Category Archives: Tips

Transitioning To Employee Ownership: FREE On-Demand Webinar

Yesterday I attended an excellent webinar on how two different small business owners transitioned ownership to their employees — one using an ESOP and one using a Worker Co-op structure.

As a CPA and consultant to many small business owners, I often am asked about succession planning and exit strategies, and my experience in cooperative taxation often leads me to recommend a transition to employee ownership. So I was glad for the opportunity to learn from the experiences of these folks who are in the thick of it.

My colleague Courtney Berner of the University of Wisconsin Center for Cooperatives led the webinar and Q&A, and Steve Storkan of the Employee Ownership Expansion Network interviewed business owners Gina Schaefer and Marty Ruddy.
– Courtney – https://uwcc.wisc.edu/staff/berner-courtney/
– Steve – https://eoxnetwork.org/
– Gina – https://acehardwaredc.com/pages/employee-ownedgina@acehardwaredc.com
– Marty – https://www.terrafirmamn.com/

I strongly recommend the informative and helpful free recording!

And just in case they might be helpful as an outline or while following along with the recording, the notes I took during the session are below.

Thanks again to Courtney, Steve, the panelists, and UWCC for this excellent resource!


Three main EE ownership structures —

  • ESOPs, most common, about 70% – better for larger busineses
  • Worker co-ops, less common but fast-growing
  • EE Ownership Trust, more common in Britain

Half of privately-held businesses are owned by boomers — who will be retiring soon (the “silver tsunami”).

ESOP – Employee Stock Ownership Plan
Employee financial control, not management control.
How does it work? the company gets a loan (from bank or owners) to pay the owners (whatever percentage ownership is agreed upon; can happen in tranches)
The owners get paid, and the company pays the loan off over time on behalf of the staff, and releases the stock to the employees
Employees just “get” their shares as opposed to worker co-ops where each member has to buy in.
Owner can remain CEO as long as necessary.
The tax benefits of an ESOP can save about 20% of value in terms of the company price compared to selling to private equity.
Vests in 20% increments annually until the employee is fully-vested.
If someone departs, the company has five years to pay them off.

Worker Cooperative
Employee-Owners have both financial and managerial control. One member, one vote.
Must sell 100% ownership to the workers; no partial purchases like with an ESOP.
Owner may become one of the many worker-owners in the new structure.
Owner or bank can finance a loan to pay the owners off over 15 years or however long.
John Abrams model – buy-in for each new owner is the price of a decent used car. :)
So they are two different things: buy-in by each worker-owner, vs company-held loan to pay off the owner.
Company can lend each owner some of the money to buy their share if that helps.
What happens if someone leaves from Marty’s worker co-op: the company has five years to pay back $9k initial investment if necessary,
but usually pay it off very quickly just to get it off the Balance Sheet if they have the cash to do it.
Then the internal capital account gets paid out in a different way, on a schedule with other owners.

Inviting staff to have an ownership mentality and be a democratically-run organization is very valuable, especially in anticipation of transitioning to ownership — but different from actual EE ownership.

Recommended book: John Abrams, “The Company We Keep”.

Neat idea – buying a pie for new owners as a way to say “here’s your piece of the pie”.

National Cooperative Resource Map – links to co-op development centers, associations, cooperative-friendly capital, co-op statutes by state:
https://uw-mad.maps.arcgis.com/apps/MapSeries/index.html?appid=a5eda85604f84f02a4f24b3b4483fb69

