Taxpayers and Tax Pros Should be Ready to Verify Their Identity When Calling the IRS

In IRS Tax Tip 2021-110, the IRS indicates that taxpayers and tax professionals will be asked to verify their identity whenever they call the IRS.

IRS phone assistors only discuss personal information with the taxpayer or a representative. To ensure that taxpayers do not have to call back, they should have the following information ready:

• Social Security numbers (SSN) and birth dates for those who were named on the tax return,
• An Individual Taxpayer Identification Number (ITIN) letter if the taxpayer has one instead of an SSN,
• Filing status: single, head of household, married filing joint or married filing separate,
• Copy of the tax return in question,
• Prior-year tax return if phone assistor needs to verify taxpayer identity with info from the return before answering certain questions, and
• Any IRS letters or notices received by the taxpayer.

Before calling about a third-party, tax professionals should have the following information available:

• Verbal or written authorization from the third-party to discuss the account,
• Ability to verify the taxpayer's name, SSN or ITIN, tax period and tax forms filed,
• Preparer Tax Identification Number (PTIN) if a third-party designee, and
• Current, completed and signed Form 8821, Tax Information Authorization or Form 2848, Power of Attorney and Declaration of Representative.

NTA Updates Guidance on Case Issues Accepted for Public Policy Reasons

In internal Memo TAS-13-0721-0008, the National Taxpayer Advocate (NTA) issued interim guidance authorizing four new issues that will be accepted for public policy reasons under TAS Criteria 9, Public Policy.

TAS case acceptance criteria.

Generally, the TAS (Taxpayer Advocate Service) accepts cases when a taxpayer is seeking help with any of the following:

1. Is experiencing economic harm or is about to suffer economic harm due to the IRS,  
2. Is facing an immediate threat of adverse action from the IRS,  
3. Will incur significant costs if TAS does not provide help (including fees for professional representation),
4. Will suffer irreparable injury or long-term adverse impact if TAS does not provide help,  
5. Has experienced a delay of more than 30 days to resolve a tax account problem,
6. Has not received a response or resolution to a tax account problem or inquiry by the date promised, 
7. Has been failed by a system or procedure that did not operate as intended, or that failed to resolve the taxpayer’s problem or dispute with the IRS, 
8. Has had their rights impaired, or those rights will be impaired, by the way the IRS is administering the tax laws, or
9. Has been determined by the NTA to warrant assistance for compelling public policy reasons (TAS Criteria 9, Public Policy). (IRM 13.1.7.1).

TAS will accept four new issues for public policy reasons.

The TAS will accept the following four issues under Criteria 9, Public Policy:

1. Cases involving the tax-exempt status of organizations subject to an IRS automatic revocation of the organization’s tax-exempt status for failure to file an annual return or notice for three consecutive years,
2. Cases involving any tax account-related issue referred to TAS from a Congressional office, except for Economic Impact Payment (EIP) issues, unemployment compensation exclusion issues and Advance Child Tax Credit issues,
3. Cases involving revocation, limitation or denial of a passport under Code Section 7345,
4. Cases that have been referred to a private collection agency for collection of a federal tax debt under Code Section 6306.

The Memo notes that TAS should accept, under Criteria 9, Public Policy, a case with one of these four issues listed above only if the case does not meet any of the TAS Criteria 1-8.

The Memo supersedes TAS-13-0521-0005 and the guidance expires July 5, 2023. It will not be incorporated into IRM 13.1.7 because new guidance on issues authorized for acceptance under Criteria 9 is issued at least once every two years.

IRS Released Draft Form 941-X

The IRS has issued a revised draft of Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund. The revision adds lines to allow for the correction of various credits reported on the most recent version of Form 941 for 2021, Employer's Quarterly Federal Tax Return (Rev. June 2021).

Lines 18a-d of the draft Form 941-X are used to correct the reporting of the nonrefundable portion of the employee retention credit, the nonrefundable portion of credit for qualified sick and family leave wages for leave taken after March 31, 2021, the nonrefundable portion of COBRA premium assistance credit and the number of individuals provided COBRA premium assistance.

