of the original distribution amount by the tax deadline for each of the three years, then there is potentially no need to amend tax returns to claim refunds. For example, if a taxpayer takes out a $90,000 coronavirus-related retirement distribution in 2020 and recontributes $30,000 on each of the tax return deadlines (April 15, 2021; April 15, 2022; and April 15, 2023), then the income from the $90,000 distribution can be excluded from the tax returns for the years 2020, 2021 and 2022.

 

https://www.irs.gov/pub/irs-drop/n-20-50.pdf


Balance Due Notice Mailings: Due Dates Extended to Help Taxpayers

Due to the COVID-19 pandemic, the IRS was unable to mail some previously printed balance due notices as a result of office closures. As IRS operations continue to reopen, these notices will be delivered to taxpayers in the next few weeks. Given the time it would take to reprogram IRS systems and generate updated notices, some of the notices taxpayers will receive have due dates that have already passed. However, each notice will include an insert confirming that the due dates printed on the notices have been extended.

Extended payment due dates:

The payment due dates printed on the notices have been extended, as described in the insert. The new payment due date will be either July 10 or July 15, 2020, depending upon the type of tax return and original due date. Taxpayers should be sure to read the insert included with the notice that explains the delay and provides the correct payment due dates.

For questions about balance due, recipients of the notice should visit the IRS website or call the number provided on their notice. However, phone lines remain extremely busy as the IRS resumes operations.

Notices that will include the insert:

  • CP11, Math Error on Return - Balance Due
  • CP14, Balance Due, No Math Error
  • CP15, Civil Penalty Notice
  • CP15B, Civil Penalty Notice for Trust Fund Recovery Penalty
  • CP15H, Shared Responsibility Payment Due
  • CP21A, Data Processing Adjustment Notice, Balance Due of
  • CP22A, Data Processing Adjustment Notice, Balance Due of
  • CP23, Estimated Tax Credits Discrepancy - We Changed Your Return to Match Your Credits or Payments Posted to Your Account - Balance Due
  • CP23T, Estimated Tax Discrepancy, Balance Due of $5 or More
  • CP47A, Tax Assessed - Notification of the Requested Credit Elect/Refund Being Applied to Section 965 Tax Liability
  • CP47B, Tax Assessed - Notification of a Credit Elect/Refund Being Applied to Section 965 Tax Liability
  • CP47C, Tax Assessed - Including Section 965 Tax Liability
  • CP51A, We've Calculated Your Income Tax For You - Balance Due
  • CP60, We Removed a payment Erroneously Applied to Your Account - Balance Due
  • CP94, Criminal Restitution Final Demand Notice
  • CP101, Math Error, Balance Due of $5 or More on Form 940
  • CP102, Math Error, Balance Due of $5 or More on Forms 941, 941SS, 943, 944, 944SS, 945
  • CP103, Math Error, Balance Due - Form CT-1
  • CP104, Math Error, Balance Due of $5 or More - Form 720
  • CP105, Math Error, Balance Due of $5 or More - Forms 11C, 2290, 706, 709, 730
  • CP107, Math Error, Balance Due of $5 or More - Form 1042
  • CP126, Math Error, Balance Due or Overpayment Less Than $1 on Forms 990PF, 4720, 5227
  • CP132, Math Error, Balance Due on Forms 990C, 990T, 1041, 1120, 8804
  • CP134B, Federal Tax Deposit(s) (FTD) Discrepancy - Balance Due
  • CP141L, We Charged a Penalty Under Internal Revenue Code Section 6652(c) - Form Filed Late
  • CP161, No Math Error, Balance Due (Except Form 1065)
  • CP162, Untimely Filing Penalty - Partnership
  • CP165, Penalty Assessed for Dishonored Check
  • CP210, Examination (Audit) or Data Processing Tax Adjustment - Balance Due, Overpayment, or Even Balance
  • CP215, Civil Penalty - 500 and 600 Series
  • CP220, Examination (Audit) or Data Processing Tax Adjustment - Balance Due, Overpayment, or Even Balance
  • CP220J, Employer Shared Responsibility Payment (ESRP) 4980H Adjustment - Balance Due, Even Balance or Overpayment Notice
  • CP230, Combined Annual Wage Reporting - CAWR/DP Tax Adjustment Amended Return Filed
  • CP233J, 4980H Adjustment bal due, even bal or overpayment Notice (ESRP)
  • CP240, Combined Annual Wage Reporting - CAWR/DP Discrepancy Tax Adjustment
  • CP260, An Erroneous Payment Previously Applied to Your Account Has Been Reversed - Balance Due
  • CP283, Penalty Charged on Your Form 5500 - Late or Incomplete Form
  • CP711, Spanish Math Error - Balance Due - Error en la Planilla - Saldo Adeudado
  • CP714, Spanish Balance Due - No Math Error - Planilla Radicada - Saldo Adeudado
  • CP721A, Data Processing Adjustment Notice, Balance Due (Spanish) - Cambios a su Planilla - Saldo Adeudado
  • CP722A, Spanish Data Processing Adjustment Notice, Balance Due of $5 or more - Cambios a su Planilla - Saldo Adeudado
  • CP802, Spanish BMF Math Error, Balance Due of $5 or More on Forms 941PR, 943PR - Hemos Hecho Cambios a su Planilla Porque Creemos que hay un Error de Cálculo
  • CP834B, Federal Tax Deposit(s) (FTD) Discrepancy - Balance Due (Spanish)
  • CP865, Spanish Penalty for Dishonored Check on Forms 94XPR FTD

