Requirements for 1099-K Expanded

The Form 1099-K reports to both taxpayers and the IRS payments the taxpayer received for goods or services provided through a credit or debit card and third-party payment services like PayPal, Zelle and Venmo, online services like Uber and eBay, or any other electronic payment system (PSE third-party payment settlement entities). This is particularly relevant for taxpayers in the gig economy who are not technically employees, do not receive a W-2 form and are often paid through a PSE rather than by a check or cash. In this circumstance, it is important that the taxpayer provide the PSE with their Taxpayer Identification Number (TIN) to avoid having the PSE withhold taxes from their payments. 

Prior to 2022, the PSEs were only required to report payments for goods or services with a 1099-K to the taxpayer and the IRS if there were at least 200 transactions a year and the transaction amounts exceeded $20,000 in that year.  

The American Rescue Plan Act of 2021 changed the minimum reporting threshold in the 2022 tax year so the 1099-K is now required if the transactions with a PSE exceed $600. There is no minimum transaction limit per year; a single transaction paid through a PSE amounting to $601 will require the PSE to file a 1099-K.

If a taxpayer receives a payment from a PSE for a personal as opposed to business transaction, such as a gift or charitable contribution, the “personal” payment should not be reported on a 1099-K and it may be necessary, in that case, for the taxpayer to notify the PSE of the character of the transaction.

The 1099-Ks subject to these lower thresholds will be due in 2023 to report the 2022 transaction payments. Some states have already adopted these lower requirements. The only one of these states contingent to Texas is Arkansas.

Understanding Your Form 1099-K | Internal Revenue Service (irs.gov)

New, lower Form 1099-K threshold prompts cautions, criticisms - Journal of Accountancy

Will the IRS Destroy 30 Million Unprocessed Tax Returns Again This Filing Season?

Leo Unzeitig, J.D., CPA - San Antonio

Chamberlain Hrdlicka

 

The deadlines for filing 2021 information returns by paper have just passed. Hopefully, everyone made the cutoffs. But if not, taxpayers are likely better off filing electronically anyway.

The U.S. Treasury Inspector General for Tax Administration (TIGTA) released a report recently with new details highlighting the pandemic’s effect on the IRS’ ability to process 2020 business tax returns. Unsurprisingly, the IRS has issues. The number of unprocessed paper returns swelled from just over 200,000 in 2019 to nearly 8 million in 2020. While a staggering 3,230% year-over-year increase in unprocessed returns is shocking, the gross number of returns unprocessed was actually significantly higher. According to TIGTA, there were an additional 30 million paper returns that the IRS simply destroyed rather than process.  

Now I understand that these are unprecedented times. And I think we can all appreciate that the IRS is underfunded and working against staffing challenges. But how exactly did this happen? And why did the IRS choose to destroy the returns rather than store them and process them at some later date?    

The details in the TIGTA report are limited to just a few paragraphs and sometimes require a bit of reading between the lines. As best I can tell, a group of auditors was performing “on-site walkthroughs” at the Ogden processing center when they happened to learn that the IRS destroyed paper-filed information returns (which TIGTA defines as any “statement, return, form, or schedule that shows a payment of rent, salaries, wages, dividends, interest, or royalties made to another person”). These seem to be solely information returns (i.e., Forms W-2, 1099, etc.) that are generally filed for computer matching purposes and have no corresponding tax due.

But after learning that the IRS was destroying unprocessed returns, TIGTA understandably pressed for additional details after which IRS management “estimated that approximately 30 million documents were destroyed on or around March 19, 2021.” The second-most interesting detail here is the date. Given that the filing deadline for most of those paper-filed information returns is Feb. 28, the IRS must have made the decision early in the year, or at least very quickly after the filing deadline, that those returns would not be processed. The report confirms as much by stating that its computer system for processing those types of returns is only good for a single tax year and needs to be updated for each new filing season.

IRS management made the decision to prioritize Forms 941 over other information returns and determined that saving the paper returns would do no good because retrieving them would be difficult. (Anyone who has been involved in an exam recently will know that the first document request is invariably a copy of the taxpayer’s original return--the one item that should already be in the government’s possession.)   

