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New claims will not be processed until January 2024 at the earliest.

By Mike Giangrande, J.D., LL.M.

The IRS announced today that they have stopped processing all new Employee Retention Credit (ERC) refund claims and will continue their moratorium at least through December 31, 2023. (IR-2023-169)

In IRS Commissioner Werfel’s words:

“The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in. … The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system.”

New claims will not be processed until January 2024 at the earliest.

By Mike Giangrande, J.D., LL.M.

The IRS announced today that they have stopped processing all new Employee Retention Credit (ERC) refund claims and will continue their moratorium at least through December 31, 2023. (IR-2023-169)

In IRS Commissioner Werfel’s words:

“The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in. … The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system.”

The IRS is continuing to process ERC claims filed prior to today’s announcement, but even those claims will face long processing delays (up to 180 days, from 90 days) because the IRS is placing stricter compliance reviews on all claims.

Today’s release does not specifically advise taxpayers to not file new claims. It only states that the IRS will not process any new claims until January 2024 at the earliest.

Taxpayers whose ERC claims are currently in process may:

• See requests for additional substantiation from the IRS before the claim’s processing is complete;
• Be referred to the IRS’s examination division for audit;
• Be referred to the IRS’s criminal investigation division if the egregious nature of the claims warrants it; or
• Soon be able to withdraw filed, but unprocessed, ERC claims under a special program, the details of which are still being worked out by the IRS.

Additionally, the IRS is developing a new settlement program for taxpayers that received an improper ERC payment. Per today’s release, more information on this program will be available this fall.

The IRS’s release is available at the following link and contains advice for taxpayers whose ERC claims may be in various stages. Go to www.irs.gov/newsroom/to-protect-taxpayers-from-scams-irs-orders-immediate-stop-to-new-employee-retention-credit-processing-amid-surge-of-questionable-claims-concerns-from-tax-pros.

By   Leslie Kaufman August 16, 2023

It's been exactly one year since President Joe Biden signed the Inflation Reduction Act, securing a core part of his domestic agenda with what's by far the most significant climate law in U.S. history. There's been no shortage of numbers attesting to the rapid transformation of the American economy: $86 billion in private investment, 51 new or expanded plants for producing solar panels, 10 new factories for making batteries, more than 100,000 clean-energy jobs.

By   Leslie Kaufman August 16, 2023

It's been exactly one year since President Joe Biden signed the Inflation Reduction Act, securing a core part of his domestic agenda with what's by far the most significant climate law in U.S. history. There's been no shortage of numbers attesting to the rapid transformation of the American economy: $86 billion in private investment, 51 new or expanded plants for producing solar panels, 10 new factories for making batteries, more than 100,000 clean-energy jobs.

One number has remained much harder to pin down over the past year: precisely how much will be spent as a result of the IRA. Cost estimates have continued to shift upward and now span a range of more than half a trillion dollars. 

This is a far cry from the headlines that greeted the law's surprising passage through Congress last summer. With some slight variation, news organizations put a price tag of about $370 billion on the climate-spending measures. That number ended up with more or less official stature, repeated in White House assessments. 

But it was always an estimate. In hindsight, the cost of the tax credits and incentives to the U.S. Treasury is clearly going to be much higher — and even after a year, there's no way to pinpoint the amount of spending that will ultimately occur. 

At the core of the forecasting challenge are two structural elements of the IRA's financial mechanics: Most of the spending comes in the form of tax credits that are uncapped, and those unlimited credits are designed to be rolled out over a 10-year span. That introduced a big element of guesswork because there's no restriction on how many businesses or citizens can claim new tax incentives made available to support everything from the purchase of electric vehicles to the production of green hydrogen and assembled-in-America batteries. 

The closest thing to an official price tag comes from the Congressional Budget Office, whose job it is to score legislation for cost. By September 2022, a month after Biden signed the IRA, the clean energy and climate portions of the bill had an estimated cost of about $391 billion between 2022 and 2031. Yet even at the time experts saw it as a lowball figure and they have offered a stream of much higher estimates ever since.

By April, to take one high-profile example, a team of researchers at the University of Pennsylvania's Wharton School, working with Goldman Sachs, updated their own earlier estimate of $385 billion with a staggering new figure in excess of $1 trillion. The report's authors cited "newer implementation" details and more optimistic assumptions about how much private capital will pour into the economy, particularly electric vehicles, in response to the promise of leveraging tax credits.

But that's not nearly the only way experts came up with enlarged estimates of how much spending would be triggered by the IRA. 

John Bistline of the Electric Power Research Institute, along with colleagues, ran a model considering a wide variety of economic variables — what happens if inflation rates continue to rise, for example, or if there is a recession — and came up with a middle figure of $781 billion for tax credit uptake. But even Bistline's work can't overcome the fact that the IRA's true dollar figure will remain a mystery for a long time. 

"One thing our modeling comparison really underscored for me is that a lot of the spending tends to happen close to the end of the 10-year budget window, so closer to 2030," Bistline said. "So we won't really know about costs for a lot of years."

A puzzle for the IRS

Both citizens and corporations will file their first deductions under the IRA next year, and what the Internal Revenue Service allows and doesn't allow under those tax filings could be revealing. But once again, this is just a start.

The IRS is still struggling to issue guidance for some parts of this complicated law. Take the confusion over EV credits. The law wants to see U.S. manufacturers protected, so cars that use parts made in China aren't eligible for the credits. But what about parts made with Chinese capital in other countries? The IRS is still debating.

