Tag Archives: tax credits

Doing Your Taxes Last-Minute And Can’t Find Your W-2 or 1099? Download Them For Free From The IRS Website

October 12, 2023 Nancy McClelland Leave a comment

I wrote a fabulously comprehensive article for MSN back in March about the various types of IRS transcripts, what they’re for, why you’d use one versus another, and how to download them. Some of my finest work, if you ask me… but today you don’t care about that. You just need to hurry up and file your tax return by Monday, October 16th, and you can’t find any of the paperwork you carefully saved to your Mac desktop, only to have it be deleted during an update. (Yes, this is a thing. I’ve had it happen to two clients already.)

Whatever the reason for not being able to find your tax documents, you still have to get that return filed by Monday. Lucky for you, most of these documents are listed on what is called a “wage and income transcript”. The beauty of a wage and income transcript is that every one of those documents sent to you – they’re called “information returns” – is also sent to the IRS, with your social security number as a unique identifier. If you download this list of documents from the IRS, you get a summary of everything filed on your behalf.

Can’t find some of your W-2s from working several jobs?
Not sure whether your freelance gig issued a 1099-NEC? Or maybe you lost track of countless different contract work payments?
You’re pretty sure you have an old dividend- or interest-bearing account given to you by your grandparents but can’t ever find the form they mailed?
Do you pay student loan interest, tuition, or mortgage interest and you can’t find the forms because you moved during the year?
No matter how many times you try to download your retirement distribution tax form, something goes wrong with the site?

Though it takes the IRS a few months to post all these to your transcript (or longer, if the issuing company filed an extension), by this point in the season, everything should be there, and you’ll be able to prepare your tax return after all — even if you lost the originals that came in the mail or can’t figure out where you saved the PDFs.

And the best news where downloading a transcript is concerned? All you need is a photo ID, a mobile phone with a camera, an email address, and an Internet connection.

Keep in mind that the IRS will not email you a transcript; you must go online and create or log in to your account and download it. There are email scams out there that entice folks to click on a link or attachment with the promise of an IRS Online transcript – don’t fall prey.

“How Can I Download My IRS Transcript?”

If you need help creating your ID.me account, the ID.me Help Center spells out the process very clearly. You can also watch this video or review these written instructions if you want to review the process first.

2. Once your account is created, log in, go to the IRS’s Get Transcript page and click the “Get Transcript Online” button.

3. Select the reason you need a transcript (it’s fine to just select “Other”).

4. Leave the Customer File Number blank and click “Go.” The screen will display all four (or five, if you have non-filing years) transcript options and the available years.

5. Under Wage & Income Transcript, select the tax-filing year.

6. After you select your transcript, like magic, a PDF will pop up in a new tab of your browser with all the information you need. (Or it will say “No record of return filed,” if nothing has posted yet.)

7. Print the file to PDF and save it somewhere safe, along with the rest of your tax season documents.

As explained above, your wage and income transcript will list all forms W-2, 1099, 1098, and 5498 that have been processed by the IRS so far for the tax year in question.

For most taxpayers, that’s all you need. But some people also can’t remember how much they paid in estimated taxes, or if they took last year’s refund and credited it forward, or they need to review last year’s return to jog their memory about this-or-that. If you’re one of those folks — no worries, I got you covered: but you need to read the longer version of this post that I shared back in March.

No need to panic — you got this. Now go file that tax return on time… for 2023, the extension deadline is Monday, October 16th, by midnight in your time zone. Yes, submitting your taxes is nerve-wracking, but it’s way better than the alternative, and with a handy list from the IRS of all your documents in one place, you’re one step ahead of most of the other taxpayers who haven’t filed yet!

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, Tips

Top Five Tax Benefits Your Preparer Might Be Forgetting

April 17, 2023 Nancy McClelland 1 Comment

I used to find it annoying when a client would forward me an article about a tax deduction or credit, to make sure I would take it on their tax return. But even though I take approximately 70 credit hours of continuing education each year (almost twice the requirement for Illinois CPAs), every once-in-a-while a new tax law falls between the cracks, or I might not realize a given client is suddenly eligible for an old one. So, while 99% of these shares are “old news”, it’s worth avoiding the eye roll and taking a look just in case. Out with the ego, in with the knowledge.

To that end, when you do share something with your tax preparer, I beg you to phrase it in respectful language that recognizes they are experts in their field. Examples: “I’m sure you already know about this but just wanted to play it safe,” or “I read about this new tax law and am constantly amazed at how much y’all have to keep up with; any chance this applies to my situation?”

