Archive for the ‘IRS’ Category

SBA Releases New Simplified Forgiveness Form for PPP Loans

Wednesday, January 20th, 2021

When Congress passed the budget reconciliation act that contained the second Covid-related stimulus, one piece of the legislation was a simplified form for Paycheck Protection Program (PPP) loan forgiveness. Late yesterday, the Small Business Administration released the newest version of Form 3508S, the form that borrowers will need to complete.

This form can only be used if the amount of the PPP loan was $150,000 or less. The form is far easier to complete than the Form 3508EZ and should make applying for forgiveness far easier. It will likely be a few days before lenders are ready to accept the new Form 3508S. (One SBA website states that the Form 3508S can only be used for loans of $50,000 or less; that is wrong. I expect that website to also be corrected in the next few days.)

2021 Tax Season to Begin on Friday, February 12th

Friday, January 15th, 2021

I have been asked by several clients when they can efile their 2020 tax returns. In most years, tax filing begins in late January. But not this year:

The Internal Revenue Service announced that the nation’s tax season will start on Friday, Feb. 12, 2021, when the tax agency will begin accepting and processing 2020 tax year returns.

The Feb. 12 start date for individual tax return filers allows the IRS time to do additional programming and testing of IRS systems following the Dec. 27 tax law changes that provided a second round of Economic Impact Payments and other benefits.

The IRS is delaying the start of tax filing because of changes to the Tax Code made with the December 27, 2020 tax law changes.

Today happens to be the date that IRS “Free File” begins. However, returns prepared using Free File will not be transmitted to the IRS until February 12th.

As of today, the deadline for filing individual tax returns remains Thursday, April 15th.

UPDATE: A friend reminds me that just because tax returns cannot be filed until February 12th does not mean you should wait on (a) sending return information to your tax professionals and (b) starting work on your 2020 tax returns. Do not wait!!! This is not going to be a fun Tax Season for tax professionals. Get your return paperwork to your tax professionals ASAP. Most tax professionals encourage you to send your tax documents (i.e. 1099s, W-2s, etc.) as you receive them–so do so!

Final 2020 Estimated Tax Payment Due on Friday

Tuesday, January 12th, 2021

The fourth quarter estimated tax payment for individuals and trusts/estates is due this Friday, January 15th. If you make estimated payments (Form 1040-ES and the state equivalents) you should either mail your payment (using certified mail, return receipt requested) on or before January 15th or pay electronically using EFTPS (requires pre-enrollment) or IRS Direct Pay. Don’t forget your state and local estimated payments (if required); most states have webpay systems that you can use.

IRS Issuing Erroneous CP14 Notices

Monday, January 11th, 2021

One of our clients received a CP14 Notice alleging she owed the late payment penalty (“Failure to Pay under Internal Revenue Code Section 6651). The notice noted he had an unpaid balance of $583 as of July 15, 2020 on 2019 tax of $8,855. The late payment penalty is assessed on the unpaid balance as of the tax filing deadline. If you have paid 90% of the tax due by the tax filing deadline, there is no late payment penalty.

If you do the math you will see that my client paid $8,272 of the $8,855 she owed, or 93.4%. That’s more than 90%, so the late payment penalty should not have been charged. I spoke with an individual at the Practitioner Priority Service (PPS), and this is the second such case he’s seen. However, it’s not happening with all such individuals as another client with a similar balance due did not receive a CP14 notice.

As we tell all of our clients, do not assume a notice from the IRS is correct. Indeed, the last study on IRS notices shows that about two-thirds of IRS notices are wrong in part or in whole. If you have any doubts, ask your tax professional.

In this case, the helpful individual at PPS reversed the penalty, so my client doesn’t need to pay anything. Still, it would be better if the IRS didn’t issue erroneous notices but given everything that happened during 2020 some hiccups are to be expected.

