EFTPS System Password Update

Log-in changes are coming to the online Electronic Federal Tax Payment System (EFTPS) for enhanced security. Effective Sept. 19, 2019, the IRS is implementing new password requirements for those making federal tax payments electronically:

• The IRS will require a 13-month password expiration policy – your password expires after 13 months from the time it was changed.
• The password must be 8 to 12 characters and follow the EFTPS guidelines:
  • At least one uppercase letter (A, B, C, etc.)
  • At least one lowercase letter (a, b, c, etc.)
  • At least one number (1, 2, 3, etc.) or one of the following characters (!, @, #, $,*, +,-)

If you updated your password within the past 13 months, your existing password with 8-12 characters will still work.

If you have not updated your password in the past 13 months or you have a system-generated password, your payment will be rejected until you update your password on the EFTPS website.

IRS Automatically Waives Estimated Tax Penalty for Eligible 2018 Filers

The IRS, in a news release on Aug. 14, 2019, announced an automatic waiver of the estimated tax penalty for certain taxpayers. The affected taxpayers are those who did not pay 90% of their 2018 tax liability through wage withholding, estimated tax payments or a combination of both.   This safe harbor from the estimated tax underpayment penalty was reduced to 85% in an announcement in January, then lowered to 80% in an announcement in March. 

 

This relief affects taxpayers who have filed their 2018 returns, paid at least 80% of their estimated tax, but failed to claim the relief for the reduced 80% requirement. The IRS estimates this to affect about 400,000 taxpayers.

 

The IRS will mail Notices CP21 to affected taxpayers notifying them of the relief. The press release states that the service will mail refund checks to these eligible taxpayers about three weeks after their CP21 notice is mailed. Eligible taxpayers do not have to contact the IRS or take any action to receive the refund.

 

Going forward, taxpayers may take advantage of this relief when filing their 2018 returns.

 

https://www.irs.gov/newsroom/irs-automatically-waives-estimated-tax-penalty-for-eligible-2018-tax-filers

 

Section 501(c)(4) and Other Tax-Exempt Entities May Have to Report Names and Addresses of Contributors for 2018

By Renee Foshee, JD, LL.M., CPA

 

Tax-exempt entities are generally required to report contributions of more than $5,000 ($1,000 for certain organizations) on Schedule B of Form 990. Schedule B is not subject to public disclosure requirements.

 

Last summer, the IRS published Revenue Procedure 2018-38, which authorized tax-exempt organizations to omit the names and addresses of contributors from Schedule B for tax years ending on or after Dec. 31, 2018. The rule change does not, or did not, apply to 501(c)(3) charitable organizations and 527 groups that must continue to report names and addresses of contributors. 

 

A federal court has struck down Rev. Proc. 2018-38 because the IRS failed to follow proper notice and comment procedures that are required by the Administrative Procedure Act. (Order, Bullock v. IRS, CV-18-103-GF-BMM, D. Montana, July 30, 2019.)

 

Some organizations may have already filed Form 990 for tax year 2018. Rev. Proc. 2018-38 was effective for returns due on or after May 15, 2019. 

 

The IRS has not yet issued further guidance on this issue for organizations that were subject to the Rev. Proc.

https://electionlawblog.org/wp-content/uploads/Bullock-v-IRS.pdf

Virtual Currency Holders Should Be Seeking Legal Counsel as IRS Begins Issuing Warning Letters

By David E. Colmenero, JD, LL.M, CPA-Dallas, and Anthony P. Daddino, JD

 

Last week, the IRS announced it has started the process of issuing warning letters to more than 10,000 cryptocurrency holders. There will be three variations of the letters sent depending apparently on the holder’s particular situation. (See IRS Announcement, IRS Has Begun Sending Letters to Virtual Currency Holders Advising Them to Pay Back Taxes, File Amended Returns; Part of Agency’s Larger Efforts ((July 26, 2019)) available at https://www.irs.gov/newsroom/irs-has-begun-sending-letters-to-virtual-currency-owners-advising-them-to-pay-back-taxes-file-amended-returns-part-of-agencys-larger-efforts.) The three letters are available on the IRS’ website and at least one will request a response under penalties of perjury. (See IRS Letter 6173 available at https://www.irs.gov/pub/notices/letter_6173.pdf.) IRS Commissioner Chuck Rettig was quoted as stating, “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties ….” 