Questions from Q&A:
Are you using the terms “Exit Planning” and “Succession Planning” interchangeably, or do they have different meanings for you?
How did you educate your employees on employee ownership?
I am working with two businesses doing projects with students in my co-op business management course. An existing worker co-op has lots of legal questions how they can and/or must differentially treat workers as employees and workers as owners. Can you advise a good first landing on legal assistance to help get their questions answered or directed to those who should. I’m no lawyer and most that I work with are in the farmer co-op world. Thanks.
What is your advice for business-owners where the owner is the key employee with specialized knowledge and credentials that is not easily replaced by other existing staff?
In Marty’s buy in model, can that buy in level be paid to the co-op over time (installments) or is it all upfront (day 1).
What happens to the equity in the business as an employee leaves, and how is that different between the 2 structures
Could a consumer cooperative spin off, say, 30% for employees to become owners under either of these structures?
What is the difference in governance control of workers as an ESOP vs a Worker Co-op? I expect there is a range of options.
A follow up to the question about spinning off 30% of a consumer co-op, could the creation of the ESOP or worker co-op component be a vehicle for capitalizing the co-op for expansion or other purposes?
Are worker equity shares in a worker co-op appreciable over time?
Steve, you mentioned existing ESOPs or Coops bringing in another small biz as a merger/acquisition, perhaps sold by a founder with no buyer prospects. Can you talk more about this as another pathway for transitioning an existing biz to an employee-owned company?
I appreciate the conversation about sharing the wealth, but one challenge I see as a CPA is that workers are always convinced that owners are “hoarding” the profits and that’s one of the motivations for becoming worker-owned. However, the company has to be healthy and profitable for this to happen! It’s not magic. If the company is struggling, the worker-owned version of the company will struggle, too. It’s not a magic bullet.
I know there are food co-ops that are also worker co-ops. How could a consumer co-op facilitate their workers starting their own worker co-op inside the food co-op?
Are there incentives, support, programs, etc. for someone looking to start a private business with a roadmap from the beginning to convert to an employee ownership model?
If a small worker owned cooperative or ESOP is often structured as a partnership for tax purposes, does the cooperative structure only impact management?
For Marty, how do the workers owner manage or address the tension between investment in the equipment needed for the business versus profits place into the internal capital account and subsequently distributed?
Interested in any ideas or models for how workers in a consumer co-op might gain “more stake in the game,” feel a real sense of ownership and directly benefit from the growth and success of the business.
What are unique challenges associated with performance management (horizon problem, shirking, freeriding, etc) at employee owned businesses? Do you use any tools/tech for reviews, ratings, etc?
Can you highlight top 3 challenges of running an employee owned business that technology or tools can help solve?
Is there any way to plan succession or manifest employee ownership when the company is merely a one or two person shop without younger family?


If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

National Society Of Accountants For Co-ops Upcoming Webinars

I often write and speak about my experiences as a co-op accountant, and how challenging it was to become an expert in the field with so few resources. Things have changed a lot since back then, with the National Society of Accountants for Co-ops (NSAC), National Cooperative Business Association (NCBA), and the Co-op Professionals Guild (CPG) all offering online education.

The NSAC line-up for the next few months is seriously powerhouse. For anyone in the field or looking to get into it, I strongly recommend a membership, which gets you into all of these webinars below at no extra charge. That said, if you only want to know the specifics of one topic or another, they are affordably priced at $56 each for non-members.

Note: I am not paid or given a discount to promote NSAC — I just think they’re great!

