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:
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.
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.
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.
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!
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.
Note: much of the information below was pulled from the old Polito Eppich website — however, they have since merged with another firm to become Magnus Blue, and as such have removed their former blog content. My 2018 blog post linking to their article on how to properly account for partnership and S-Corp health insurance to avoid double-dipping now points to a web archive of the original site — but since that’s hard to find, I’m borrowing some of their material and sharing it here as well. To-date it’s the most well-illustrated and to-the-point summary I’ve seen on the topic.
The IRS rules for reporting health insurance premiums for partnership and S-Corp owners are complex, and as a result, easy to accidentally bungle. Sometimes an entity will incorrectly deduct the premium, and so will the owner — on their personal return — leading to what is known as “double-dipping”. This usually happens when the person preparing the personal return did not also prepare the business entity return.
TL;DR? The most important take-aways are: 1) you can’t double-dip; and, 2) though the particular hoops that have to be jumped through are a) different for partnerships than for S-Corps, and b) a PITA for both, they are in fact the law and must be followed.
The key here is that when the entity pays for health insurance for owners, it is deducted as payments for services to the partners or S-Corp shareholders — who are then entitled to take the self-employed medical insurance deduction — which means it will net to zero deduction on the personal return. If you’re not careful, then the deduction is mistakenly taken on both the entity-level and personal returns. In their original article, Polito Eppich illustrated the accidental double-dipping (all charts are copyright of Polito Eppich).
We will use an example of a $10,000 medical insurance premium to illustrate this issue. Here’s what was happening (incorrect approach):
Income (Expense)
Passthrough Business Entity
Owner’s K-1
Owner’s Personal Return
Net Taxable Income
Medical premiums paid
$(10,000)
Ordinary income reduced
$(10,000)
$(10,000)
Self-employed medical insurance deducted
$(10,000)
(10,00)
Total effective deduction on owner’s return
$(20,000)
Accidental double-dipping — the $10k premium becomes $20k.
Here is how it should be handled:
PARTNERSHIPS
The actual deduction occurs at the partnership level and is passed to the partner — via lower income on the K-1.
If the partnership pays for the health insurance premiums for its partners, it deducts the expense as guaranteed payments and reports the amount to each partner on their respective K-1s as guaranteed payments.
The partner then picks up the guaranteed payment as income and reports “self-employed health insurance” deduction. The guaranteed payment offsets the self employed health insurance deduction for a net zero effect on taxable income, thus the single deduction described above on the K-1.
(When a partner pays his (her) own medical insurance premiums, the self-employed medical insurance deduction is allowed if there is self-employment income.)
Correct reporting for partnership:
Income (Expense)
Partnership
Owner’s K-1
Owner’s Personal Return
Net Taxable Income
Medical insurance premiums paid and deducted
$(10,000)
$(10,000)
$(10,000)
$(10,000)
Guaranteed payment to partner
10,000
10,000
10,000
Self-employed medical insurance deduction
(10,000)
(10,000)
(10,000)
Total effective deduction on owner’s return
$(10,000)
Partnership: by following the IRS rules, the $10k premium remains a $10k net deduction.
S-CORPORATIONS
S-Corps are a bit more complex because owners who work for the company are paid payroll via W-2 (rather than guaranteed payments to partners). Keep in mind that these rules only apply to shareholders who own more than 2% of the company. Owners below 2% are not eligible for the self-employed medical insurance deduction.
The S-corporation deducts the expense as compensation and includes the amount on the shareholder’s W-2 — in Box 1, but not in Boxes 3 or 5, which means they are not subject to Social Security or Medicare taxes (commonly known as “payroll taxes” or “employment taxes”). The amount should also be reported in box 14 of the W-2 — this is only for informational purposes, so that the personal tax preparer knows to take the deduction. Some payroll companies will track this reporting properly throughout the year, but others require a call at year-end to make sure this amount shows up properly in Box 1 and 14. (See my blog post on how to handle this for Gusto Payroll.)
The shareholder reports the compensation from their W-2, then deducts the health insurance amount noted in Box 14 on the W-2 as a “self-employed health insurance” deduction on the personal 1040. Because the amount is subject to income taxes, but not employment taxes, taking the self-employed health insurance deduction leads to a net-zero impact to taxable income. The actual deduction is achieved at the corporation level and passed to the shareholder in the form of lower income reported on the K-1.
Correct reporting by S Corporation for 2% or greater shareholders:
Income (Expense)
S-Corp
Shareholders’s K-1
Owner’s Personal Return
Net Taxable Income
Medical insurance premiums paid and deducted as owner wages lower ordinary income
$(10,000)
$(10,000)
$(10,000)
$(10,000)
Owner’s W-2
10,000
10,000
Greater than 2% shareholder medical insurance premium (Noted in Box 14 of W-2)
(10,000)
(10,000)
(10,000)
Net taxable income reported by shareholder
$(10,000)
S-Corp: by following the IRS rules, the $10k premium remains a $10k net deduction.
Either way — partnership or S-Corp, the net result is that the amount paid by the company for health insurance on behalf of owners should only be deducted once, on the entity return, and as payments for services. On the personal return these payments will net to zero after the deduction for self-employed health insurance is taken.
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.
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.
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.