 

These letters reflect the most recent development in the IRS’ efforts to identify and tax gain on virtual currency transactions. In 2014, the IRS issued IRS Notice 2014-21, which directs taxpayers to treat virtual currency as property. (See IRS Notice 2014-21.) The apparent intent of this treatment is to treat transactions involving virtual currency as taxable for federal income tax purposes, even where one virtual currency is exchanged for another.

 

The IRS separately issued a summons against Coinbase, a market exchange for Bitcoin, Ethereum and other virtual currencies, seeking information about its customers. Although Coinbase resisted, a federal district court eventually forced Coinbase to disclose to the IRS the taxpayer ID, name, birth date, address and historical transaction records of approximately 13,000 customers in early 2018. That same year, the IRS Large Business and International Division added cryptocurrency transactions to its list of compliance campaigns. (See IRS Announcement, IRS Announces the Identification and Selection of Five Large Business and International Compliance Campaigns (July 2, 2018).)

 

The IRS Criminal Investigations Division similarly stated it intends to seek criminal charges in certain cases involving virtual currency transactions. (See CCN Markets, US Justice Department & IRS are in Hot Pursuit of Bitcoin Tax Evaders (June 25, 2019).) And for those taxpayers who owe money to the IRS, in December 2018 IRS Collections successfully seized virtual currency from a delinquent taxpayer and later revised the Form 433-A Collection Information Statement in February 2019 to add a specific question about the taxpayer’s virtual currency holdings. (See IRS Form 433-A available at https://www.irs.gov/pub/irs-pdf/f433a.pdf.)

 

This recent round of letters shows that the IRS has been successful in identifying many investors of virtual currency and is ready to take the next significant step in pursuing them. Because of the increase in value for many virtual currencies, the potential tax implications for many taxpayers can be significant. Bitcoin, for example, was selling at under $50 in 2013. As of today, Coinbase reports the value of Bitcoin at over $9,500, and at one point it was trading at over $13,000. (See Crypto.com, Historical Data for Bitcoin, available at https://coinmarketcap.com/currencies/bitcoin/historical-data/.)

 

For investors who have merely held virtual currency as an investment in its initially acquired form without exchanging it, there may be little or no tax consequences to report - much like buying most other investment properties and simply holding them. But for taxpayers who have exchanged virtual currency in any manner, including for example exchanging it into cash or from one virtual currency into another, or who acquired virtual currency in exchange for property or services, the IRS may view the transactions as generating taxable income. Moreover, to date, the IRS has not announced any intention of offering amnesty to virtual currency holders. For now, they can expect the IRS to assess tax and potentially penalties, as well. 

 

Complicating matters for at least some taxpayers is the fact that the IRS may seek to go back further than the general three-year statute of limitations in making assessments. While the IRS generally has three years from the filing of a return to make an assessment, there are exceptions where there is a substantial omission of income or where a taxpayer commits fraud. (See IRC sec. 6501(c), (e).) Because the IRS may allege either of these in certain cases, it could seek to go back more than three years in some cases.

 

There may be a limited window of opportunity for some taxpayers to request a voluntary disclosure from the IRS before receiving a letter to potentially avoid criminal prosecution. That window could close after the IRS issues a letter to a particular taxpayer. Because the IRS expects its mailing to be completed by the end of August, this potential window of opportunity may be limited. For taxpayers who are assessed penalties, it may also be possible to request waiver of penalties on the basis of reasonable cause depending on their particular circumstances.

 

Of course, the IRS letter campaign does not necessarily resolve the ultimate question:  How should virtual currency be treated for federal income tax purposes? More specifically, is the IRS treatment of virtual currency correct? Should the exchange of virtual currency be treated as taxable transactions for federal income tax purposes, particularly where it is exchanged for other virtual currency? These are all questions that may ultimately be addressed by the federal courts. 