Similarly, U.S. tax officials have yet to define what projects will qualify for the green hydrogen tax credit. At stake is potentially as much as $120 billion, according to Adithya Bhashyam of BloombergNEF. It's another uncapped incentive, though, so the cost will depend on how much qualifying green hydrogen gets produced.

Macroeconomic trends are also critical. If the inflation that the climate-spending law was named after stays high, that could slow the rollout of new projects due to higher costs. There are behavioral unknowns, too, as in how many people will really buy electric vehicles or heat pumps, even with generous incentives.

Another potent variable is just time. Mona Dajani, global head of energy and infrastructure projects at the law firm Shearman & Sterling, has seen a rush of investors looking to structure projects to best take advantage of IRA incentives. But a year later businesses are still "just dipping their toes in," she said, because there are ongoing political attacks from Republicans in Congress. If that partisan rancor settles down — something unlikely in a presidential election year — then the real "floodgates of investment could open."

That would mean that the cost of the climate and energy provisions of the legislation could skyrocket well past the $1 trillion mark, which could create a negative feedback loop of its own. West Virginia Senator Joe Manchin, a Democrat whose 11th-hour support secured passage of the IRA, has been furious over rising cost estimates and has criticized the Biden administration for issuing guidance that he considers beyond the scope of the law.

Christina DeConcini, director of government affairs at the World Resources Institute, a climate research group, sees ballooning use of the tax credits as a good thing. It represents more people investing. "It's not like there's a window you can just go up to and get money out," she said. 

Indeed, expert estimates indicate private money is pouring into the system and will, if anything, continue to increase. Venture capital investment in climate tech reached a record $70.1 billion last year, according to HolonIQ Global Impact Intelligence, for an enormous 89% rise over 2021. A recently released Goldman Sachs report thinks that the bill will eventually drive a whopping $3.3 trillion in investments, though much of the money will be back loaded to the end of the 10-year period.

"The tax credit is incentivizing this private investment to create manufacturing jobs in parts of the countries that have been overlooked for decades," DeConcini said. "It's good news."

More importantly, said Bill Hoagland, senior vice president at the Bipartisan Policy Center and a former director of the Senate Budget Committee, there are a lot of things that the budget scoring doesn't take into account. Nothing in the IRA attempts to price the social costs of carbon dioxide emissions, which include more frequent natural disasters like this summer's intense heat waves and last week's devastating wildfires in Maui. In addition to tragic loss of lives, such events take a growing toll on federal relief funds. Lower emissions from the law could avoid worst-case scenarios and their costs.

"If you believe in — and I do — that climate change is an existential threat to the economy and that this law will reduce some of these external costs, whether it's health care or disaster coverage," said Hoagland, "then that could be a plus to revenues in the long haul."

 Leslie Kaufman

By Michael Cohn August 02, 2023, 4:32 p.m. EDT 7 Min Read

The Internal Revenue Service hopes to process all of the tax correspondence, notice responses and nontax forms it receives digitally in the next two years in an effort to reduce the amount of time-consuming paper it receives in the mail.

By Michael Cohn August 02, 2023, 4:32 p.m. EDT 7 Min Read

The Internal Revenue Service hopes to process all of the tax correspondence, notice responses and nontax forms it receives digitally in the next two years in an effort to reduce the amount of time-consuming paper it receives in the mail.

The IRS launched what it's calling a "paperless processing" initiative Wednesday. Taxpayers would have the option to go paperless for IRS correspondence by the 2024 filing season, with the goal of achieving paperless processing for all tax returns by filing season 2025. The IRS is making the digital push as part of the extra funding it received under last year's Inflation Reduction Act to improve taxpayer service and technology after experiencing a long backlog of unprocessed taxpayer correspondence during the pandemic.

"Today, we are announcing that — by the next filing season — taxpayers will be able to digitally submit all correspondence, nontax forms and notice responses to the IRS," said Treasury Secretary Janet Yellen. "Of course, taxpayers will always have the choice to submit documents by paper. For those taxpayers, by filing season 2025, the IRS is committing to digitally process 100% of tax and information returns that are submitted by paper — as well as half of all paper correspondence, non-tax forms and notice responses. It will also digitalize historical documents that are currently in storage at the IRS."

Currently, the Treasury Department pointed out, taxpayers can't digitally submit many types of forms and pieces of correspondence beyond their annual 1040 tax return, and the IRS is unable to digitally process the paper tax returns it receives. For decades, taxpayers needed to respond to notices for document verification via the U.S. Postal Service, and IRS employees had to manually enter the numbers from paper tax returns into computers one digit at a time, creating significant delays for taxpayers and challenges for IRS staff.

The IRS receives approximately 76 million paper tax returns and forms, and 125 million pieces of correspondence, notice responses and nontax forms every year, according to the Treasury, and its limited capacity to accept forms digitally or digitize all the paper it receives has kept it from delivering the kind of service that taxpayers expect. The IRS has over 1 billion historical documents that cost $40 million per year to store.

After receiving an infusion of $80 billion in extra funding over 10 years under the Inflation Reduction Act (which was later reduced by the deal between President Biden and House Speaker Kevin McCarthy, R-California, to avoid a debt default), the IRS is now able to let taxpayers respond to more notices directly online. The agency has made progress in deploying technology to automate the scanning of millions of paper returns. Under the next phase of its modernization efforts, the IRS is speeding up its paperless processing efforts. 