Behavioral Ethics March 9, 2022 | 11:00 AM EST
FREE NSAC Members | $56 Non-Members 
CPE: 1 Credit Hour
As we continue to be challenged by an increasingly complex business environment, it is important to develop ethical reasoning skills that allow us to put ethical decision-making into practice. In this session, attendees will discover how to identify ethical paradigms and learn how stakeholders are impacted by their ethical choices. Additionally, participants will explore real-life cases that will allow them to rehearse ethical practices. Be prepared for any ethical dilemma and register now! Click for more info. 
Agricultural Economic Outlook April 5, 2022 | 11:00 AM EST
FREE NSAC Members | $56 Non-Members 
CPE: 1 Credit Hour
Want to know more about current and expected market conditions affecting agricultural co-ops? This CLN will address the core issues impacting the macroeconomy, agricultural commodity markets, and the agricultural economy with particular focus on the effects of COVID-19 and inflation. Attendees will get an outlook on the agricultural commodity markets; including corn, wheat, soybeans, rice, cotton, hay, cattle, hogs, and dairy, as well as the impact of rising production costs. Gain valuable insight into current market conditions by registering today! Click here for more info.
Financial Ratios for Agricultural Co-ops April 20, 2022 | 11:00 AM EST
FREE NSAC Members | $56 Non-Members 
CPE: 1 Credit Hour 
Designed specifically for Agricultural Co-ops, this session will explore how to analyze company performance based on an evaluation of financial statements, and introduce ratios used in the financial analysis of cooperatively structured organizations. Learn what to look for when comparing a company to its peers and industry norms, and how to analyze company performance compared to strategic business objectives. Take advantage of this revealing CLN today! Click here for more info.
Financial Ratios for Electric Co-ops April 20, 2022 | 2:00 PM EST
FREE NSAC Members | $56 Non-Members 
CPE: 1 Credit Hour
Designed specifically for Electric Co-ops, this session will explore how to analyze company performance based on an evaluation of financial statements, and introduce ratios used in the financial analysis of cooperatively structured organizations. Learn what to look for when comparing a company to its peers and industry norms, and how to analyze company performance compared to strategic business objectives. Don’t miss out on this engaging session! Click here for more info. 
Tax Update April 28, 2022 | 11:00 AM EST 
FREE NSAC Members | $56 Non-Members 
CPE: 1 Credit Hour
This session will bring attendees the latest and up-to-date tax law changes and new tax return reporting items. Additionally, the CLN will explore any anticipated future tax law changes. Some of the topics that will be covered include: Meals and Entertainment, 163(j) Interest Expense Limitation, Net Operating Losses, R&D Tax Credit Update, and State Taxes Post Wayfair. Stay informed about the latest developments that are most likely to affect your organization with this 60-minute zoom! Click here for more info.
Processing of Work Orders for Electric Co-ops May 5, 2022 | 2:00 PM EST
FREE NSAC Members | $56 Non-Members 
CPE: 1 Credit Hour
In this CLN, participants will review the accounting process for construction and retirement of utility plant from the work order stage to unitization. This will include the audit perspective of this process, along with industry trends and common mistakes to avoid. Sign up today for this exclusive guidebook to processing work orders! Click here for more info.
Navigating New FASB Guidance: Your 2022 Guide May 12, 2022 | 2:00 PM EST 
FREE NSAC Members | $56 Non-Members 
CPE: 1 Credit Hour
Join us for an informative overview of new FASB standards that could impact your organization. This session will explore recent developments in the financial accounting standards relevant to cooperatives. Guest speakers Randy Throener and Amy Schreck will discuss the latest FASB guidance so attendees can successfully implement these recent amendments. Take advantage of this educational CLN! Click here for more info.
How Electricity and Demand Really Work & How it Impacts Rates May 19, 2022 | 11:00 AM EST
FREE NSAC Members | $56 Non-Members 
CPE:1 Credit Hour
As cooperatives consider moving from traditional to more innovative rate design structures, it is increasingly important to understand the different billing units required for each innovative design. Three-part, Four-part, Time-of-use, Critical peak, Super off-peak, and other innovative rate designs require an understanding of and access to a range of billing units. These include Non-coincident demands, Coincident demands, Time-based energy usage, KVar, and more. In this encore session from TFACC 2021, attendees will learn some of the billing units required for innovative rate designs, and explore some of the challenges involved in obtaining, using, and explaining them to members. Don’t miss out on this specialized presentation! Click here for more info.

Reasonable Compensation Stress Test & Resources

This isn’t the first time I’ve posted about the useful resources offered by RCReports — but as it turns out, it’s been a while. Apparently I take it for granted that everyone knows about Reasonable Compensation requirements all too often, and then I regularly discover that it’s just not true.

Note: I am a loyal paid subscriber to RCReports, and receive no compensation or discounts for promoting their service or resources. I just think they’re great.

In any case, recently I was asked by a colleague to train her on the basics of Reasonable Compensation and walk through my process. I asked her to do these three pieces of homework first:

  1. Read this article about stress-testing the RC amount – How to Stress Test a Reasonable Compensation Figure – RCReports
  2. Watch this 2-hour RC Reports training session – Reasonable Compensation for S Corps on Vimeo
    (tip for professionals – this class is sometimes offered on CPAacademy for free, with CPE credit included).
  3. Watch this 1-hour RC Reports demo – RCReports Product Demo – RCReports

I know most non-accountants won’t bother with the 2-hour training session that walks through court cases and the history of Reasonable Compensation audits and challenges. And certainly folks who are not in the business of performing these calculations aren’t likely to bother with the 1-hour demo.