Now, I know what you are thinking. Why does the IRS bother requiring taxpayers to go through the time, effort and expense to file returns if the IRS knows it will not be able to process them? Here, I have to cut them some slack. I suspect the answer is that most of those returns are required to be filed by statute and are not merely an exercise of the IRS’ discretionary authority. See Sections 6041 through 6050Y. Thus, even if the IRS acknowledged to taxpayers that it would not be able to process the returns, the Code mandates they be filed nonetheless.

The more concerning aspect to taxpayers, practitioners and the IRS is what will happen over the next few years as the IRS computer system begins to propose failure-to-file information return penalties. Because the IRS prioritized filing Forms 941 above all else, the computer system should know that wages were paid to employees, thus presenting a mismatch when there are no corresponding Forms W-2 in the file. Presumably, the IRS computer will start issuing notices and proposing penalties. 

We have increasingly seen this type of issue come up and the Combined Annual Wage Reporting (CAWR) unit, often charged with considering responses and requests for penalty abatement in this area, is so understaffed that correspondence is unanswered for months, if not years, and very strong requests for abatement are denied without explanation. More often than not, penalties are assessed and revenue officers proceed with aggressive collection actions before the issue can be resolved and the penalties abated. 

While this issue portends a huge mess, SBSE management apparently developed a “risk assessment” to evaluate the impact. TIGTA and the IRS shared no further details regarding this investigation, but I suspect that because most large taxpayers are required to file information returns electronically, the impact will be limited to the “small” taxpayers who file by paper and thus have a relatively small potential penalty exposure. Unfortunately, these are the taxpayers who most often spend disproportionate time and resources resolving minor issues with the IRS. 

Perhaps the best we can do is remember this issue in several years and raise it in a penalty abatement letter or in response to criminal charges for failing to file returns. Maybe we can also urge clients to file information returns electronically rather than by paper. But it is certainly an open question whether the IRS has sufficiently prepared for this issue in the current filing season.  Given the current state of affairs, I am sure there are some who hear the IRS sharpening the shredder blades. 

TXCPA Committee Calls for a Balanced IRS Budget in the BBB Act

TXCPA’s Federal Tax Policy Committee generally supports the increased IRS funding in the Build Back Better Act. However, the BBB proposed budget increase is allocated disproportionately toward enforcement activities as a revenue raiser. To restore taxpayer confidence, the committee urges a more balanced funding approach between taxpayer services, modernized technological infrastructure, staff training and compliance. The TXCPA FTP released a letter this week to the U.S. Senate Appropriations Chairman Patrick Leahy and Vice-Chairman Richard Shelby to support this more rational allocation of budget resources.

https://www.tx.cpa/docs/default-source/comment-letters/federal-tax-policy/2022_2023/2022/balancedirsfundsbbbact030222.pdf?sfvrsn=e79ad2b1_2

TXCPA Continues to Urge Delay in Schedules K-2 and K-3 Reporting

As the filing deadline for pass-through entity tax returns draws near, TXCPA’s Federal Tax Policy Committee again urges Treasury and the IRS to fully delay implementation of Schedules K-2 and K-3 filing requirements to 2023 (the 2022 tax year).

https://www.tx.cpa/docs/default-source/comment-letters/federal-tax-policy/2022_2023/2022/additionalk2k3relief030122.pdf?sfvrsn=f19dd2b1_4

TXCPA Committee Asks the IRS to Engage with Tax Professionals on Third-Party Online Authentication Concern

TXCPA’s Federal Tax Policy Committee appreciates that the IRS transitioned away from the taxpayer facial recognition authentication process. With recent IRS news of a short-term solution, the committee is asking Treasury and the IRS to delay implementation of a new third-party online authentication process in order to engage with and seek comments from the tax professional community.

https://www.tx.cpa/docs/default-source/comment-letters/federal-tax-policy/2022_2023/2022/irs_facial_recog_third_party_ltr.pdf?sfvrsn=33b5d2b1_2

IRS Suspends Mailing of Additional Letters

On Feb. 9, 2022, the IRS announced the temporary suspension of more than a dozen additional notices until the backlog is under control.