https://taxpayeradvocate.irs.gov/news/nta-blog-mailbox


TXCPA Meets with the IRS Taxpayer First Act Office

In a call on June 2, Lisa Beard and Jim Clifford with the IRS Taxpayer First Act Office (TFAO) described their progress on implementation of the tax law to members of the TXCPA Federal Tax Policy Committee. 

 

The Taxpayer First Act of 2019 had 46 provisions; the TFAO is responsible for three of those provisions:

  • taxpayer experience/customer service,
  • employee training, and
  • modernization/reorganization to facilitate implementation of taxpayer first strategy (the data will define the structure).

 

The TFAO received over 1,000 comments letters and has met with over 100 stakeholder groups. They also conducted Hill briefings, met with Treasury and IRS leadership, and visited 25 IRS locations nationwide to form the foundation for change.

 

The call focused on the taxpayer experience in which the TFAO has defined six “big ideas” for a holistic approach:

  • proactive outreach and education geared towards taxpayers who want to be informed using readily understandable language,
  • full suite of digital self-service options:
    • fully functional taxpayer online account:
      • all aspects of a taxpayer’s account available online, and
      • taxpayers will be able to authorize a representative to access their online account if necessary.
    • online document exchange, and
    • online chat and call-back features.

(Implementation for individuals is moving faster than for businesses due to identity authentication issues and the need for some businesses to have multiple authorized users.)

  • seamless transitions:
    • integrated case management where the assistors can access and address all aspects of the taxpayer’s issues,
    • telephone, chat, email or videoconference readily available with one click,
    • instill a concierge mentality, enabling and empowering employees to stay engaged and find someone to answer the taxpayer’s question, and
    • if passed along, then new assistor is up to speed, removing the barrier of the taxpayer (tax professional) restating the whole issue to a new agent.
  • access for the “underserved population’’ such as taxpayers without internet access or other access limitations, taxpayers without bank accounts, overseas taxpayers, low income taxpayers, elderly, disabled, etc.,
  • coordinate with the professional community and recognize these ecosystems of partnerships to vet ideas; connect as a community with the IRS acting as a hub,
  • data management and analytics by utilizing the IRS’ existing data more strategically and empower the other five big ideas.

 

The TFAO made it clear that feedback from taxpayers and tax professionals is not a one-time part of this process; rather, there would be ongoing conversations with the interested parties. Their process will be that of listening, learning and then designing/implementing, which will lead to more listening, learning and adjusting as an ongoing process. They also agreed that a change in culture to being more willing to communicate was foundational. The training strategy is far along and soft skills have been an important area in training. They will continue to look for duplications, be taxpayer focused and strive to improve operational efficiency.

 

The timeline for the TFAO’s plan includes presentation to Congress in December with formal adoption one year after presentation. However, many ideas which have been developed in this process are currently being implemented.

 

As we receive more communication from the TFAO leadership, we will provide that information to the TXCPA membership.