But anyone running their own corporation, and those considering electing S-corp status, will want to read about stress-testing. This is something you can do regardless of the calculation process, or how you got to the salary amount in the first place. A helpful excerpt (edited) from the article:

There are six main factors or tests (the IRS lists even more), but “applying just the first three will usually tell you whether a compensation is reasonable or not. In other words – three strikes and you’re out.”

1) Training and experience: Does $X/year seem like enough compensation for somebody who has this level of training and experience?
2) Duties and responsibilities: Does $X/year seem like enough compensation for someone with these duties and responsibilities?
3) Time and effort devoted to the business: Does $X/year seem like enough compensation for someone who worked this many hours/week?

But what if the company can’t afford to pay reasonable compensation? I hear that question a lot, as you might imagine. That’s a common situation, and a simple answer — you’re not required to pay yourself the entire amount of salary… it just means that you can’t issue distributions until it has been paid. “The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.” And no fair holding off on paying salary for years while building up retained earnings and then issuing a huge distribution in the first year you pay yourself salary. The IRS knows that trick as well. RCReports writes more about the issue in this article — check out Example 4 in particular for information about the look-back period.

There are different methods of determining Reasonable Compensation — yes, I’m referencing yet additional RCReports articles for details — the cost approach, market approach, and income approach. The Cost Approach generally works best for small businesses where the business owner provides multiple services for the business (wears many hats).

The key with all of these resources is to get shareholder-employees to take a closer look at their own salaries and make sure they are following IRS guidelines. Stress-testing is a great place to start, but for a more thorough approach to calculating Reasonable Compensation, I recommend contacting a CPA with background in this area who can walk you through an RC interview and help you support the amount you ultimately choose.


If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

How to Apply for a Chicago Sidewalk Cafe Permit – FREE Webinar 3/3/22

Thursday, 3/3 at 10:00 AM

How to Apply for a Sidewalk Cafe Permit

Presented by the Department of Business Affairs & Consumer Protection (BACP)

Sidewalk cafes provide restaurants an opportunity to expand their footprint to serve customers outside. This webinar will cover sidewalk cafe basics including sidewalk cafe operational conditions and requirements, as well as how to apply for a Sidewalk Cafe Permit, which is required to operate a sidewalk cafe in Chicago.

Register here: Webinar Registration – Zoom

Also, check out this recording of BACP’s webinar, “How to Apply for a Sidewalk Sign Permit” on YouTube.


If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

K-2 & K-3 Requirement Issues For Small Businesses

2/16/22 UPDATE: Looks like the IRS may be issuing relief after all!

Check out this article — IRS to delay some K-2 and K-3 reporting requirements for partnerships | Accounting Today

The source is #15 in the IRS FAQ on the topic:

This Journal of Accountancy article walks through the particular scenario where this relief — only for tax year 2021 — applies. They note that:

The relief announced Wednesday applies where:

  • In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts. 
  • In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign-source income (see Regs. Sec. 1.861-9(g)(3)).
  • In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders, nor did the partners or shareholders request, the information on the form or its attachments regarding:
    • Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
    • Line 20c, Form 1065, Schedules K and K-1 (controlled foreign corporations, passive foreign investment companies, 1120-F, Sec. 250, Sec. 864(c)(8), Sec. 721(c) partnerships, and Sec. 7874) (line 17d for Form 1120-S).
  • The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

To learn more, I recommend this excellent Compass Tax Free 10-Minute Webinar update from 2/17/22 on the new FAQ relief for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA.

(Our original blog post is below, for context and reference.)


K-2 Mountain (courtesy of Wikimedia Commons)

Yes, that photo is of K-2, the second-highest mountain on Earth, where apparently one person dies on the mountain for every four that reach the summit. (Didn’t expect that to show up in my search for a common-usage-right image of an IRS K-2 form.)

The good news is that — as frustrating and arduous as this new IRS K-2 and K-3 reporting requirement is — no one is likely to die while attempting to complete it, and therefore I think we should just all keep this extremely challenging K-2 mountain in mind before we get too frustrated about additional complexities in tax preparation.