There are five tax benefits I’ve noticed — in my interactions with colleagues at conferences, in webinar chat, or in our online communities — that seem to keep flying under the radar. Most likely the tax preparer is expecting the bookkeeper or taxpayer to bring it up if one of these situations exists, but they may not know it’s significant, and may forget to note it in the books or tax organizer. So, to make sure we’re all on the same page, here are a few choice tax benefits that are often overlooked.

Credit for Small Employer Retirement Plan Startup Costs
Employer Credit for Paid Family and Medical Leave
Restaurant Meals Enhanced Deduction (2021 & 2022 only)
Self-Employed Health Insurance
Health Insurance Premium Tax Credit

Credit for Small Employer Retirement Plan Startup Costs —
SECURE 2.0 gets most of the airtime these days, but back in late 2019, the original version of this law passed, making it easier for small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer, and made them accessible to a wider range of employees. Although many of these benefits were modified and expanded upon with SECURE 2.0, the new rules didn’t take effect until 2023. But that shouldn’t stop you (or your preparer) from taking a look at the benefits in place in 2022. For starters, Form 8881, Credit for Small Employer Pension Plan Startup Costs provides for a maximum tax credit of up to $500 per year for startup costs, and another $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment. This benefit is a win-win for employers and employees, especially when the employee additionally qualifies for the retirement savers’ credit.

Employer Credit for Paid Family and Medical Leave —
Effective starting 2018, the Section 45S Employer Credit for Paid Family and Medical Leave is designed to cover up to 25% of the cost to employers of providing paid family and medical leave to their staff. The FMLA credit is claimed on Form 8994, Employer Credit for Paid Family and Medical Leave. To qualify, employers must have a written policy providing all eligible employees access to at least two weeks of paid family and medical leave annually, paid at 50% or more of normal wages (yes, short-term disability policies often count).

Policies must also include leave that covers one or more of the following:
– Birth of a child
– Adoption or fostering of a child
– Care for a spouse or family member with a serious health condition
– Employee’s own serious health condition
– Spouses and family member of certain active military members

Employers can claim the credit for up to 12 weeks of paid leave benefits. It’s available through 2025 and the IRS has an FAQ on it that’s chock-full of details.

Restaurant Meal 100% Deduction —
For 2021 and 2022 only, businesses can deduct the full cost of business-related food and beverages purchased from a restaurant; the limit is usually 50% of the meal, so this can be quite a savings. For our own clients, we’re simply exporting the entire “Meals” category from their financial software and reviewing all payees, sorting out the ones that are not restaurants… yet another benefit for small business owners who heed our cry to “please add payees to all transactions”.

Per the IRS, to qualify for the enhanced deduction:
– The business owner or an employee of the business must be present when food or beverages are provided.
– Meals must be from restaurants, which includes businesses that prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption.
– Payment or billing for the food and beverages occurs after December 31, 2020, and before January 1, 2023.
– The expense cannot be lavish or extravagant.
– Grocery stores, convenience stores and other businesses that mostly sell pre-packaged goods not for immediate consumption, do not qualify as restaurants.

Self-Employed Health Insurance Deduction —
Now, this may sound obvious, since almost everyone knows that self-employed people are generally allowed to deduct their health insurance premiums for themselves, their spouses, and their dependents (and in some cases, non-dependent children). Yet we often see this benefit overlooked on tax returns, especially when S-Corp shareholders pay for their insurance through work. There are special and complex rules regarding how this health insurance deduction is claimed, which I suspect is why it is often missed (or sometimes duplicated). It’s important to understand that this is not a business deduction; neither do you have to itemize to take it. The deduction is claimed as a reduction of taxable income, and applies only to income taxes, not to self-employment taxes. It also needs to be subtracted from Section 199A Qualified Business Income before calculating the QBI Deduction, and there are complex issues when it interacts with the Premium Tax Credit (see below), so keep an eye out for these potential issues when claiming this important tax benefit.