NTA Blog: An Overloaded IRS Stops Certain Automated Notices, But Taxpayers Still Need to File Federal Tax Returns and Pay Outstanding Taxes - TAS

Partners Required to File Forms K-2 and K-3 Even if Only U.S. Source Income (In Most Situations)

By Josh Whitworth, CPA-Dallas

On Jan. 18, 2022, the IRS updated its instructions to the Schedules K-2 and K-3. These additional modifications to instructions make it clear that partnerships may need to file Forms K-2 and K-3 even if the partnership has no foreign source income, deductions or foreign tax credits. This is a change from the original instructions where the “Who Must File” section began with the following:

The partnership need not complete this schedule if the partnership does not have items of international tax relevance (typically, international activities or foreign partners).

Find more discussion on this topic in TXCPA Exchange

This section did not mention that there would be cases in which partnerships with neither international activities nor foreign partners would have to complete these forms.

The following paragraph has now been added to the “Who Must File” section:

Note. A partnership with no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued may still need to report information on Schedules K-2 and K-3. For example, if the partner claims a credit for foreign taxes paid by the partner, the partner may need certain information from the partnership to complete Form 1116. Also, a partnership that has only domestic partners may still be required to complete Part IX when the partnership makes certain deductible payments to foreign related parties of its domestic partners. The information reported in Part IX will assist any domestic corporate partner in determining the amount of base erosion payments made through the partnership, and in determining if the partners are subject to the Base Erosion and Anti-Abuse Tax. See each part for applicability.

This note would seem to clearly infer that partnerships would need to provide applicable gross income to its partners even if all income is U.S. source. 

The original instructions indicated if no activity of international relevance or no foreign partners that these forms would not be required under “Who Must File.” However, page 7 of original instructions beginning at the section entitled “Schedule K-2, Parts II and III, and Schedule K-3, Parts II and III” mentioned that partners claiming the foreign tax credit due to other items on their respective returns could require the partnership to complete these parts:

Certain partners will use the following information to claim and figure a foreign tax credit on Form 1116 or 1118. Schedules K-2 and K-3, Parts II and III, must be completed unless the partnership does not have a direct or indirect partner that is eligible to claim a foreign tax credit and such partner would have to file a Form 1116 or Form 1118 to claim a credit.

The instructions continue to say the information will need to be provided by the partnership even if the partnership has no foreign activity.

This requirement applies regardless of whether the partnership pays or accrues foreign taxes because other information, such as the source of the partnership’s income and the value of its assets, are relevant in determining the partner’s foreign tax credit. A partner that is eligible to claim a foreign tax credit includes a domestic corporation, a U.S. citizen or resident, certain U.S. trusts and estates, certain foreign corporations, and certain nonresident individuals.

The partnership may still be able to avoid filing this form if the partnership can certify that none of its underlying partners have any foreign source income or any activity with international relevance.

Schedule K-2 and Schedule K-3, Parts II and III, would be the only parts required by the partnership if there was no other activities of international relevance or foreign partners and the only reason for filing was to provide its partners the necessary information for them to complete their applicable Form 1116 or Form 1118, if applicable.

Please note that these modifications apply to S corporations as well.

Mileage Rates For 2022

By Tom Ochsenschlager, J.D., CPA

In Notice 2022-03, the IRS announced the deductible mileage rates for 2022:

• 58.5 cents per mile for business use,
• 18 cents per mile for medical or moving (for active duty military individuals), and
• 14 cents per mile for service with charitable organizations.

As an alternative to the standard rates, the actual cost of operating the vehicle can be used if complete records of the cost are maintained and the depreciable value of the vehicle is limited to no more than $56,000.

Generally, an employee does not have to report employer mileage reimbursements as income if the reimbursement amount does not exceed the 58.5 cents per mile substantiated for business use of their vehicle. However, the notice provides guidance:

• For the deductions available to employees to offset reimbursements exceeding that amount, and
• For the income to be reported where employers provide automobiles for the personal use of an employee.