In all seriousness, here’s the story:
1) The IRS, in an attempt to deter fraud, for 2021 began requiring all pass-through entities to disclose foreign transactions as part of the tax returns and the K-1 package to shareholders and partners.
2) Initially, the new schedules were only to be used by entities with international transactions to report.
3) In mid-January, the IRS issued revised instructions for the schedules that may require domestic partnerships and S corporations without any foreign source income or assets to prepare Schedules K-2 and K-3.
4) If even one of the partners or shareholders plans to or is required to report foreign tax credits on Form 1116, Foreign Tax Credit, the Partnership or S-Corp must prepare Schedules K-2 and K-3.
5) As a result, the complex and comprehensive “reporting requirement applies to a much larger percentage of pass-through-entity (PTE) returns than perhaps the IRS intended”, as Forbes pointed out.

“This seems like an overly burdensome requirement to quietly clarify in the middle of filing season.” – Tom Gorczynski, EA

All is not lost. Yes, we’re talking about well-over 20 additional pages of tax forms — but it’s likely that you won’t have to fill them all out. An exception from filing Part II and Part III, Section 2, on Schedule K-3 may apply for a pass-through-entity that:

  • only has US-source income;
  • does not have income or deductions that the partners can source or allocate and apportion; and
  • only has limited partners owning less than 10% of the capital and profits of the partnership at all times during the tax year.

(Though the IRS clarified that a business with no foreign-source income must still file Part II (foreign tax credit limitation) and Part III (information for preparing Forms 1116 or 1118) on Schedules K-2 and K-3 if their partners have items of international tax relevance.)

From the NATP Blog: “For preparers who are handling the returns of both the partnership and the partner, the partner can choose alternatives to filing Form 1116 and triggering the Schedules K-2 and K-3 filing requirements if one of the following applies:

  • The partner neither paid nor accrued any foreign taxes and there was no foreign tax credit carryover for the tax year;
  • The foreign tax paid was under the $300 individual reporting threshold ($600 for married filing jointly) for Form 1116, or an election is made under Section 904(j) of the Tax Code to report the credit without the form;
  • Schedule A is used to report a deduction for foreign taxes (which also avoids the $10,000 SALT cap).

“Preparers who are not completing returns for the partner reporting foreign tax payments will need to ask the partners/shareholders directly for their information. If they fail to respond to the request, the preparer will at least have made a documented, good-faith effort to obtain the required information and should be eligible for the good-faith relief outlined in Notice 2021-39.”

To add to the complexity, the availability of e-filing for the new Schedules K-2 and K-3 is:

  • March 20, 2022, for Form 1065
  • Mid-June 2022 for Form 1120-S
  • January 2023 for Form 8865

Therefore, for preparers who have to file Schedules K-2 or K-3, there are three options.
– One is to extend the returns, as e-filing is not available until after the current due date of both the S corporation and partnership returns.
– Another option is to paper-file the return, which will cause delays in processing.
– The third option (what we will likely do for those returns we cannot reasonably extend) is to prepare the K-2/K-3 forms and attach them to e-filed S-Corp and Partnership returns as a PDF. Generally the IRS is not great about referring to these attachments, and some tax software programs have problems delivering them; but at least it will show a good-faith attempt in the case of an audit.

Per Amber Gray-Fenner in Forbes, “These alternatives, while prudent, present some potentially serious unintended consequences:

  • The IRS may be inundated with PDF attachments that it is not prepared to process and review. PDF attachments are often separated from original returns never to be seen again—at least not until the taxpayer receives a notice looking for the “missing” information.
  • Many more PTE returns may be put on extension than would normally be the case.
  • Extended PTE returns mean extended 1040s, which is unsatisfactory to many taxpayers and tax professionals.”

In that same article, my colleague Fred Stein hopes “Occam’s Razor ‘kicks in and IRS realizes the unintended consequences this creates for many small businesses.’ If not, the additional work involved could cause PTE return preparation prices to increase by thirty to fifty percent.”

A summary from last week’s AICPA Town Hall:

We will be reaching out to all our S-Corp and Partnership clients to let them know about these new rules, and to ask that they obtain signed confirmation from each of their owners as to any personal requirement to file Form 1116 or another foreign-related tax form on the 1040 returns.