Premium Tax Credit —
This one is often overlooked on tax returns in more than one direction… often the client forgets to provide Form 1095-A (Marketplace Health Insurance) to their preparer, which shows the advance premium tax credit, and therefore any increase or decrease in the credit based on the current year’s income is missed. How does this happen? Well, the credit is based on the prior tax year’s income, but “reconciled” on the tax return against the current tax year’s income — therefore, if the taxpayer had a good year, they may lose most or all of their credit. By contrast, in more difficult times, they may find out on the return that they’re entitled to more of a credit than they received. Not everyone enrolled on the Marketplace is eligible for a credit, so it’s easy to miss in the long list of tax organizer questions if the client doesn’t know to ask or to submit the form.

Per the IRS: If you benefit from advance payments of the premium tax credit, it is important to report life changes to the Marketplace as they happen throughout the year. Certain changes to your household, income or family size may affect the amount of your premium tax credit. These changes can alter your tax refund, or cause you to owe tax. Reporting these changes promptly will help you get the proper type and amount of financial assistance. For more information, see Claiming the Credit and Reconciling Advance Credit Payments.

To be fair to tax preparers everywhere, there is far more in the Internal Revenue Code (IRC) than any one person could ever know, which is part of why CPAs are required in most states to obtain more continuing education credits than almost any other professional designation. (Though keep in mind — there is no requirement that a tax preparer be a CPA, or even an EA. See here for my guide to finding a qualified tax preparer in your area.) The past five years have seen unprecedented increases in tax law complexity, and quite frankly — it’s hard to keep it all straight. So if you’re concerned your tax preparer is missing something, please approach the matter with respect and deference, and do not judge too harshly if they happen to have missed something. Just be glad you read this article and caught it in time! (And if you didn’t catch it in time, ask them about filing an amendment.)

Education, IRS, Tips

Dreading Doing Your Taxes? Use This Hack to Download Your IRS Account Transcript—For Free

March 10, 2023 Nancy McClelland 4 Comments

Unless you’re an accountant, you’ve probably never even heard of an IRS account transcript—but it’s the best hack there is for getting an accurate snapshot of your income, deductions, tax payments, tax filings, and account activity records.

Here’s how it works: the IRS receives a copy of every single tax form filed by you – or “on” you (by, say, an employer or brokerage firm). If you’re paralyzed with fear of filing your tax return because you might be missing documents, you can easily find them by accessing your IRS transcript. It’s such a helpful (and free) tool that I urge all of my clients, family and friends to take advantage of the option – and the Taxpayer Advocate Service does, too.

There are five different types of IRS transcripts, but for this hack we’re focusing on three of them: the wage and income transcript, the account transcript, and the prior-year record of account transcript.

“Why Should I Download My IRS Transcript?”

First, it’s important to note that there is more than one type of transcript, and each meets a different need… a different “why should I”. The most important one for filing your taxes is called the “wage and income transcript”:

Can’t find some of your W-2s from working several jobs?
Not sure whether your freelance gig issued a 1099-NEC? Or maybe you lost track of countless different contract work payments?
You’re pretty sure you have an old dividend- or interest-bearing account given to you by your grandparents but can’t ever find the form they mailed?
Do you pay student loan interest, tuition, or mortgage interest and you can’t find the forms because you moved during the year?
No matter how many times you try to download your retirement distribution tax form, something goes wrong with the site?

The beauty of a wage and income transcript is that every one of those documents sent to you – they’re called “information returns” – is also sent to the IRS, with your social security number as a unique identifier. So by downloading this list of documents from the IRS, you get a summary of everything filed on your behalf.

However, it takes time for the IRS to wade through all these filings and post them to your account. Sometimes they’re not all posted until a month or two after Tax Day. If nothing has posted yet, it will simply say “No record of return filed.”

But if you’re filing taxes for a prior-year or on extension, it’s a total gold mine. Our firm has even helped clients catch up on tax returns from years’ past by recreating their history based on these transcripts. (That said, I recommend downloading it even if you’re filling on time, just to verify that you’re not missing anything in your pile of tax forms.)

The second most-important transcript during tax-filing season is the ”account transcript”. This lists information on payments and credits posted to your account throughout the year, and we actually require our own clients to submit it to us with their tax organizer annually:

Don’t remember how much and when your estimated tax payments were?
Did you receive payments, such as stimulus checks or advance EIC or child tax credits?
Going through divorce proceedings, do you need to know on which spouse’s account payments were made or credits applied, or how much tax withholding was paid?

And lastly, there’s the “record of account transcript”, which combines a “return transcript” of a prior-year tax return with any activity posted since then.

Do you need to review last year’s return to make sure you’re not forgetting something important this year?
Are you being asked to verify your income when applying for a mortgage or financial aid, SBA loan, social services or checking on a prior-year tax refund?