It’s Time to Generate 2020 1099s

Wednesday, January 6th, 2021

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)
  • Where you would normally have to send a 1099 but you made payment by a credit or debit card

Otherwise, you need to send a Form 1099 to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your accounting software (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

This year will be the first year we’ll be using the new Form 1099-NEC to report nonemployee compensation instead of reporting this on Form 1099-MISC. Form 1099-NECs have a filing deadline of February 1, 2021 (for reporting 2020 nonemployee compensation). Form 1099-MISCs are used for all other 1099 reporting except interest, dividends, capital gains, etc. Payments of rent, royalties, advertising, crop insurance proceeds, substitute payments in lieu of dividends, attorney proceeds, other income (including gambling winnings not reporteable on a Form W-2G), and nonqualified deferred compensation are just some of the items reported on a Form 1099-MISC.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file Form 1099-MISC with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing might be easier than electronic filing.

IMPORTANT: The IRS is not sending Form 1099-NECs to state tax agencies. Thus, if you have a state filing requirement for your Forms 1099-NEC, you must separately file this with your state tax agency.

If you wish to file paper 1099s, you must order the forms from the IRS. The forms cannot be downloaded off the Internet. Make sure you also order Form 1096 from the IRS. This is a cover page used when submitting information returns (such as 1099s) to the IRS. WARNING: It is taking the IRS months to fill these orders. We ordered our paper 1099s in October; we have yet to receive them. It is likely too late to order them from the IRS and meet the February 1st deadline. Most tax professionals have software that can file 1099s directly with the IRS and state tax agencies; there are also services you can find that will do this for you.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-NEC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement (issuing form 1099-MISC).

Remember, the deadline for submitting 1099-NECs for “Nonemployee Compensation” (e.g. independent contractors) to the IRS is now at the end of January (though we get an extra day this year, because the 31st falls on a weekend): Those 1099s must be filed by Monday, February 1st.

Here are the deadlines for 2020 information returns:

  • Monday, February 1st: Deadline for mailing most 1099s to recipients (postmark deadline);
  • Monday, February 1st: Deadline for submitting 1099-NECs for Nonemployee Compensation to IRS;
  • Monday, March 1st: Deadline for filing other paper 1099s with the IRS (postmark deadline);
  • Monday, March 15th: Deadline for mailing and filing Form 1042-S; and
  • Thursday, April 1st: Deadline for filing other 1099s electronically with the IRS.

Remember, if you are going to mail 1099s to the IRS send them certified mail, return receipt requested so that you have proof of the filing.

Also note that most 1099s must be mailed to recipients. Mail means the postal service, not email. The main exception to this is if the recipient has agreed in writing to receiving the 1099 electronically. I consider this the IRS’s means of trying to keep the Post Office in business.

The 2020 Tax Offender of the Year

Thursday, December 31st, 2020

Many are called; few are chosen. It’s time once again for that most prestigious of prestigious year-end awards, the Tax Offender of the Year. It takes more than cheating on your taxes; you need to really cheat or do a series of Bozo-like actions. Every year I hope that there are no worthy candidates; as usual, there are plenty.

The United States Congress get a nomination. “The compromise deal that passed for Covid relief could have been done a lot sooner,” the nominator wrote. And she’s absolutely right. But this reminds me of a joke I remember from Get Smart! When asked how long it would take for an appropriation bill for Control to pass, the answer is two months; when asked how long it would take for an emergency appropriation bill to pass, the answer is three months.

The California Department of Tax and Fee Administration (CDTFA) received a nomination. Consider if you sold items through, and you had two sales to California residents in 2014-2016. The CDTFA is coming after you for back sales taxes, penalties, and interest because your products were possibly warehoused in an Amazon warehouse in California. There are many court cases on this, and even the Los Angeles Times–usually a proponent of additional taxes in California–thinks that the CDTFA is nuts. But Congress and the CDTFA didn’t even make the top three.

Finishing in third place was Winfred Fields. Mr. Fields is enjoying a 109-month stay at ClubFed for a brazen tax fraud scheme. Mr. Fields specialized in preparing returns for workers in oil exploration in the Gulf of Mexico. They were paid by US companies, and Mr. Fields filed returns noting that per tax treaties with the United Kingdom, Spain, or New Zealand these workers’ pay was exempt from US taxation. They weren’t, but the IRS processed the returns. He also required the tax refunds to be deposited in his bank account (a violation of Circular 230, the regulations that tax professionals fall under), so he could take his fee off the top. He received $3,097,974 of illicit refunds and kept $1,302,271 for himself.