(For tax preparers who may not have any idea how to fill out these extremely long, complicated, new forms, Greg White is offering a live webinar on February 18th called “A Practical Approach to Quickly Filling Out Forms K-2 and K-3“.)

As you may have guessed, this unexpected new guidance will cause additional time, effort, and cost to all our small business S-Corps and Partnerships — almost none of whom actually have any foreign transaction exposure. After all the requests we’ve made of the IRS to reduce the tax preparation burden on small business owners and their CPAs, I wish I could say this is laughable.


In case that wasn’t enough for you, we’ve compiled a rich list of resources for your reading and watching enjoyment.

AICPA Resources:
Navigating the new Schedules K-2 and K-3 (Sept. 2021 Tax Advisor)
AICPA Comment Letter, K-2/K-3 (Sept. 2021)
AICPA Podcast on Practitioner Insights, K-2/K-3 (Nov. 2021)
IRS offers further K-2/K-3 relief, Journal of Accountancy (Feb. 2022)

NATP Resources:
2/10/22 National Association of Tax Professionals Blog Post – Tax preparers take note: another change for 2021 tax season with Schedules K-2 and K-3

Tax Speaker Resources:
2/4/22 Emergency Update Newsletter
2/9/22 Free 12-Minute Webinar – TaxSpeaker’s Solution to IRS’s New Form K-2 and K-3 for partnerships and S Corporations – YouTube

Compass Tax Resources:
2/10/22 Free 15-Minute Webinar – discussion on the new requirements for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA
Compass Tax Resources:
2/17/22 Free 10-Minute Webinar – update on the new FAQ relief for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA

IRS Resources:
Changes to the 2021 Instructions for Schedules K-2 and K-3 (Form
8865)
(Jan 18, 2022, IRS)
Changes to the 2021 S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S) (Jan 18, 2022, IRS)
Changes to the 2021 Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (Jan 18, 2022, IRS)
Notice 2021-39 re: penalty relief for good faith compliance efforts
(June 2021, IRS)


If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

IRS Service Issues – What Is Being Done? How Can You Help?

On last week’s AICPA Town Hall they discussed the IRS service issues I posted about recently, as well as the advocacy efforts by the newly-formed Tax Professionals United for Taxpayer Relief Coalition — including the AICPA, NATP, and many other organizations. (Check out their recent media briefing here.)

They were effective in getting a bi-partisan group of nearly 200 members of Congress to send a letter to the US Treasury Secretary requesting the IRS implement the following:

  • Halt automated collections from now until at least 90 days after April 18, 2022;
  • Delay the collection process for filers until any active and pending penalty abatement requests have been processed;
  • Streamline the reasonable cause penalty abatement process for taxpayers impacted by the COVID-19 pandemic without the need for written correspondence;
  • Provide targeted tax penalty relief for taxpayers who paid at least 70 percent of the tax due for the 2020 and 2021 tax year; and
  • Expedite processing of amended returns and provide TAS and congressional caseworkers with timely responses.”

Shortly afterwards, the IRS announced they are suspending a small portion of automated notices — which they clarified on February 9 as “notices of unfiled returns and unpaid balances generally, including a final notice of an outstanding balance and intent to levy”.

The IRS identified the suspended letters and notices as:

  • CP80, notice of an unfiled tax return. The IRS sends this when it has credited payments or other credits to the taxpayer’s account but has not received a tax return for the tax period.
  • CP59, unfiled tax return, first notice. The IRS sends this when it has no record of a prior-year return’s having been filed. The Spanish-language version, CP759, is included.
  • CP516, unfiled tax return, second notice. This is a request for information on a delinquent return for which there is no record of filing. The Spanish-language version, CP616, is included.
  • CP518, final notice — return delinquency. The Spanish-language version, CP618, is included.
  • CP501, balance due, first notice. This letter is a reminder of an outstanding balance on the taxpayer’s accounts.
  • CP503, balance due, second notice.
  • CP504 balance due, third and final notice. This also is a notice of intent to levy.
  • 2802C, withholding compliance letter. This letter notifies taxpayers whom the IRS has identified as having underwithheld taxes from their wages, with instructions on correcting their withholding amount.
  • CP259, business return delinquency. The IRS has no record of a prior-year return’s having been filed. The Spanish-language version, CP959, is included.
  • CP518, final notice of a business return delinquency. The Spanish-language version, CP618, is included.