By next tax season, taxpayers will be able to digitally submit all of their correspondence, nontax forms and responses to notices. The IRS is estimating that over 94% of individual taxpayers will no longer need to send mail to the agency at that point, and up to 125 million paper documents will be submitted digitally per year. However, taxpayers who wish to submit paper returns and correspondence can continue to do that.

Taxpayers will also be able to e-file 20 additional tax forms by the 2024 filing season, allowing up to 4 million more tax documents to be filed digitally every year. That includes amendments to Forms 940, 941, 941-SS and 941 (PR), some of the most common forms taxpayers file when amending their tax returns. At least 20 of the most used nontax forms will be available in digital, mobile friendly formats for taxpayers to complete and submit, including a Request for Taxpayer Advocate Service Assistance when they need help from that office.

By filing season 2025, another 150 of the most used non-tax forms will be available in digital, mobile friendly formats that can allow taxpayers to submit them with their cell phones. By then, the IRS will be able to digitally process all paper-filed tax and information returns, allowing up to 76 million paper documents to be processed digitally every year to speed up taxpayer refunds by several weeks, the Treasury Department estimates. Half of paper-submitted correspondence, nontax forms, and notice responses will be processed digitally by that time, enabling up to 60 million paper documents to be processed digitally every year. 

By filing season 2026, the IRS predicts that all paper documents — including correspondence, nontax forms and notice responses — will be processed digitally, and up to 1 billion historical documents will be digitized, giving taxpayers access to their data and saving the agency an estimated $40 million in storage costs each year.

Some tax experts would like to see the IRS take a cautious approach in its technology plans. "They have very ambitious plans to modernize and improve the technology capability, and that's all good," said Mark Everson, a former IRS commissioner and now a vice chairman at the tax consulting firm Alliantgroup, in an interview last week before the latest announcement. "I'm simply saying better safe than sorry as they go forward. They can't be so hellbent to meet a specific deadline or timeline that it increases the risk significantly of a problem because all hell will break loose if there's a major problem."

Enforcement push

This year, the IRS has been stepping up its enforcement efforts after receiving the extra funding from the Inflation Reduction Act. "The dividends on these investments will take time to see, but the IRS has already taken aggressive action over the past few months to crack down on tax evasion," said Yellen. "In recent months, the agency has closed about 175 delinquent tax cases for millionaires. That has generated about $38 million in recoveries. The IRS has also continued to intensify its effort to enforce against wealthy individuals who fail to file tax returns at all."

Some observers would like to see the IRS use more of the funding it is receiving to improve taxpayer service and technology as opposed to stepping up its enforcement efforts.

"The IRS will need to build a much more robust customer service and business systems infrastructure than even the one envisioned in its strategic plan," said National Taxpayers Union president Pete Sepp in a statement. "Given this need, and the commissioner's warning that recent customer service improvements could hit a funding cliff in a year, it is now more imperative than ever for Congress to redirect the funding infusion the IRS received in 2022 away from heavy-handed enforcement and toward modernization efforts that respect taxpayer rights while increasing voluntary compliance. Prioritization needs to be the key word going forward."

The efforts at the IRS are moving forward despite resistance in Congress to some of the enforcement efforts.

"This is a huge step forward for the customer experience the IRS provides American taxpayers, and it's precisely the kind of upgrade Democrats intended when we passed the Inflation Reduction Act," said Senate Finance Committee chairman Ron Wyden, D-Oregon. "It's clear that when Congress lays out a clear goal and provides adequate funding, the IRS is able to get the job done. "

Yellen pointed out that the extra funding from the Inflation Reduction Act has enabled the IRS to answer phone calls faster this year, reaching an 87% level of service with live assistance this filing season, more than a five-fold increase over last year. The IRS answered 3 million more phone calls this past tax season than in 2022, and she said the agency cut wait times from 28 minutes down to three minutes. The IRS was able to hire over 5,000 more people with the extra funding.

"Thanks to the IRA, we are in the process of transforming the IRS into a digital-first agency," she said. "This 'paperless processing' initiative is the key that unlocks other customer service improvements. It will enable taxpayers to see their documents, securely access their data, and save time and money. And it will allow other parts of the IRS to rely on these digital copies to provide faster refunds, reduce errors in tax processing, and deliver a more seamless and responsive customer service experience, and much more. I urge Congress to provide stable and sufficient annual appropriations for the IRS in order to sustain and build on this progress."

June 29, 2023

The IRS has been sending a special follow-up mailing to taxpayers in several states affected by disasters to reassure them that they have extra time to file and pay their taxes. This new mailing will be sent in the next few weeks to residents in California, Alabama, Arkansas, Florida, Georgia, Indiana, Mississippi and Tennessee which are designated disaster areas that received the CP14 Balance Due collection notices in late May and June from the IRS. While the earlier mailings were sent out as a legal requirement, the current mailings reiterate that taxpayers have until later this year (to October 16th) to timely pay under the disaster declaration. The letter in English and Spanish includes additional information to help taxpayers understand the disaster relief they have received.

June 29, 2023

The IRS has been sending a special follow-up mailing to taxpayers in several states affected by disasters to reassure them that they have extra time to file and pay their taxes. This new mailing will be sent in the next few weeks to residents in California, Alabama, Arkansas, Florida, Georgia, Indiana, Mississippi and Tennessee which are designated disaster areas that received the CP14 Balance Due collection notices in late May and June from the IRS. While the earlier mailings were sent out as a legal requirement, the current mailings reiterate that taxpayers have until later this year (to October 16th) to timely pay under the disaster declaration. The letter in English and Spanish includes additional information to help taxpayers understand the disaster relief they have received.