The best news where downloading any transcript is concerned? All you need is a photo ID, a mobile phone with a camera, an email address, and an Internet connection.

“How Can I Download My IRS Transcript?”

1. From the IRS website, you’ll need to create an ID.me account. (This is the most involved of the steps, but thankfully you only have to do it once; moving forward, you’ll simply sign into the same account each time.) The ID.me website uses facial recognition to confirm your identity, so you’ll need your phone to take a selfie.

If you need help creating your ID.me account, the ID.me Help Center spells out the process very clearly. You can also watch this video or review these written instructions if you want to review the process first.

2. Once your account is created, log in, go to the IRS’s Get Transcript page and click the “Get Transcript Online” button.

3. Select the reason you need a transcript (it’s fine to just select “Other”).

4. Leave the Customer File Number blank and click “Go.” The screen will display all four (or five, if you have non-filing years) transcript options and the available years.

5. Under Wage & Income Transcript, select the tax-filing year.

8. Then go back to the open “Get Transcript” tab and click the tax year under Account Transcript, which will list all payments and credits on your account.

9. Lastly, go to the Record of Account Transcript section and click the prior-year link. It will list all account activity for the tax year in question, followed by every single field from your tax return.

(And if you want to get deep into the weeds, NASFAA has an amazing “Tax Transcript Decoder” that compares the fields on a tax return to the fields on a tax return transcript, and Saving To Invest had fun with highlighters when creating a legend for each row on an account transcript.)

Done! Let the tax return preparation begin!

IRS, Tips

Struggling With Taxes? Here’s Where To Get Help

March 7, 2023 Nancy McClelland Leave a comment

The past three years have been challenging in so many ways, to so many people — but as a tax preparer, I can confidently say that the inability for the IRS to provide its usual level of customer service has been among the most impactful. Luckily, recent Congressional funding to make up for years of inadequate budgets, combined with Treasury Secretary Yellen’s direction that IRS priorities should include clearing the backlog of unprocessed tax returns and improving customer service, seem to be making a difference.

Pre-pandemic, the IRS offered all sorts of taxpayer assistance options, but the inability to offer in-person services, as well as the intense strain that government financial relief programs placed on the already-stretched agency, made it impossible to offer even the most basic of support programs. The good news is that some of the Taxpayer Assistance Centers are reopening to the public, one Saturday each month for walk-in help without an appointment.

On March 11, April 8 and May 13, from 9 am to 4 pm, certain IRS Taxpayer Assistance Centers will offer in-person service and assistance to meet taxpayers’ needs. The IRS recommends that you come prepared and bring documents such as photo ID, Social Security cards, IRS notices received, proof of bank account information, and so on. Professional foreign language interpretation will be available through an over-the-phone translation service. For a list of addresses, visit the IRS’s website announcement and then click the plus-sign to the left of your date of choice. Scroll down to your state, and all the addresses of the participating offices will be listed.

The IRS also notes various options for obtaining free tax preparation services locally:

Eligible individuals or families can get free help preparing their tax return at Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) sites. To find the closest free tax return preparation help, use the VITA Locator Tool or call 800-906-9887.
To find an AARP Tax-Aide site, use the AARP Site Locator Tool or call 1-888-227-7669.
Any individual or family earning $73,000 or less in 2022 can use tax software through IRS Free File at no cost. There are products in English and Spanish.
MilTax, a Department of Defense program, offers free return preparation software and electronic filing for federal tax returns and up to three state income tax returns. It’s available for all military members, and some veterans, with no income limit.

The IRS has also published a series of “Tax Time Guide” news releases designed as a resource to help taxpayers file an accurate tax return. And US News & World Report recently published a list of free and low-cost tax preparation resources. It’s not a magic wand, but after a few rough years, you’re no longer alone when it comes to navigating tax season.

Illinois, IRS, Tips

Today’s The Day! 2022 Tax Filing Season Begins

January 23, 2023 Nancy McClelland Leave a comment

January 23, 2023 — Per IRS 2023-11, following a successful opening of its systems today, the IRS is now accepting and processing 2022 tax returns; taxpayers have until April 18 to file their taxes this year.

According to Acting Commissioner Doug O’Donnell, taxpayers can count on IRS delivering improved service this filing season. As part of the August passage of the Inflation Reduction Act, the IRS has more than 5,000 new telephone assistors and added more in-person staff to help taxpayers.