Lines 26a-c of the draft Form 941-X are used to correct the reporting of the refundable portion of employee retention credit, the refundable portion of credit for qualified sick and family leave wages for leave taken after March 31, 2021, and the refundable portion of COBRA premium assistance credit. 

https://www.irs.gov/pub/irs-dft/f941x--dft.pdf

Tax Credits Extended for Paid Leave

The Families First Coronavirus Response Act included Code Sections 3131 and 3132 that provided employers and self-employed individuals with fewer than 500 employees refundable credits rather than mere deduction for the compensation paid to employees for “emergency paid sick leave” and “emergency family and medical leave.” In order to qualify for these benefits, the payment had to be related to the COVID-19 pandemic. Although the availability of the credits and tax-free income initially expired on March 31, 2021, the American Rescue Plan Act of 2021 has now extended the availability of these benefits for COVID-19 emergency wages paid from April 1, 2021, through Sept. 30, 2021.

An alternative that might be considered is for the employee to agree to have his/her COVID-19 emergency wages contributed to a 170(c) charitable organization. Notice 2021-42 that is effective through Dec. 31, 2021, provides that the employee does not report the income but also does not receive a charitable deduction while the employer receives the refundable credit for the amount contributed.

Employer tax credits for employee paid leave due to COVID-19

IRS extends tax relief for employer leave-based donation programs that aid victims of the COVID-19 pandemic

Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021 for Leave After March 31, 2021

Farm (Ranch) Loss Carrybacks

Revenue Procedure 2021-14 provides guidance for treating net operating losses incurred in 2018, 2019 and 2020 related to farming.

By way of background, the Tax Cuts and Jobs Act repealed the ability of most taxpayers incurring a net operating loss (NOL) to carry that loss back. NOLs related to farming were permitted a carryback but only for two years. (And that carryback could be waived.)

The Coronavirus Aid, Relief and Economic Security (CARES) Act changed the treatment of all NOLs, including farm NOLs, for tax years 2018, 2019 and 2020. It provides a five-year carryback and repealed the prior restriction that limited the amount of the prior year income that could be offset by the NOL to 80% of the prior year’s taxable income. (The 80% limitation will be applicable again for taxable years beginning after Dec. 31, 2020.) This gives taxpayers with farm losses the ability to revoke a prior election to waive the carryback.

Now, the Covid-Related Tax Relief Act provides taxpayers with farming losses, as defined in IRC 172(b)1)(B)(ii), with an election to disregard the CARES Act provisions and continue to carry farm losses back two years subject to the 80% limitation.

https://www.irs.gov/pub/irs-drop/rp-21-14.pdf

Economic Nexus for Sales Tax is Now Universal and Economic Nexus for Income Taxes is Spreading

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

 

With the pandemic came major shifts in state sales and income tax nexus rules. States needed to make up for lost revenue from individual and business taxes during a period of lower economic activity. At the same time, states needed more money to cover increased health care and unemployment costs. With budget needs and the South Dakota v. Wayfair Supreme Court decision (585 U.S.____(2018), the states have aggressively changed nexus laws to apply to more out-of-state businesses. Texas practitioners need to keep up to date on developments to be able to advise clients on the changing nexus rules for online sales.

Sales Tax Nexus

The Supreme Court’s Wayfair decision blessed South Dakota’s assertion of “economic nexus” for sales tax purposes, allowing a state to tax sales without the previously required physical presence by prior law under the Supreme Court’s decision in Quill v. North Dakota, 504 U.S. 298 (1992). The opportunity to tax out-of-state vendors was particularly appealing to states as consumers shifted to online purchases to avoid in-person shopping during the pandemic. Today, just three years after the Wayfair decision, all states that collect sales taxes have enacted economic nexus statutes.

In the Wayfair case, the Court approved South Dakota nexus statute that required out-of-state vendors to collect and remit sales taxes if they had more than $100,000 in sales or 200 or more separate transactions in the state. This could be burdensome on small businesses that have a small number of low-dollar sales in a state; e.g., 500 widgets sold for $5 at a 6% sales tax rate would require the vendor to collect and remit $150 in taxes. The cost to comply might be 10 times that figure and smaller businesses might be tempted to skip the tax, particularly because states do not have the resources to pursue them. However, not filing a return may result in penalties, an open statute of limitation and ethical issues for the business and its tax professional. And the issue could be much larger if there are omitted taxes in other states, to say nothing of the approximately 10,000 local sales tax jurisdictions.

Compliance can be complex, with some states modifying the Supreme Court-blessed Wayfair nexus standard. Some states have modified the South Dakota rules to require both $100,000 and 200 sales or have raised one threshold or the other. States also have different requirements for registration if there is a sales tax liability, and the frequency and due dates vary from state to state. To further increase complexity, the laws are constantly changing and there is no software that handles sales taxes with just a few clicks. A good guide for state sales tax nexus rules that is frequently updated is provided by the Sales Tax Institute.