The IRS has also updated the insert that will accompany upcoming CP14 balance-due notices to make it clearer that the payment date listed in the letter does not apply to those covered by a disaster declaration, and the disaster dates remain in effect. The plain language insert, which is in English and Spanish, includes a special QR code that takes people to the IRS Disaster page.

By  Greg Stohr June 30, 2023

The U.S. Supreme Court tossed out President Joe Biden's plan to slash the student debt of more than 40 million people, rejecting one of his signature initiatives as exceeding his power.

The justices, voting 6-3 along ideological lines, sided with six Republican-led states that sued to challenge the program, which by one estimate would have cost $400 billion over 30 years.

By  Greg Stohr June 30, 2023

The U.S. Supreme Court tossed out President Joe Biden's plan to slash the student debt of more than 40 million people, rejecting one of his signature initiatives as exceeding his power.

The justices, voting 6-3 along ideological lines, sided with six Republican-led states that sued to challenge the program, which by one estimate would have cost $400 billion over 30 years.

Writing for the court, Chief Justice John Roberts said the administration was "seizing the power of the legislature" by trying to cancel so much student debt.

Biden is likely to face renewed pressure from lawmakers and loan-relief advocates to find an alternative way to cancel debt, possibly using a different legal rationale. For now, the high court ruling strips him of an accomplishment as he looks toward his reelection bid next year. Biden is expected to speak about options later Friday.

Student loan payments are set to resume in late August after a three-year pause. Millions of people could fall behind on their debt.

"This fight is not over," said Senator Elizabeth Warren, a Massachusetts Democrat and proponent of the relief plan. "The president has more tools to cancel student debt — and he must use them."

The three liberals in dissent said that the states lacked the legal right to challenge the loan relief and that Congress authorized the forgiveness plan. "In every respect, the court today exceeds its proper, limited role in our nation's governance," Justice Elena Kagan wrote for the dissenters.

The conservative-dominated Supreme Court has thwarted Biden's agenda on multiple occasions. The court stopped Biden from blocking evictions during the pandemic and requiring workers to get COVID vaccines or regular tests. The justices have also slashed the Environmental Protection Agency's power to address climate change and protect wetlands.

Biden's plan would have forgiven as much as $20,000 in federal loans for certain borrowers making less than $125,000 per year, $250,000 for households.

"Biden's student loan bailout unfairly punished Americans who already paid off their loans, saved for college, or made a different career choice," Republican National Committee Chairwoman Ronna McDaniel said in a statement. "Americans saw right through this desperate vote grab, and we are thankful that the Supreme Court did as well."

The administration contended the student-loan program was authorized by a 2003 law that gives the education secretary special powers when responding to national emergencies. The law, known as the Heroes Act, says the secretary can "waive or modify" provisions to ensure that debtors "are not placed in a worse position financially" because of a national emergency.

Roberts said that law doesn't give the education secretary power to "rewrite that statute from the ground up."

Roberts invoked the "major questions doctrine," a legal concept that has become a potent tool under the current court for limiting the power of federal agencies and departments. The high court has said the executive branch needs clear congressional authorization before taking actions that have sweeping political and economic significance.

The states — Nebraska, Missouri, Arkansas, Iowa, Kansas and South Carolina — and two borrowers challenged the program in separate cases. The court said separately the borrowers lacked standing. The Biden administration argued that all the challengers lack standing to sue because they aren't being directly harmed by the policy.

State standing

Roberts said the states had standing because of the impact on the Missouri Higher Education Loan Authority, a nonprofit, state-created entity that by law must contribute to a fund Missouri uses to pay for projects at public colleges. MOHELA itself wasn't involved in the suit.

"The secretary's plan will cut MOHELA's revenues, impairing its efforts to aid Missouri college students," he wrote. "This acknowledged harm to MOHELA in the performance of its public function is necessarily a direct injury to Missouri itself."

Kagan blasted that reasoning, saying the states "have no personal stake" in the loan-forgiveness program.

"They are classic ideological plaintiffs: They think the plan a very bad idea, but they are no worse off because the secretary differs," Kagan wrote.

The state case is Biden v. Nebraska, 22-506.

— With assistance from Janet Lorin and Emily Birnbaum

Greg Stohr

By  Michael Cohn June 08, 2023, 1:22 p.m. EDT 7 Min Read

Congress' recent move to shift $21.4 billion in funding away from the Internal Revenue Service as a condition for increasing the debt limit isn't deterring the tax agency from moving ahead with its strategic plans to hire more employees, improve taxpayer service and modernize its technology, but it could slow down efforts to close the tax gap and audit more high-income taxpayers and corporations.

And IRS officials are still emphasizing one of their priorities: preventing fraudulent claims for the widely advertised Employee Retention Credit.

By  Michael Cohn June 08, 2023, 1:22 p.m. EDT 7 Min Read

Congress' recent move to shift $21.4 billion in funding away from the Internal Revenue Service as a condition for increasing the debt limit isn't deterring the tax agency from moving ahead with its strategic plans to hire more employees, improve taxpayer service and modernize its technology, but it could slow down efforts to close the tax gap and audit more high-income taxpayers and corporations.

And IRS officials are still emphasizing one of their priorities: preventing fraudulent claims for the widely advertised Employee Retention Credit.