Taxpayers who electronically file a tax return with no issues and choose direct deposit should still receive their refund within 21 days of the date they file – similar to previous years. Due to tax law changes such as the expiration of the Advance Child Tax Credit and Recovery Rebate Credit this year to claim pandemic-related stimulus payments, many taxpayers may find their refunds somewhat lower this year.

The State of Illinois also opened its tax season today. In a press release, the IDOR Director, David Harris, highlighted the improved and enhanced MyTax Illinois system.

In addition to being able to file Form IL-1040 for free through MyTax Illinois, individuals may also use the site to make payments, respond to department inquiries, and check the status of their refunds using the Where’s My Refund? link.

MyTaxIllinois also allows taxpayers to look up Illinois-Personal Identification Numbers (IL-PINs), which are eight-digit numbers assigned by the department and used as signatures when e-filing returns. Amounts of any estimated tax payments can also be viewed and (when necessary), amounts reported on Forms 1099-G and 1098-F can also be found on the site.

Back to the IRS… in today’s news release, they also shared their tips for a smooth filing season:

Fastest refunds by e-filing, avoiding paper returns: To avoid refund delays, IRS encourages taxpayers to file their tax return electronically with direct deposit instead of submitting a paper tax return. Taxpayers may use IRS Free File on IRS.gov, other tax software or a trusted tax professional. Members of the armed forces and qualifying veterans can file their federal tax return and up to three state tax returns for free electronically using MilTax, a Department of Defense program.

Avoid delays; file an accurate tax return: Taxpayers should make sure they’re ready to file an accurate and complete tax return. This can help avoid processing delays, extensive refund delays and later IRS notices.

Earned Income Tax Credit or Additional Child Tax Credit refunds: Taxpayers may file their returns beginning Jan. 23, but the IRS cannot issue refunds involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February. The law provides the extra time to help the IRS prevent fraudulent refunds. “Where’s My Refund?” on IRS.gov should show an updated status by Feb. 18 for most EITC and ACTC filers. The IRS expects most of these refunds to be available in taxpayer bank accounts or debit cards by Feb. 28 if people chose direct deposit and there are no other issues with their tax return.

Avoid phone delays; online resources best option for help: IRS.gov is the quickest and easiest option for help. IRS assisted phone lines continue to receive a high volume of calls. To avoid delays, check IRS.gov first for refund information and answers to tax questions. Setting up an Online Account on IRS.gov can also help taxpayers get information quickly. IRS Online Account was recently expanded to allow more people to gain access. The Interactive Tax Assistant can also help taxpayers get answers to many tax questions online at any time.

Online options for free help; answers to common questions: Use IRS.gov to get answers to tax questions, check a refund status or pay taxes. No wait time or appointment needed — online tools and resources are available 24 hours a day.

Other free options for help: IRS Free File is available to any person or family who earned $73,000 or less in 2022. For taxpayers who are comfortable completing their own tax forms, Free File Fillable Forms may be a good option. MilTax is a free tax resource available to the military community, and it’s offered through the Department of Defense. Qualified taxpayers can also find free one-on-one tax preparation help nationwide through the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs.

2021 tax returns still being processed: Taxpayers can check Where’s My Amended Return? to find out the status of their tax year 2021 Form 1040-X and can still file their 2022 tax returns even if their 2021 tax returns haven’t been processed. Visit the IRS Operations page for more information on what to expect.

April 18 tax deadline: This year, the filing deadline is April 18 for most taxpayers, but automatic six-month extensions of time to file are available for anyone for free. See Extension of Time to File Your Tax Return for instructions. Taxpayers should be aware that filing Form 4868 only extends the time to file tax returns. Those who owe taxes should still pay by April 18 to avoid late payment penalties.

Let the filings begin!

IRS

Rising inflation may result in some taxpayers paying smaller tax bills

December 1, 2022 Nancy McClelland Leave a comment

“Money” by Got Credit is licensed under CC BY 2.0.

The IRS recently announced that tax brackets would widen by nearly 7% for next tax year, to combat rapidly rising inflation. As a result of these and other changes made in an attempt to match the rising costs of groceries and other daily necessities, some Americans will find that when they file their 2023 tax returns, they may actually have lower tax bills than in the prior season.

Due to these new, wider tax brackets, taxpayers whose incomes have not kept pace with inflation may find that more of their taxable earnings fall into lower groupings–and therefore will owe comparatively less tax when they file than those whose incomes have increased with inflation.