Income Tax Nexus

Over 20 states have enacted economic nexus statutes for business income taxes after the Wayfair decision. However, Public Law 86-272 (15 USC 381-384), which limits states’ income tax power in interstate commerce is still in place, along with court decisions construing it. Generally, this federal statute permits certain limited solicitation activities within a state without subjecting the seller to a state’s income taxes. With new economic nexus statutes in place, states may increasingly challenge businesses that claim they are exempt under P.L. 86-272. And courts may interpret P.L. 86-272 narrowly as potentially out of touch with the e-commerce world as the 1992 Quill sales tax case that the Supreme Court overturned. Also, the statute does not protect certain types of sales; e.g., sales of tangible personal property where services are provided or sales of intangibles.

To further complicate matters, the online delivery of services creates confusion to the taxpayer and the state. What is being sold via online delivery? Is it tangible personal property subject to the P.L. 86-272 limitations or does the state now define it as the sale of a service or intangible?

In addition, franchise taxes may be impacted by economic nexus statutes, as not all the states have added a quantitative measure to aid in defining “doing business” in the state. As a franchise tax, the P.L. 86-272 provisions are not applicable and the business may become subject to franchise tax in more states without any physical presence.

In any case, practitioners and their clients will have to wrestle with sourcing e-commerce revenues and expenses to apportion them to particular states. Practitioners need to be able to advise their clients about online sales as the law develops further. If there were a bright side, it would be that some states have provided rules for allocation and apportionment in their economic nexus statutes.

Wayfair - Online State Sales Taxation | TXCPA

Supreme Court Leaves Affordable Care Act Unchanged

Supreme Court ACA Case

In 2020, the U.S. Supreme Court agreed to hear the case of California et al. v. Texas et al. that addressed the constitutional validity of the Affordable Care Act (ACA). On June 17, 2021, the Court issued its 7-2 decision, which leaves the ACA unchanged for 2021 and prior tax years.

The plaintiffs in the case were Texas and 17 other states, plus two individuals. The case focused on the constitutionality of the ACA tax penalty on individuals for not having health insurance, commonly called the “individual mandate,” pursuant to Section 5000A, and how its constitutional status impacted the rest of the ACA.

The questions posed to the Supreme Court were: (1) whether the plaintiffs had standing to challenge the individual mandate; (2) whether reducing the penalty to zero under the Tax Cuts and Jobs Act of 2017 rendered the individual mandate unconstitutional; and (3) if so, whether the individual mandate was severable from the rest of the ACA. The Supreme Court primarily focused on the first issue and, in a departure from the decisions of two lower courts, ruled that the plaintiffs did not have standing to sue. The Supreme Court directed that the case be remanded and dismissed. Consequently, the case has ended, leaving the ACA intact.

ACA Protective Claims

Because of the possibility that the Court would render a decision that would result in refund opportunities for ACA taxes paid in prior years, some taxpayers chose to file ACA protective claims for 2016 and/or 2017 to hold open the statute of limitations for filing a refund claim for those years. The protective claims gave taxpayers the option to file amended 2016 and/or 2017 income tax returns after the Court issued its decision, in the event the decision found the ACA to be unconstitutional in its entirety for the 2016 and 2017 years.

Given the Court’s ruling and the fact that there is no change to the ACA, the following appears to be the impact on taxpayers who filed ACA protective claims for 2016 and/or 2017:

• There is no change to ACA taxes paid in prior years so there currently does not appear to be a basis to file amended Forms 1040 or 1041 unless there is litigation in the future challenging the ACA. The Supreme Court did not rule on the merits of the claim, thus there is the potential for future litigation.
• There does not appear to be any action to be taken on protective claims filed for 2016 or 2017.

Many practitioners may have prepared protective refund claims for their clients to file and clients may be receiving a notice from the IRS regarding the disposition of these claims. Since it has been many months since these protective refund claims were filed and our clients may not recall exactly why they are getting notices from the IRS regarding their 2016 or 2017 income tax returns, it might be a good idea to affirmatively reach out to clients and remind them why they filed the protective claim, explain the results of the case, and advise them that they may receive a letter from the IRS stating that no further action will be taken on their protective claim or that the IRS is rejecting the claim.