As part of the debt limit deal negotiated by House Speaker Kevin McCarthy, R-California, and President Biden and passed earlier this month to avert an unprecedented default by the federal government, lawmakers agreed to rescind $1.4 billion of the $80 billion allocated to the IRS over 10 years under last year's Inflation Reduction Act, and to make another $20 billion of the funding available to other non-defense programs over the next two years.

"A $20 billion cut, but there's still $60 billion remaining, and that's $60 billion we did not have a year ago," said Douglas O'Donnell, deputy commissioner of services and enforcement at the IRS. "We still have the opportunity to truly transform the agency."

He said the IRS is working now to sort out what the $20 billion cut means.

"We are going through a number of scenarios," said O'Donnell. "We don't know exactly what it's going to look like, but we do think that our original plan for the first five years will hold and it's going to be the further-out years where we're going to have more of a challenge to deal with the reduction. We'll see. There will be more to follow. It's early days."

The IRS has been facing challenges since the pandemic with processing its backlog of returns, although the extra funding from the IRA enabled it to perform better this year. 

"The pandemic did not help us. The ability for taxpayers to get to us was really, really bad," O'Donnell acknowledged. "It dropped to the single digits. We were not able to keep up with the paper that was coming in. We have returns currently that cannot be filed electronically. It's not that people don't want to. It's that they cannot and that's partly due to a lack of investment. We're working to right-size that."

Both paper returns and amended returns are slowing down processing at the IRS (See "Taxpayer Advocate: The IRS has a paper problem.")

"We still are getting a lot of amended returns," said O'Donnell. "Almost all of it is due to relief programs during COVID. The Employee Retention Credit is a huge issue. There's a lot of people who didn't know about it and deserved the credit and filed, and we're processing those. But there is a lot of noncompliance. Some of it is edging into the fraud areas. We're working with the Department of Justice to make sure that we properly administer that space. There's just a lot of problems there."

He urged tax professionals to help the IRS prevent bogus claims for the ERC.

"I've given a couple of interviews just trying to get the word out, but we need to figure out some way, and tax pros can help us with this," said O'Donnell. "These individuals who are being sold this notion that almost anyone can claim this credit by these mills — they are creating a lot of heartache for businesses because when we go out, if they've gotten a refund, we're going to pull it back and there's going to be penalties and interest associated with it. Those folks that have gotten 25% of the refund as a fee for helping them, they're gone. They're not going to represent them. Whatever you can do to help us, we'd appreciate it. You're helping the community more broadly."

The IRS has been using data analytics at its Office of Fraud Enforcement and Office of Promoter Investigations, according to Lia Colbert, commissioner of the Small Business/Self-Employed Division, to detect various types of fraud, including among promoters of dubious ERC claims.

"When I think about what happened with the Employee Retention Credit, it's almost like a veritable business case study in an underfunded and under-resourced agency having to deliver an incredibly complicated tax credit to an incredibly needy population, literally trying to deliver a lifeline of credits to a population of paper returns."

IRS employees had to use pencils to identify risk categories and fraud areas on piles of paper returns to spot trends with promoters of the ERC, weeding out bogus claims from legitimate ones. The service is now in the process of deploying more scanning technology thanks to the extra funding it received last year.

"We still did pretty OK in that space, because we were able to deliver help to nearly 2 million employers and over $150 billion in credits, but we want to do so much more," said Colbert. "This is now that opportunity where we can do a little bit more of that. When it comes to Employee Retention Credits and the Inflation Reduction Act funding, I think about now being able to imagine a world where that 941-X comes in electronically, being able to work with our digital and our scanning teams to be able to get information immediately so we can start to risk assess immediately. I think about working with our IT partners to try to design new ways to capture data more efficiently and new communication strategies. I think about ways we can coordinate across our functions better. That funding and that little bounce really helps us get to this."

Dealing with inflated expectations for the ERC can be a headache for tax professionals as well.

"The ERC presents multifaceted challenges, and it's one of the things that keeps me awake at night, in large part because the ERC has probably the single largest potential for buyer's remorse from taxpayers that I've ever seen," James Creech, a senior manager with the tax team at Top 100 Firm Baker Tilly, told Accounting Today. "Baker Tilly, early on in the ERC, spent a significant amount of time developing processes and counterweights and independence, so we could do honest, good-faith credit eligibility calculations."

He noted that his firm began warning about the flood of inappropriate ERC claims with an alert it sent out in October 2021.

"There's a lot of people who get promised the moon that they're going to qualify for ERC so come claim your $20,000 per year per employee," said Creech. "I've heard verbatim from clients that if you didn't fire anyone during COVID, you qualify. There's no mention of gross receipts or suspension [of operations]. It's just if you didn't fire anyone, which isn't the law, but it's persuasive if you're looking at it from hindsight and saying, 'Well, we made it through COVID. We're signing up with a shop that is telling us that they can do this and look at the size of the check. And they're charging a contingency fee.'"

"What happens if you get caught?" he continued. "The IRS is going to ask you to repay the entire thing. They're not going to care that you paid a contingency fee. And if you get caught, you're going to look at 100% repayment, plus potential penalties, plus interest, which is now 7%."

He is seeing claims ranging from $300,000 to $2 million. "Being told you have to repay $2 million in one sitting for a credit you didn't qualify for, but you were promised the moon and the money's already been spent, could be catastrophic," said Creech.

Another Top 100 Firm, Sikich, hosted a program last month for financial clients to give them a rundown on the rules and regulations for the ERC, and in a poll of participants, it found that 58% said they are being approached daily or weekly by ERC providers offering "claim and refund-related services."