According to the Bureau of Labor Statistics, consumer prices increased by around 8.2% in September compared to the same month last year, with grocery costs up by 13%. However, many workers have yet to see salary increases sufficient to keep up with inflation. In fact, in September, seasonally-adjusted average hourly wages decreased by 3% from the previous year.

According to the IRS, some 60 tax rules–including standard deductions for single and married taxpayers–will be adjusted to reflect these increased costs. Married couples’ standard deduction will increase by $1,800 to $27,700 from the prior year. For single filers, the standard deduction will be $1,3850–a $900 increase.

Marginal tax rates are also being updated for inflation. The lowest marginal tax rate of 10% now applies to single filers making $11,000 or less annually, which is up from $10,275. From $20,550 previously, couples can now earn $22,000 and still qualify for the 10% bracket. The qualifying transportation and parking benefit cap will increase by $20 to $300 per month.

What modifications are anticipated for 2023?

This year’s inflation rate also impacts the adjustments the IRS will make for next tax season, so that taxpayers can plan for 2023. Kiplinger provides a good breakdown and explanation, as well as charts for each filing status and income range, for both 2022 and 2023.

Substantial changes to tax brackets

The top income limit for married couples filing jointly for the 12% tax bracket will increase from $83,550 in 2022 to $89,450 in 2023. This could prevent some taxpayers from falling into a higher tax rate (and potentially a higher bill). The standard deduction, a fixed amount taxpayers can utilize to lower their taxable income, is also anticipated to increase significantly. According to Wolters Kluwer, married couples filing jointly in 2023 may claim up to $27,700, an increase from $25,900 in 2022.

Additional tax credits and limits on tax-advantaged contributions

The Child Tax Credit was modified substantially by the Biden Administration for tax year 2021 and increased to $3,600 to support those with families struggling from the pandemic, but it’s reverting to $2,000 for this tax year (absent any last-minute tax extenders from Congress). That could lead to what is called “refund shock”–where expectations of large pandemic-related refunds are unsubstantiated.

The Earned Income Credit, which benefits lower-income working taxpayers, was expanded to include both younger and older taxpayers last year, a change that has been made permanent.

In some situations, increasing taxpayers’ contributions to certain tax-advantaged accounts can also reduce their taxable income. You can make an IRA contribution of up to $6,500 in 2023, up $500 from 2022–and those over 50 are allowed an additional catch-up contribution of $1,000. The contribution caps for 401(k) and other employer-sponsored retirement accounts will see significant hikes as well. People with health savings accounts (HSAs) may contribute up to $3,850 for individuals or $7,750 for a family in 2023. HSAs allow pre-tax contributions to pay for medical bills.

Conclusion

There is no assurance that tax bills will be lower, even though these changes may allow taxpayers to take a more generous standard deduction or put more money into accounts that could cut taxable income. This is because several things affect overall tax liability. Codification changes are intended to mitigate the effects of inflation; as a result, people whose earnings may not have kept pace with inflation may benefit, and others who did receive cost-of-living raises may at least avoid moving into a higher tax bracket. And a select number of us may be fortunate enough to pay less tax.

About The Co-Author: Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.

Education, IRS, Tips

How To File Your 2021 Tax Return While Waiting For 2020 To Be Processed

March 29, 2022 Nancy McClelland Leave a comment

A short article in today’s Accounting Today newsletter (which I highly-recommend) included an extremely helpful snippet that I want to make sure to spread far-and-wide.

To validate and successfully submit an electronically filed tax return to the IRS, taxpayers need their adjusted gross income, or AGI, from their most recent tax return. The IRS has a couple of “special tips” to ensure the tax return is accepted by the IRS for processing.

For those waiting on their 2020 tax return to be processed, enter $0 (zero dollars) for last year’s AGI on the 2021 tax return.

For those who used a non-filer tool in 2021 to register for an advance Child Tax Credit or third Economic Impact Payment in 2021, enter $1 (one dollar) as the prior-year AGI.

All others should enter the prior year’s AGI from last year’s return. Tax preparation software that was used last year will auto-populate this field.

And my personal suggestion to add to this list — make sure to get a transcript before trying these, since there is some possibility that your tax return has already been processed and you are unaware of it, or that the answers you’re looking for will show up on a wage and income transcript (stimulus and child tax credit payments, as well as estimated tax payments, for example).