Per the Journal of Accountancy: “How long the letters and notices will be suspended or at what point the backlog can be considered sufficiently cleared to resume them remains unclear. The news release Feb. 9 said the IRS “will continue to assess the inventory of prior year returns to determine the appropriate time” to start sending them again. And there has been no mention of relieving taxpayers from their obligation to file returns or pay taxes that are the subject of the letters and notices, if those returns and taxes are indeed unfiled and unpaid.”

While this is a welcome step, it falls seriously short of what is needed.

In a recent Op Ed, former National Taxpayer Advocate Nina Olson outlined her suggestions to “fix the IRS”, and the AICPA Journal of Accountancy podcast elaborates on the following four recommendations:

  1. Discontinue automated compliance actions until the IRS is prepared to devote the necessary resources for a timely resolution
  2. Align requests for account holds with the time it takes the IRS to process any penalty abatement requests
  3. Offer a reasonable cause penalty waiver, similar to the procedures of first-time abatement administrative waiver
  4. Provide taxpayers with targeted relief from the underpayment and the late payment penalty for the 2020 and 2021 tax year

The podcast (highly-recommended short listen!) walks through these one-by-one and explains why each is crucial — in a very straightforward manner, providing examples of what kind of struggles real-life taxpayers and their advisors are going through.

A key takeaway: “What we’re trying to do with these recommendations is to lessen the need to reach out to the IRS. In theory, if we’re having to call the IRS less then the IRS will be able to get to people who have other types of problems and get those problems resolved.”

The Washington Post shared an article today highlighting the severity of the IRS backlog and what it means for this tax season.

In testimony before the House Ways and Means Committee on Tuesday, National Taxpayer Advocate Erin Collins noted that as of late December, the IRS had a backlog of 6 million unprocessed individual returns and 2.3 million unprocessed amended individual returns. In addition, more than 2 million Forms 941, Employer’s Quarterly Federal Tax Return, and its amended version remained unprocessed. Many of the latter included claims of the employer retention credit emergency pandemic relief provision.

But all this isn’t enough — they need to hear actual stories from real taxpayers about what you’ve gone through. If you had a challenge with the IRS in the past couple years, and especially if you have an ongoing issue, please contact your Senators and Representatives to tell your personal story. This generally moves them to action, and what we need now is continued and increased pressure on the IRS to make short-term immediate changes that will affect the here-and-now of this tax season.

RESOURCES:
Find your rep: https://www.house.gov/representatives/find-your-representative
Members of Congress Twitter handles: https://twitter.com/i/lists/34179516/members
IRS Social Media: @IRS


If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Chicago “Joint Readiness Summit” This Fri 2/4 – Small Biz Funding Opportunities

From Chicago Business Affairs & Consumer Protection

JOINT READINESS SUMMIT: This Friday, February 4 from 9:00AM to 4:00PM

Join the City of Chicago, Cook County, and State of Illinois leaders as well as other experts to learn about what it takes to be “ready” to apply for grants and contracts funded by American Rescue Plan Act (ARPA) and other economic recovery funding streams.

This event will take place via Zoom and will be simultaneously streamed on YouTube. Meeting information will be sent via email prior to the event. ASL interpretation and closed captioning will be provided.

Learn about the Chicago Recovery Plan — the City’s plan to amplify once-in-a-generation federal funding to create an equity-based investment strategy to catalyze a sustainable economic recovery from the COVID-19 pandemic. The funding under the Chicago Recovery Plan, which includes funding from the American Rescue Plan Act and over $600 million in local bond funds, is allocated alongside all other available resources in the City budget to maximize this opportunity over the next 3-5 year funding period. The initiatives and strategic priorities that make up the Chicago Recovery Plan were a result of several stages of community engagement and input during the 2022 budget development process.  The list of current funding opportunities can be found here:
Funding Opportunities (chicago.gov)

Register by visiting the Joint Readiness Summit Registration Webpage.


If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.