"Clients are getting solicited by some of these providers who want to provide a study for them," said Jim Brandenburg, a tax partner at Sikich. "They're getting calls on a fairly regular basis, telling them that they qualify."

Clients will ask his firm what they know about the ERC after receiving such calls or hearing about inflated claims about the ERC in ads. "In some cases, we might have looked at a company and they might qualify, but in other cases, we've made the assessment that we don't think that they're eligible for it, but yet they're still getting some of these calls," Brandenburg told Accounting Today. 

He tries to educate them about how the ERC rules work, such as a reduction of gross receipts in either 2020 or 2021, and whether it was due to government order that led to a parietal or full shutdown. Brandenburg advises them to be careful and make sure they do their due diligence. He expects to see the IRS stepping up its enforcement activity in this area.

"At the IRS, they trained a number of their individuals at the end of last year on the ERC," said Brandenburg. "Some of the agents, I think, were helping out with the regular busy season filing, but my guess is perhaps this summer and into the fall, they will devote more time toward some of the ERC audits. There will probably be more activity over this coming year and even into next year."

By  Michael Cohn April 18, 2023, 10:33 a.m. EDT

The Internal Revenue Service's new commissioner, Danny Werfel, lauded the agency's performance this tax season, thanks to the extra funding from last year's Inflation Reduction Act.

"This marks a special time for the nation with the arrival of the tax-filing deadline," he said during a press conference Monday. "This was a big year for the IRS in many ways. The agency really had its hands full during the pandemic, handling three rounds of stimulus payments and many other changes needed to support our country and our fellow citizens. This is really the first tax season we've had since 2019 where the IRS and the nation were on normal footing, so this was a test of the IRS, and I'm pleased to report that the IRS delivered a solid 2023 filing season by any measure. You can see this progress in every aspect of our operations. The IRS stepped up to help taxpayers in many different ways this tax season. The IRS has answered more calls from taxpayers seeking our help, provided more in-person assistance and offered more online."

By  Michael Cohn April 18, 2023, 10:33 a.m. EDT

The Internal Revenue Service's new commissioner, Danny Werfel, lauded the agency's performance this tax season, thanks to the extra funding from last year's Inflation Reduction Act.

"This marks a special time for the nation with the arrival of the tax-filing deadline," he said during a press conference Monday. "This was a big year for the IRS in many ways. The agency really had its hands full during the pandemic, handling three rounds of stimulus payments and many other changes needed to support our country and our fellow citizens. This is really the first tax season we've had since 2019 where the IRS and the nation were on normal footing, so this was a test of the IRS, and I'm pleased to report that the IRS delivered a solid 2023 filing season by any measure. You can see this progress in every aspect of our operations. The IRS stepped up to help taxpayers in many different ways this tax season. The IRS has answered more calls from taxpayers seeking our help, provided more in-person assistance and offered more online."

On Monday, the Treasury Department delivered a kind of report card for the IRS this past season, showing improvements in performance thanks to the extra $80 billion in funding allocated over 10 years (see story). While most of the funding is for increased enforcement, the IRS was able to use some of the money for hiring of taxpayer service personnel this tax season. 

Due to the 5,000 new hires made possible by the Inflation Reduction Act, IRS customer service representatives answered more than 6.5 million taxpayer calls this year, 2.4 million more calls with live assistance since the start of the year through April 7, compared to the same period in 2022. The IRS added new technology features like customer callback options, which will be available for 95% of taxpayers calling for toll-free live assistance by the end of July 2023. 

The IRS achieved an 87% level of service this year, exceeding Treasury Secretary Janet Yellen's goal of 85%. The agency also reduced phone wait times to four minutes from 27 minutes, served 100,000 more taxpayers in-person, digitized 80 times more returns than in 2022 through the adoption of new scanning technology, cleared the backlog of unprocessed 2022 individual tax returns with no errors, launched two new digital tools, and enabled a new direct-deposit refund option. That represents a big improvement over last year, when the IRS hit just a 15% level of service to taxpayers and millions of refunds were delayed for months.

"This tax day marks an important milestone at the IRS," said Deputy Secretary of the Treasury Wally Adeyemo during the press conference. "Thanks to the Inflation Reduction Act resources, we have dramatically improved services this filing season. IRS employees have shown that when they have the resources, they will provide the services they've always wanted to provide to American taxpayers. Under the vision detailed in the strategic operating plan, taxpayers will be able to seamlessly interact with the IRS in the way that works best for them: on the phone, in person and online. This filing season, the IRS has made great strides in all three areas as shown through the brand new data we're releasing today. First, the IRS has achieved an 87% level of service, exceeding Secretary Yellen's ambitious goal of 85%. It's important to remember how this stacks up to last year, when we were able to perform at less than 15%. IRS customer service representatives answered 2 million more calls and cut waiting times by 85% this year. We've cut it down to four minutes from 27 minutes. That's better than most companies can achieve. Factoring in taxpayers served by automated phone applications, the IRS actually achieved a 93% level of service."

He noted that the IRS has also reopened its in-person Taxpayer Assistance Centers across the country. The Treasury said on its "report card" that the IRS hired hundreds of new TAC employees, with 335 TACs open this filing season, including 17 new or newly reopened TACs that closed last year. The IRS served 428,000 taxpayers in-person as of March 31, 107,000 more taxpayers than during the same period last year. Approximately 92% of TACs were open as of early April, and several are scheduled to open in the coming weeks. The IRS also hosted Taxpayer Experience Days in more than 100 TAC locations to provide in-person help on Saturdays.