 

For now, anyone who has received or anticipates receiving an IRS letter or who has otherwise engaged in unreported virtual currency transactions should seek legal counsel. Some questions that should be addressed include: (i) How much exposure does the taxpayer have under the IRS treatment of virtual currency transactions?; (ii) What actions should the taxpayer take to mitigate exposure to penalties?; (iii) How should the taxpayer respond to the IRS letter, particularly where a response is requested?; and (iv) What actions should the taxpayer take to preserve their rights under federal law, particularly if the taxpayer seeks to challenge an IRS assessment or denial of a refund claim?

 

Virtual currency holders and tax practitioners should also keep in mind there may be state tax consequences, as well. Because many state income and business taxes are tied to federal income tax amounts, there may also be reporting and payment obligations at the state level. Many states offer voluntary disclosure or amnesty programs that may benefit taxpayers. The full effect of state tax implications for virtual currency transactions remains to be seen, given the limited guidance currently available.

 

If you have any questions regarding virtual currency, please contact David Colmenero at dcolmenero@meadowscollier.com and Anthony Daddino at adaddino@meadowscollier.com or by phone at 214-744-3700.

 

 

Eligible Partnerships Receive Six-Month Extension to File Form 1065 and Furnish K-1s

The IRS has granted relief to partnerships that did make the proper election allowed by the Centralized Partnership Audit Regime (the new partnership audit rules, CPAR) or which did not provide the information required by the CPAR such as the designation of the partnership representative. If a partnership filed its 2018 Form 1065 by March 15, 2019, and timely issued Schedule K-1s to its partners, or filed after that date but before the date of the issuance of Rev. Proc. 2019-32 (July 25, 2019), but did not make the CPAR election or include the requirement, it now has until Sept. 15, 2019, to file a superseding Form 1065 and include that election.  

 

The CPAR essentially requires that, in the case of an increase in taxable income, the partnership at the time of the audit is responsible for the taxes on the changes—not the partners during the year being audited. Partnerships with fewer than 100 partners, and no ineligible partners, may elect out of this regime on an annual basis. Eligible partners include individuals, C corporations, S corporations and estates of deceased partners. Partnerships with foreign partners, single member LLCs or other partnerships as partners, and certain other partners cannot make the election. (For more information on electing out, see regulations under Section 301.6221(b).)

 

The election is made on Form 1065, Section B, question 25. If a partnership that qualifies did not make the election on a return filed prior to March 15, 2019, it should consider doing so under this new relief.

https://www.irs.gov/pub/irs-drop/rp-19-32.pdf

 

TXCPA’s Federal Tax Policy Committee recently commented to the IRS with concerns regarding the new tax basis reporting requirements in the 2018 Instructions to Form 1065.

 

 

 

Transcript Faxing Service Has Now Ended

Kathy Ploch, CPA-Houston

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Listed below are various IRS resources:

 

• “About the New Tax Transcript” at www.irs.gov/eServices
• “Secure Access: How to Register for Certain Online Self-Help Tools” at www.irs.gov/SecureAccess
• Publication 4557, Safeguarding Taxpayer Data, on securing tax information at https://www.irs.gov/pub/irs-pdf/p4557.pdf
• IRS E-Help Desk 1-866-255-0654
• IRS Secure Access Registration 1-888-841-4648
• IRS Fact Sheet 2018-20 at www.irs.gov/newsroom/steps-for-tax-professionals-to-obtain-wage-and-income-transcripts-needed-for-tax-preparation

 

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

Rick Allen, CPA-East Texas

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

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

 

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

 

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

 

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

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

Final Rules Permit Truncated TINs on W-2s

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

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

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

 

IRS Audits 2018—Audit Credibility?

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

 

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

Number of Audits Declines Again

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

Individual Audits

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

Business Returns

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

Detailed Information

Tables in the Data Book cover specific issues:

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

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

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

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

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

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

Conclusion

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

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

Charitable Contributions from a Required Minimum Distribution

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

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

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