Coming in second place are Stein Agee & Corey Agee of the Atlanta area. The Agees developed syndicated conservation easements (SCE), and sold those to high-income individuals. For every dollar you contributed to one of their partnerships, you got a $4 tax deduction. If someone came to me with this as a possible investment, I would immediately think there’s a problem. A fundamental rule of taxation is you can only deduct what you pay for, and it’s hard for me to envision how you can get a (say) $40,000 deduction for investing $10,000. But I digress…

We’re not talking about a small tax fraud here. Per the Department of Justice press release, more than $1.2 billion of fraudulent deductions were taken; the Agees received more than $1.7 million in commissions. Stein and Corey Agee both pleaded guilty to one count of conspiracy to defraud the United States; they’re looking at up to five years at ClubFed plus probable monetary penalties.

And, yes, $1.2 billion of fraud is only second place.

In 1970, a company called Universal Computer Systems (UCS) was formed. It began as a regional data processing service bureau, and expanded in the 1980s, mainly providing computer services to automobile dealers. The company was successful, and expanded to have offices not only in the United States but in several other countries.

In 2006, UCS merged with Reynolds and Reynolds, another automobile dealer computer service company. The merger was valued at about $2.8 billion. Robert Brockman, who was CEO of UCS became CEO of the combined company (which took the Reynolds and Reynolds name). Their current products include dealer management systems for inventory, accounting, contracts, and logistics. It remains a successful business.

Mr. Brockman allegedly began having foreign entities to help shelter his wealth. There is nothing wrong with this, provided you appropriately disclose the entities and pay your US taxes based on the Internal Revenue Code. You likely can figure out where this is headed….

Mr. Brockman’s entities, which included trusts and companies in Bermuda, the British Virgin Islands, and Nevis (part of Saint Kitts and Nevis, two islands in the Caribbean). There are bank accounts in these countries and in Switzerland and somehow not all of these accounts allegedly made it onto Mr. Brockman’s annual Reports of Foreign Bank and Financial Accounts (the FBAR).

Mr. Brockman also allegedly filed false tax returns from 2012 – 2018, ignoring capital gains that were made in various transactions (detailed in the indictment). There are also counts of wire fraud, money laundering, and conspiracy. From the Department of Justice press release:

According to the indictment, Brockman, a resident of Houston, Texas, and Pitkin County, Colorado, used a web of offshore entities based in Bermuda and Nevis to hide from the IRS income earned on his investments in private equity funds which were managed by a San Francisco-based investment firm. As part of the alleged scheme, Brockman directed untaxed capital gains income to secret bank accounts in Bermuda and Switzerland. The indictment further alleges that to execute the fraud, between 1999 and 2019, Brockman took measures such as backdating records and using encrypted communications and code words to communicate with a co-conspirator, among other alleged actions.

In addition to the tax offenses, the indictment alleges that, between 2008 and 2010, Brockman engaged in a fraudulent scheme to obtain approximately $67.8 million in the software company’s debt securities. As CEO, Brockman was contractually restricted from purchasing any of the software company’s debt securities without prior notice, full disclosure, and amending the associated credit agreements. The indictment alleges that Brockman used a third-party to circumvent those requirements, to acquire the debt securities, and to conceal from the sellers valuable economic information. The indictment further alleges that Brockman used material, non-public information about the software company to make decisions about purchasing the debt. In addition, Brockman allegedly persuaded another individual to alter, destroy, and mutilate documents and computer evidence with the intent to impair the use of such evidence in a grand jury investigation.

Mr. Brockman has pleaded not guilty, and it should be remembered that these charges are just allegations.

It is clear from the indictment that at least one (probably two) individuals within Reynolds and Reynolds have cooperated with the Department of Justice. Additionally, Robert Smith, the CEO of Vista Equity Partners in San Francisco, admitted his part of the scheme and will be paying $139 million to the United States and will avoid prosecution.

The total alleged fraud is $2 billion.

There are numerous other interesting items within the indictment; here are just a few:

On or about June 3, 2007, BROCKMAN, using his encrypted email system, directed Individual One to purchase a computer program called “Evidence Eliminator” for Individual One’s computers…

On or about October 20, 2011, BROCKMAN, using his encrypted email system, directed Individual One to attend a money laundering conference “if possible under an assumed identity.”…

On or about December 9, 2012, BROCKMAN, using his encrypted email system, directed Individual One to change the scture in which the shares of Point were held, moving them to a “purpose trust” with a “dressed up charitable purpose” to avoid inquiries from banks and “the house” about the ultimate beneficial owners of Point.