The IRS has also expanded its digitization initiative to eliminate the backlog of paper tax returns. The IRS has expanded scanning to some of the most commonly used tax forms — Forms 1040 and 941 — and has scanned 10,000 as of April 13. The IRS is on track to scan millions of returns this year. Thanks to the extra funding from the Inflation Reduction Act, the IRS scanned 470,000 940 forms as of April 13. In the first quarter of the year, the IRS scanned 80 times more returns than in all of 2022.

Online services have improved efficiency in other ways as well. "Taxpayers are now able to respond to notices online," said Adeyemo. "They also have a new online filing option: the new direct deposit refund option. Until this tax season, when taxpayers received notices for things like document verification, they had to respond through the mail. Taxpayers are now able to respond to nine of the most common notices for credits like the Earned Income Tax Credit, saving them time and money. Under the strategic operating plan, the IRS will expand this tool to allow taxpayers to respond online to 72 of the most common notices they receive in the mail. This will make it significantly easier for individuals and small businesses to resolve issues and get their refunds in a timely manner. The IRS also launched an online portal to allow businesses to file 1099s electronically. These forms previously needed to be submitted through the mail. Small business owners often prepare their own taxes rather than hire professionals, and this new tool is saving millions of small business owners time and money."

He noted that in the first five years of the 10-year strategic operating plan, taxpayers will be able to securely file all documents and respond to all notices online and securely access and download their data and account history.

"The new notice and 1099 tools show how the IRS is making progress toward that goal," said Adeyemo. "In addition to service upgrades, the IRS has made major gains in its efforts to eliminate paper backlogs through scanning. The IRS has digitized 480,000 990, 941 and 1040 forms to date through the adoption of the new scanning technology, 80 times more forms in the first quarter of this year than in all of 2022."

He predicted that in the first five years of the 10-year strategic operating plan, the IRS will eliminate the paper backlogs that have delayed taxpayer refunds and transition to a fully digital correspondence process. 

Werfel pledged to help taxpayers more with the extra funding. "Just like during the pandemic, IRS employees worked very hard again this year to help taxpayers, but this time they had help, thanks to funding Congress provided under the Inflation Reduction Act," he said. "These resources made a remarkable difference for taxpayers. This funding allowed us to hire more than 5,000 additional phone assistors, which led to a phone level of service averaging 87% during the filing season. This was a dramatic improvement from last year when those figures came in at under 15%."

He pointed to the reduction in the average wait time on the phone from 27 minutes last year to four minutes this year. "Our customer service representatives have provided assistance on more than 6.5 million calls this year, up from just over 4 million last year," said Werfel. "That means with our additional funding, we helped 2.4 million more taxpayers this year than in 2022. By anyone's measure, our phone service for taxpayers and tax professionals made a quantum leap this year. With the additional funding, we also increased our face-to-face assistance with our Taxpayer Assistance Centers, helping 474,000 people this year, more than a 30% jump from a year ago. And we continue to add staff and reopen Taxpayer Assistance Centers at many locations around the country. We've reopened 16 of these walk-in locations this year, and added one new location and hired 450 new staff, with more to come. Even our volunteer tax preparation services improved. We've had 2 million tax returns prepared under the VITA and TCE [Volunteer Income Tax Assistance and Tax Counseling for the Elderly] program, a jump from less than 1.6 million a year ago. All of this occurs, as the IRS continued to reduce its backlog of tax returns and correspondence from the pandemic. This work did not slow our 2023 filing season operation. We received more than 100 million tax returns through April 7 and refunds rolled out quickly. So far the IRS has delivered more than 69 million tax refunds with close to $200 billion to taxpayers."

The IRS and FTB have extended tax return filing and payment deadlines for those in affected CA counties (all CA counties, except for Lassen, Modoc, and Shasta counties) until October 16^th.

The IRS and FTB have extended tax return filing and payment deadlines for those in affected CA counties (all CA counties, except for Lassen, Modoc, and Shasta counties) until October 16^th.

Because of the long delay without needing extensions, we think this will be a useful tool for taxpayers who either owe a balance due for 2022 or are expecting to make 2023 estimate payments. However, the payment delay does come with a potential risk. The IRS indicates that if a taxpayer receives a penalty notice they should call the IRS for abatement. Last year the IRS was only answering 13% of its calls. They claim they’ll do better this year, but trying to get an erroneous penalty abated could turn into a fiasco, if the prior three years are any indication.  Millions of CA taxpayers may be gambling on how automated the IRS’ and the FTB’s suppression of penalty notices will be.

With the stock market down in 2022, many taxpayers will likely get tax refunds for 2022. For taxpayers with 2022 tax refunds expected, there’s no reason to delay filing. Their only decision should be about whether to pay their first three 2023 estimated tax installments on the regular dates or wait until October 16^th.

Remember this filing and payment delay generally doesn’t apply to taxpayers not living or working within these counties.

Based upon our experience on the 2019 and 2020 charitable remainder unitrust filings, this filing delay may not get honored for those returns, without a significant battle over IRS late-filing penalty notices. In those past years, when the whole country’s filing dates were delayed, we found the IRS’ computers were not reprogramed and CRUs got $5K penalty notices that took months to get resolved. Since this delay only involves certain CA counties, we really doubt any IRS reprogramming will take place for CRU penalty notices. For CRU returns, we recommend the normal April 18th filing date be observed or the normal extension be filed by April 18th. For similar reasons, we think affected CA taxpayers having Gift Tax returns due or those filing forms 5471 or 8938 (which carry hefty potential penalties if late) should get extended using usual extension forms by April 18th.