Hopefully these tips will help expedite your tax return filing and processing — but as the article points out, “significant backlogs, lack of adequate staffing, difficulty reaching tax authority agents by phone and pandemic-related IRS and state and local office closures” are making this tax season particularly challenging one for tax professionals and taxpayers.

Education, IRS, Site News, Tips

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

February 13, 2022 Nancy McClelland Leave a comment

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)

IRS, Site News, Software, Tips

Tax Season Begins Jan 24 — IRS Says to Expect Frustration

January 16, 2022 Nancy McClelland Leave a comment

In an already unprecedented year, the IRS is taking an unprecedented approach toward managing taxpayer expectations, and with good reason: with tax season officially beginning this coming January 24th, the IRS is dealing with a severe lack of staffing — facing workforce headcounts at 1970s levels — and a backlog of tax returns from the past two years. They say to expect frustration this tax season.

The IRS has been dealing with budget shortages for many years now, and Covid forced their mailrooms to close down for months at a time, creating a massive backlog from which they have not yet recovered. Add to that the unbelievable number of new demands placed upon the agency: three rounds of stimulus payments, Employee Retention Credits for both 2020 and 2021, and demands for guidance in an unbelievable number of groundbreaking areas of code… it is certainly understandable that they would not be able to meet taxpayer needs.

So what can taxpayers do to avoid additional problems? Filing electronically with direct deposit, and avoiding a paper tax return — at almost any cost — is more important than ever this year. Additionally, those who received an Economic Impact Payment or an advance Child Tax Credit last year should be especially careful to order an IRS transcript ahead-of-time to confirm these amounts before filing a return. (We are requiring all clients to submit both federal and state transcripts this year, in their own interest.)

Also, keep in mind that by law, the IRS cannot issue a refund involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February, though eligible people may file their returns beginning on January 24. The law provides this additional time to help the IRS stop fraudulent refunds from being issued.

Due to the Emancipation Day holiday falling on Friday, April 15th, the filing deadline to submit 2021 tax returns or an extension to file is Monday, April 18, 2022. Taxpayers requesting an extension will have until Monday, Oct. 17, 2022, to file (but not an extension to pay; make sure to pay an estimate of tax with your extension).

The IRS did note that if you are still awaiting processing of your 2020 tax return, this should not prevent you from filing a 2021 return — but as a CPA, I’d recommend against that approach, opting instead to file an extension with a payment of any estimated tax due; otherwise, changes from 2020 could affect 2021 and require an amended return.

The American Institute of CPA’s VP of Tax, Ed Karl, has repeatedly shared in AICPA Town Halls and articles that the IRS Commissioner himself testified that during busy season the IRS gets 1500 calls per second — this translates into their only being able to answer 2% of calls. “No, that is not a typo.” The AICPA strongly supports penalty relief measures that are fair, reasonable and practical, and would mitigate the negative effect of the coronavirus on taxpayers and require less contact with the IRS. Such an approach would alleviate the daily struggles that taxpayers, their advisers and the IRS face. Specifically, the AICPA urges Treasury and the IRS to:

Stop compliance actions until the IRS is prepared to devote the necessary resources for a proper and timely resolution of erroneous notices, missing refunds and other matters. At a minimum, stop automatic collections at least for 90 days after the filing deadline.
Align requests for account holds with the time it takes the IRS to process any penalty abatement requests.
Provide taxpayers with targeted relief from underpayment of estimated tax penalty and the late payment penalty.
Offer a COVID-19 reasonable cause relief, similar to the procedures of first-time abatement and generally facilitate the easier adoption of reasonable cause relief.

Those are some solid suggestions for short-term relief — long-term suggestions and more can be found in this excellent AICPA summary. On Friday, the AICPA joined a coalition seeking relief from IRS service challenges, pointing out that “though the pandemic has created unforeseen and prolonged problems for the IRS, taxpayers, and tax professionals, the IRS has not taken reasonable actions to reduce burdens that appear likely to continue into the upcoming tax filing season”.