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.
(c) Matthew G. Bisanz, CC BY-SA 3.0 via Wikimedia Commons
After Forbes reported in early July that starting a month earlier, tax professionals had noticed a higher-than-usual volume of CP-14 notices — the type typically issued when a taxpayer has a balance due on their account — the IRS has finally admitted that this is a systemic issue.
In a statement issued last week, the IRS indicated that no immediate action or phone call is needed: Taxpayers who receive a notice but paid the tax they owed in full and on-time (electronically or by check) should not respond to the notice.
However, many taxpayers are scared and confused by letters such as this — and they may not know how to determine whether they did in fact pay their taxes on-time. Maybe the check was lost in the mail; maybe they selected the wrong period or type of payment when using the IRS Direct Pay system; maybe they reported their estimated tax payments inaccurately. Unfortunately, because tax issues can be terrifying, it’s not uncommon to presume the IRS is correct and pay any balance due on a notice.
Never fear — there are solutions. The IRS online transcript service has undergone improvements in the past few years that make it relatively painless to obtain a PDF of all payment and return activity on your account. In fact, due to the number and complexity of governmental aid such as stimulus checks and the advance child tax credit, our CPA firm requires clients to obtain a transcript before we will finalize their return preparation (I’ve written up instructions here). And the IRS Online Account Center also lists other types of useful information taxpayers can access.
But… this all begs the important question: why did this happen?
According to Amber Gray-Fenner at Forbes, “In early June tax professionals on social media started reporting problems with electronic payments made by the taxpayer listed as the spouse on jointly filed returns. Specifically, CP-14 notices were being issued for accounts where an electronic payment was made by a spouse using IRS Direct Pay and the payment was not applied to the balance due on the jointly filed return.”
Accounting Today reported that, “In general, when certain payments are processed, programming does not move the payment to the married filing jointly account when the payment is:
Not electronic and is made by the secondary spouse.
Electronic, is made by the secondary spouse, and posts before the joint return indicator is present to identify the primary taxpayer.
Made by the secondary spouse using the Online Account ‘Make a Payment’ functionality.”
While this does line up with most of the issues tax professionals and their clients are seeing with these CP-14 balance due notices, it doesn’t jibe with our experience in past years. Spouses with separate tax payments have been filing jointly for many years, and the IRS Direct Pay system is not new — yet the number of these erroneous notices is far higher than in previous seasons.
Some tax professionals who have called the IRS’ Practitioner Priority Line (PPL) on behalf of their clients have been told by some IRS representatives that “there is no way of knowing” that the payment is for the jointly filed return and not some other tax debt that is attached to the spouse’s social security number. This is, quite simply, not correct. When making a payment using Direct Pay taxpayers must specify a reason for the payment (balance due, estimated payment, etc.), the tax form to which the payment applies (Form 1040, etc.) and the tax year to which the payment applies.
Screenshot of IRS Direct Pay list of Reasons, by Nancy McClelland, August 2, 2022
If the spouse of a taxpayer makes a Direct Pay payment for a balance due on a Form 1040 for a year that they filed jointly with their spouse (the primary taxpayer on the jointly filed return) there is really no reason that payment should not be automatically and correctly applied.
However, this is what the IRS currently maintains is the source of the problem. Complicating matters, the second bullet above — the one that references the “joint return indicator” — is specifically referring to taxpayers who e-filed and paid on the same day, and the payment was made by the second partner on the return. In this case, if the payment was made and posted to the IRS system before the return was electronically accepted and posted, it sounds like the IRS computers didn’t know that the balance due payment was related to the jointly filed return.
Now that the overburdened and understaffed agency recognizes that this is a systemic issue — after thousands of tax professionals reported it to the IRS Systemic Advocacy Management System (SAMS) — hopefully they will be able to rectify it soon (automatically removing the associated penalties and interest)… and more importantly, prevent it from causing problems next year. The AICPA has mentioned numerous times on their regular Town Hall series that erroneous notices just compound the problems at the IRS. They aren’t just stress-inducing for the client and irritating for their CPAs — they actually further gum up the works at an already struggling government agency. The IRS has as a result, put a temporary hold on certain types of automated notices, but the CP-14 is unfortunately not on the list.
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.
Effective July 1, the IRS standard mileage rate — the amount that can be deducted per-mile in lieu of reporting actual costs — is increasing by 4-cents, to $0.65/mile, per Annoucement 2022-13.
The adjustment is being made in recognition of recent increases in the cost of gasoline. Normally, the adjustment is made annually, but in special cases such as this, the IRS Commissioner will make an exception.
Not only is this amount the official deductible amount when the optional standard method is used, but many businesses, and the federal government, also use it as the reimbursement rate for employee travel and transportation.
If you use a mileage-tracking template, make sure to update the per-mile multiplier. Most programs like Mile IQ do not track actual costs — they simply report the number based on a report’s date range, and the taxpayer or their CPA will do the math on the tax return. In 2011, the last time this happened, the IRS had a field for the number of miles driven Jan 1-June 30 and a separate field for those from July 1-Dec 31 — which is likely to be the case this year as well.
The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute.
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.
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.
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.
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.
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.
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.”
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.
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.
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
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.
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.”
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.
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.”
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.
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.