 

https://www.thetaxadviser.com/issues/2020/jun/taxpayer-first-act-protection-information.html

 

 


Home Office Deduction Out of Touch with COVID Realities

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

 

The office in home deduction is out of touch with the realities of our COVID-19 world. The restrictions on deducting home office expenses were intended to prevent taxpayers from deducting personal expenses of a home for minimal work performed there. However, in a COVID-19 world, workers are staying home to comply with safety orders and to protect themselves, not to create deductions, and the current tax rules make legitimate deductions related to working from home difficult or impossible. TXCPA wrote to Congressional leaders to encourage greater availability of the home office deduction during the pandemic.

The Problem

To limit the home office deduction to only the most meritorious cases, Section 280A requires that the office must be regularly and exclusively used as a principal place of business or as a place to meet with patients, clients or customers in the normal course of business. In addition, home office deductions are limited to the income from the activities in the home office. To the extent that depreciation is taken on a home office, there are potential problems of basis adjustments and depreciation recapture when the home is sold. For employees, the Tax Cuts and Jobs Act eliminated the home office deduction altogether after 2017. Finally, the IRS closely scrutinizes claimed home office deductions. (See IRS Pub 587 Business Use of Your Home and Instructions for Form 8829.) These limitations make legitimate home office deductions impossible for many home office workers during the pandemic.

Various government shelter-in-place, stay-at-home and work-safe rules have caused millions of taxpayers to work from home during the pandemic. A Gallup poll at the end of April showed 63% of U.S. employees said they had worked from home in the past seven days because of coronavirus concerns, a number that had doubled from 31% three weeks before. These individuals have home expenses related to their work that are generally not reimbursed and that fairly should be deductible. Even when COVID-19 subsides, workers may be reluctant to return to offices for some time because of lack of adequate social distancing and other protections.

TXCPA Letter

TXCPA wrote a letter to Congressional leaders to recommend that the requirements to take an office in home deduction be relaxed for 2020 as follows:

  • Employees and self-employed individuals should be allowed an above-the-line deduction for a home office.
  • The current requirement that the home office be the principal place of business should be temporarily removed.
  • The current requirement that the home office be used exclusively for business should be temporarily removed.

TXCPA provided reasons for these recommendations. Many individuals cannot work at their former principal place of business during the pandemic and may not be able to do so for some time after the virus subsides. They meet virtually rather than in-person in an office. These remote workers may not have the space for a separate office in the home that satisfies the “regular and exclusive use” requirement. Workers have additional direct and indirect costs of maintaining an office in home that should fairly be deductible. If these changes were made, home workers would be able to use the simplified method for claiming home office expenses that would provide some fairness with a minimal deduction that avoids much of the complexity of a regular home office deduction.

Simplified Home Office Deduction

The home office deduction is often avoided because it can be complex and draw IRS scrutiny. The simplified method of claiming an office in home deduction is an alternative to the regular method. The deduction calculation is simplified, and substantiation and allocation of actual expenses are minimized. The deduction is limited to a maximum of $5 per square foot for up to 300 square feet per year, pro-rated by months of use as an office. This is in lieu of actual home expenses and avoids complexities of depreciation, basis reduction and potential depreciation recapture on sale of the residence. It also does not reduce deductions for home mortgage interest and real estate taxes, so allocation problems are avoided. This might encourage many more taxpayers to take an office in home deduction. For more information about the simplified method, see IRS Revenue Procedure 2013-13.


SBA Issued Their PPP Loan Forgiveness Application

The U.S. Small Business Administration (SBA) has released its Paycheck Protection Program (PPP) Loan Forgiveness Application. Although banks will probably have their own version of this, the SBA application is very helpful to loan recipients. The application resolves several issues, such as the method of accounting allowed, the correlation between the eight-week covered period and employers’ various payroll periods, some of the documentation which will be required and record retention rules.

Guidance is still needed in some areas, such as the definition of ‘Transportation,” but this application, when used in conjunction with SBA’s affiliation rules under 13 CFR 120 RIN 3245-AH36, will answer most questions relating to the calculation of forgivable amounts under this program.

https://www.sba.gov/document/sba-form--paycheck-protection-program-loan-forgiveness-application

https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Eligibility-Criteria-and-Requirements-for-Certain-Pledges-of-Loans.pdf