In the meantime, here are several important dates from Tax Practice Advisor that taxpayers should keep in mind for this year’s filing season:

January 14: IRS Free File opens. Taxpayers can begin filing returns through IRS Free File partners; tax returns will be transmitted to the IRS starting January 24. Many tax software companies also are accepting tax filings in advance.
January 18: Due date for tax year 2021 fourth-quarter estimated tax payments.
January 24: IRS begins 2022 tax season. Individual 2021 tax returns begin being accepted and processing begins.
January 28: Earned Income Tax Credit Awareness Day to raise awareness of valuable tax credits available to many people – including the option to use prior-year income to qualify.
April 18: Due date to file 2021 tax return or request extension and pay tax owed.
April 19: Due date to file 2021 tax return or request extension and pay tax owed for those who live in MA or ME due to Patriots’ Day holiday.
October 17: Due date to file for those requesting an extension on their 2021 tax returns.

Best of luck — and please remember to be kind and patient with your tax preparer and agency representatives. We’re all human beings struggling with an imperfect system during a difficult time.

COVID-19 Financial Relief, Education, IRS, Tips

IRS Finally Issues Guidance On Employee Retention Credit (ERC)

August 12, 2021 Nancy McClelland Leave a comment

It finally happened… the IRS released long-awaited guidance on the Employee Retention Credit (ERC):
• August 4 – Notice 2021-49 and accompanying IR-2021-165
• August 10 – Rev. Proc. 2021-33

Some major questions were answered:
• Whether wages of more than 50% shareholders and their spouses are considered qualified wages for the purpose of the credit.
(Mostly “no”, unless you’re an orphan with no living siblings or kids. Much frustration abounds — more on this later.)
• Whether cash tips are included in qualified wages.
(Yes. Good news!)
• Whether full-time employees or full-time equivalent employees should be used to calculate the number of employees to determine whether a business is a small or large eligible employer.
(Head-count, not FTEs. Good news again!)
• Timing of the wage deduction disallowance.
(Must be on 2020 tax return, so amend if already filed.)
• Does gross receipts for ERC include PPP, SVOG, RRF?
(Mostly “no”, as long as you treat them consistently. More good news!)

They also released rules on changes made to the ERC by the American Rescue Plan Act (ARPA) regarding:
• Recovery Start-up Business
• Severely Financially Distressed Employer

There were other significant updates to the ERC as well, including clarifications as to:
• If an employer may claim both the ERC and the Internal Revenue Code Section 45B “Tip Tax Credit” that applies to food and beverage workers.
(YES! You can double-dip. Truly shocking, and good news.)
• Instructions on amending filed income tax returns returns after receiving the ERC.

Thankfully, the AICPA shared numerous resources on these in this week’s Town Hall — I strongly recommend viewing the AICPA TV session called “Employee Retention Credit: Your Questions Answered”. In this video, Kristin Esposito and April Walker review the IRS notice and explain guidance on the common questions listed above.

Additionally, AICPA released two Tax Adviser Articles:
• Guidance on claiming ERC
• New safe harbor for ERC gross receipts calculation

They are also putting together a panel of practitioners for a September Town Hall, to discuss how each is dealing with client returns based on this new guidance.

In addition to all the AICPA goodies, our go-to legal resource, Alan Gassman and Brandon Ketron recorded a “PPP and ERC Update” video on August 7th that explores (and vents) Notice 2021-49 (it was recorded prior to Rev. Proc 2021-33, so there’s no reference to the fact that PPP, SVOG, and RRF receipts are not included in gross income for ERC qualification purposes).

Which is a good segue to circle back to the frustration derived from the IRS’s “letter of the law” guidance. The basic idea is that if owners have any living relatives (regardless of association with the business), their wages do not qualify for ERC — but those of an orphan with no siblings or offspring would. Unsurprisingly, this didn’t go over well in the accounting and legal communities:

NCCPAP blasts IRS guidance on Employee Retention Credit | Accounting Today

Newly Issued Employee Retention Credit Guidance Punishes Owner Employees If They Have Living Family Members | Forbes

Practitioners call for fixes to the Employee Retention Credit | Accounting Today

IRS Issues Additional Guidance for Claiming the Employee Retention Tax Credit | Gould & Ratner LLP – JDSupra

I suspect the IRS is attempting to force Congress’s hand by taking the sloppily-written legislation at face value and therefore releasing a ridiculous literal interpretation they know could not have been intended. But without sufficient administrative authority to read their own preferences into it, the IRS has now put Congress in a position to have to release new legislation to explicitly spell out their original intent. Will this happen anytime soon? Do we hold off on filing client 941-X returns in the meantime? Or is Congress too busy to right this wrong?

We’ll be mulling these questions over in the next few weeks, with the intention of making a game-time call with enough time to get our September 15th extended business tax returns filed.

The Dancing Accountant