 

Authors: Carol Warley, J.D., CPA-Houston, RSM US, LLP; Anne Bushman, CPA, RSM US, LLP; Jill Harris, CPA, RSM US, LLP; and Rick Allen, CPA-East Texas, Henry & Peters, PC.

Senate Finance Chair Proposes Bill to Overhaul Tax Break for Pass-Through Businesses

By David Donnelly, CPA-Houston

The Small Business Tax Fairness Act proposed by Senator Ron Wyden (D-Ore.), chair of the Senate Finance Committee, includes several changes to the Section 199A qualified business income (QBI) deduction.

Of particular note are two proposed changes:

• The Act proposes to limit the QBI deduction to taxpayers whose income is less than $400,000, which will affect many of our clients.
• The Act proposes to expand the QBI deduction to most trades or businesses, including all professional trades or businesses.
  • The current law excludes the QBID for ”a specified service trade or business.” This exclusion in the current law does not allow the QBID for income from the state-certified professions, except engineers and architects. 
  • The proposed Act removes this limitation, effectively allowing the QBID for all professions (including the practice of accounting), if the taxpayer’s income is less than the proposed $400,000 cap.

This is only proposed legislation and is far from becoming law. Although passage is uncertain, this does remove an arbitrary limitation from the current law.

Wyden introduces bill to overhaul pass-through deduction and expand to accountants

Proposed bill

Practitioners Cautiously Await Opening of New Tax Pro Account

You will recall that the IRS previously created an online Power of Attorney (POA) application for practitioners but closed that system down quite a while back. The IRS is reviving the ability to apply for POAs online. Currently, the IRS has about a four-month backlog of processing POAs.

The IRS is expecting to introduce the Tax Pro Account on July 18. The Tax Pro Account is an online system that allows tax professionals to securely request POA authorization and/or tax information authorization (TIA) to represent an individual taxpayer in front of the IRS, in lieu of filing a paper Form 2848 or Form 8821.

The Tax Pro Account's functionality will allow tax professionals to initiate what the IRS refers to as a "third-party authorization" online and send it to a client's IRS online account. The taxpayer will then be able to access their online account and digitally approve (or reject) the authorization, sending it to be recorded on the IRS' Centralized Authorization File (CAF). The process is fully electronic and most requests will be posted immediately (within 48 hours) to the CAF database.

Only two tax professionals can elect to receive copies of IRS notices and communications sent to a taxpayer. If more than two tax professionals make an election, after approval of the first two authorizations by the taxpayer, the remaining authorizations will not be processed.

At this time, it does not appear that taxpayers will receive notification about pending authorization requests. Tax professionals also cannot view authorization history such as pending requests and statuses.

Some practitioners are skeptical that the new interface will reduce the time it takes to post POAs on the CAF database. Since the client needs to have an online account with the IRS, this may create a bottleneck. Most taxpayers do not generally interact with the IRS electronically and may not be able to successfully navigate through the process, especially the Secure Access registration.

Tax professionals can still use the current established options to make requests such as submit Forms 2848 and 8821 via online tool, fax or mail into the CAF.

Publication 5533 Why You Should Create an IRS Online Account

Publication 5533-A How to Submit Authorizations Using Tax Pro Account and Online Account

Publication 5533-B Benefits of Tax Pro Account and Digital Authorizations

IRS Small Business and Criminal Divisions Will Hire Thousands of Auditors by September

The co-commissioners of the IRS' Small Business/Self-Employed Division (SB/SE) and the commissioner of the Criminal Investigations Division (CI) recently announced that they will be hiring thousands of auditors by the end of September 2021. This is if the IRS receives the anticipated FY 2022 budget increase of $1.7 billion more than it received in FY 2021.

IRS SB/SE Co-commissioners De Lon Harris and Darren Guillot plan to hire 1300 field revenue officers, 400 tax compliance officers for “in-person audits" (formerly called "office audits") and 518 automated collection (ACS) phone representatives. Guillot said that when taxpayers receive an IRS notice threatening to garnish wages or levy property, they expect someone to answer the phone.

SB/SE will utilize new personnel to increase compliance in the areas of fuel tax, syndicated conservation easements and employment taxes.

The co-commissioners also expect their largest ACS call center to be bilingual in Puerto Rico. The plan is to increase collection personnel in Puerto Rico from 57 to as many as 400 by the end of 2021.