Again, an indictment does not mean Mr. Brockman is guilty of the alleged offenses. However, the indictment shows a picture of deliberate disregard of US taxes. Mr. Brockman is facing many, many years and large financial penalties if found guilty of the 39 counts for which he faces trial.

And that’s a wrap on 2020, a dismal year that I hope we don’t have to experience ever again. May all of you have a Happy, Healthy, and Safe New Year.

IRS Issues 2021 Standard Mileage Rates

Thursday, December 31st, 2020

A week ago the IRS announced the 2021 standard mileage rates:

  • $0.56 per mile for business use (was $0.575 per mile in 2020);
  • $0.16 per mile for medical/moving (was $0.17 per mile in 2020); and
  • $0.14 per mile for service of charitable organizations (unchanged from 2020).

These rates (except for the charitable driving rate) come from a study that the IRS has conducted every year determining the costs of operating cars. The charitable mileage rate is set by statute. With gasoline and insurance costs down in 2020, the standard mileage rates fall for 2021.

This Deposit from “IRS 310” Is Your Stimulus Payment

Thursday, December 31st, 2020

This morning, I found a very small deposit in my bank account; it was coded “IRS 310”. It’s the second stimulus payment, and it’s real. Kudos to the IRS for getting these out almost instantaneously with the signing of the legislation Sunday night.

Remember, your tax professional will need to know the amount of payment you received. In theory, you will get another letter in the mail noting this amount. Give that letter (and the previous letter) to your tax professional. The stimulus payments (technically, the Economic Recovery Payments) are advances on a refundable tax credit on your 2020 tax returns.

If you received less than the full amount you should have, you will be able to obtain the tax credit on your 2020 return. If you received more than you should have (let’s say your income increased in 2020), you do not have to pay the credit back.

Expenses Associated with PPP Loans to be Fully Deductible

Monday, December 21st, 2020

According to this morning’s Wall Street Journal, businesses that took Paycheck Protection Plan (PPP) loans will be allowed to fully deduct expenses paid by the PPP loans. While a cap on the amount on this provision was originally inserted in the legislation, that cap was reportedly removed. Assuming this is accurate–the actual text of the legislation is not available as of this writing–this will be a big win for business owners who took PPP loans.

That’s not the only thing in the legislation, of course. There will be $600 stimulus payments, extension of unemployment and PUA benefits, and numerous other provisions. I’ll have more on this when the actual text is available.

PPS Gets Friendlier: Callbacks Available

Tuesday, December 15th, 2020

Twice a week, on average, I call the IRS’s Practitioner Priority Service. It’s the usual starting place for tax professionals to resolve issues with the IRS. This year, calling the IRS has been an adventure. This is not the IRS’s fault: Covid has played havoc with everyone. But getting through to the IRS for tax professionals has been an adventure: If I call after 9am PST I’m usually greeted by the message, “Due to extremely high call volumes we cannot complete your call at this time; please call back later. Goodbye.”

This morning, I called the IRS to resolve a client’s payment. He made a payment for 2019 taxes–and it shows on the IRS computer system. However, it has not made it to the client’s account; somehow the payment is stuck in limbo. When I called the IRS up I was greeted with something new and improved (really, this isn’t a joke):

We estimate your wait time to be between 15 and 30 minutes.

Rather than waiting on hold, we can call you back when it’s your turn. You will not lose your place in the queue. To receive a callback, press….

After entering my callback number (it does require a direct phone number), I was told I would receive a callback in 20 minutes…and I did! This is a marked improvement, and I’m surprised the IRS hasn’t publicized it.

Additionally, I’ve been told the ability to receive callbacks has been added to the IRS’s Identity Protection Unit. This year, the IRS has sent out 25% more letters requiring individuals to prove their identity while staff has been cut. Getting through to that number has been extremely difficult. Callbacks make the identity verification process a little easier.

All-in-all, kudos to the IRS for adding some technology that helps users.