In both these circumstances, the cost of operating the vehicle (an auto, van or truck) can be based on the deductible mileage rate cited above or, as an alternative, a computation of the “out-of-pocket” costs of the vehicle’s use where the depreciation deduction is limited to a maximum value of $56,000 for the vehicle.

IRS issues standard mileage rates for 2022 | Internal Revenue Service

IRS Facial Recognition Issues—the TXCPA Committee is Responding

Update

The IRS announced Feb. 7, 2022, that it will transition away from the use of third-party verification involving facial recognition. This is good news for the profession and the taxpayers.

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By David Donnelly, CPA-Houston

In 2021, the IRS began using facial recognition technology in their Advance Child Tax Credit program. This technology required taxpayers to upload certain photographic identification (for instance, a driver’s license) and then take a ”selfie” with their computer, phone or other device, in order for the IRS to authenticate the taxpayer’s identity. The program is being administered through a subcontractor, id.me.

The IRS has announced that this identification program will be expanded to the practitioner community in the summer of 2022. Practitioners will be required to register for this authentication process to access their e-Services account. 

The system, as used in the ACTC program, has been difficult to use and, as designed, excludes taxpayers who do not have access to the technology. The same problems will exist for the practitioner community.

In addition, there has been much discussion in the professional media and in Congress about the use of this technology and whether it is appropriate for tax collections. There are also concerns regarding the confidentiality of the data, the security of the data in the hands of a third-party contractor, potential expansion of the program to other or inappropriate areas and the roll-out of the program without a public comment period.     

While the TXCPA Federal Tax Policy Committee understands the difficulties faced by the IRS regarding identity issues, we share the general concerns regarding this entire matter. We are currently working on a comment letter to the Commissioner of the IRS. Hopefully, the concerns about this program will cause the IRS to re-assess the program; TXCPA intends for the voice of our members and the practitioner community as a whole to be heard in this re-assessment.

Update

We have been informed that Treasury is reviewing the use of the id.me system. Since the news is ambiguous, Treasury could be considering an alternative biometric ID authentication platform. The FTP will issue comments.

Privacy Advocates, Lawmakers Concerned About IRS's Facial Recognition Plan | HuffPost Latest News

Pitfalls for Tax Preparers for this Tax Season

By David P. Donnelly, CPA-Houston

There are several areas which should concern tax preparers in this tax season. Two of these with the potential for client and preparer frustration are the Child Tax Credit and the stimulus payments.

Child Tax Credit

The Advance Child Tax Credit (ACTC) paid in 2021 was based on previous tax filings. Taxpayers who received the credit should receive Letter 6419 (or both spouses if MFJ) stating the amount paid and the number of qualifying children, based on the taxpayer(s)’ 2019 return. Preparers need to enter these payment amounts on the 2021 form to calculate the amount owed to the taxpayer(s) or if an overpayment occurred.  

The IRS sent approximately 50 million letters to taxpayers on Dec. 14; since this was before the final payment in December, there is some concern that the amount on the letters could be incorrect. Regardless, preparers need to ascertain the correct amounts paid—this can be done by accessing the client’s transcript or having the taxpayer do so. 

The taxpayer can access the Child Tax Credit Update Portal. It is presumably more fee-efficient for the taxpayer to provide this information than for the preparer to acquire a POA and then request a transcript. Regardless of how the information is acquired, filing an accurate return is preferable to having to deal with the IRS correspondence if the amounts are incorrect.

Stimulus Payments

Once again, preparers will have to deal stimulus payments, also known as the Recovery Rebate Credit and the Economic Impact Payment. Our clients need to provide this information; if inaccurate, we will once again be dealing with manually processed returns, difficult-to-bill time and frustrated clients. As with the ACTC, the taxpayer’s transcript should provide the proper information. 

Taxpayers can determine their payment at Recovery Rebate Credit.

These two areas are only a part of the complexities that will impact this tax season. We will also have the new Forms K-2 and K-3, and the expiration of the CARES Act tax provisions. All of this will make for an interesting year.