Standard Mileage Rates for 2023

For 2023, the standard rate for business mileage will be 65.5 cents per mile. The previous rate was 62.5 cents per mile.

The standard rate for the use of a car when providing services to a charitable organization will remain at 14 cents per mile.

The 2023, standard mileage rate for the use of your car for medical expenses or deductible moving expenses will be 22 cents per mile.

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. Current tax law cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. Current tax law cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Good used or better condition
The law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.

Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself."

Household items include furniture, furnishings, electronics, appliances, and linens, and similar items. Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable.

The law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments.

Fair market value
You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it. Therefore, its value is less than what you paid for it.

If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.

Get a receipt
Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.

Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.

Exception
In some cases, the rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.

If you have any questions about the charitable contribution rules for donations of clothing and household items, give our office a call.

To our business clients:

Form 1099-NEC is to be used for reporting nonemployee compensation (NEC). This form must be filed by January 31, 2023 with the IRS and also provided to the recipient by this date. California participates in the combined Federal/State filing program for Form 1099-NEC which means that a copy of the form won’t need to be sent separately to the FTB.

The form 1099-MISC is still required for other types of payments and information. See below for the specific uses of this form.  

The 1099-NEC form is unusual in that it needs to be both to the IRS and the recipient by January 31^st. Most other 1099s are due to the recipient by January 31st and to the IRS by February 28th. The penalty for each instance of failing to file a correct 1099 form by the due date with the IRS is as follows:

• $50 per form if correctly filed within 30 days of the due date;
• $110 per form if correctly filed after 30 days of the due date but by August 1st;
• $280 per form if filed after August 1st, or not filed (assuming there was no intentional disregard);
• At least $570 per form with no maximum penalty if due to intentional disregard of the requirements.

A similar additional penalty framework applies if the payee isn’t provided their copy by these deadlines.

California may impose its own penalties when conducting an audit, the most severe of which is for failure to file 1099 forms to independent contractors. In those cases, California can effectively negate the deduction for those expenses by imposition of its penalties.

Federal business income tax returns contain two questions regarding the filing of 1099 forms. We'll be checking with you about your fulfilment of the 1099 form filing requirements in order to answer those questions correctly.

WHAT IS A 1099 FORM?

A 1099 form is an informational return on which businesses report various sorts of payments they've made to partnerships, sole proprietorships, individuals and certain types of corporations during the calendar year. Some of the most common types of 1099 forms are: 

WHO SHOULD WE SEND A 1099 FORM TO?
They should be sent to partnerships, sole proprietorships, limited liability companies (LLC), limited liability partnerships (LLP), and individuals you made payments to in the course of your business.
A 1099 should also be sent to any attorney, physician, or a supplier of medical services even if they are a corporation. Any payment on which you take backup withholding for Federal income taxes must be reported on the appropriate Form 1099, regardless of the amount of the payment. This means:

1. Only send 1099s for payments you made related to the operation of your business.
2. You don't need to send 1099s for materials or products you purchased.
3. You don't need to send 1099s to corporations (unless it is for medical or legal services). However, the burden to find out if it's a corporation is on you. If the name has "Incorporated", "Inc.", "Corporation", or "Corp." in it, you can assume it's a corporation. Otherwise, you need to ask.
4. You don't need to send 1099s to exempt organizations, retirement trusts, or IRA accounts.
   
   

FILING RETURNS WITH THE IRS
If you must file any Form 1098 or 1099 with the IRS and you are filing paper forms, you must send a separate Form 1096 with each different type of form, as the transmittal document.

For businesses located in California, the government copies need to be mailed to:

Department of the Treasury
IRS Submission Processing Center
1973 North Rulon White Blvd.
Ogden, UT 84201

Businesses who file 250 or more informational returns are required to file electronically through the IRS' FIRE System (Filing Information Returns Electronically). We can help you with this.

Regulations are expected to be finalized at some point in the near future to reduce the 250-return requirement threshold for 2022. The IRS will post an article at IRS.gov explaining the change if and when it is finalized. In addition, we will update this 1099 letter on our website, www.seebacpa.com, at the time the regulations are finalized.

CALIFORNIA REPORTING REQUIREMENTS
If you file IRS Forms 1099 series, Forms 5498, 1098 and W-2G with the IRS on paper, you are not required to file a paper copy of the same form with the Franchise Tax Board. The IRS will forward the information to them.

When the Federal and State payment amounts differ, you may file information returns directly with the Franchise Tax Board.

WHAT INFORMATION DO YOU NEED FOR THE 1099 FORM?

1. Name and address of whom you paid.
2. The amount you paid them during 2022.
3. The type of payment made.
4. Their identification number. For an individual this would be their social security number. For a proprietorship, LLC, partnership, or corporation this would be their employer identification number which is a nine-digit number, usually beginning with "94-" or "77-".

IMPORTANT: It is extremely important that the name recorded on the 1099 agrees with the name listed on the Social Security Administration's records for the specified identification number.
Therefore, in the case where an individual is self-employed, care must be taken to make
sure that the proper name is listed on the 1099. Any "dba" name should be listed on the
1099 underneath the individual's legal name which agrees with the Social Security Administration's records. 

WHAT IF SOMEONE WON'T GIVE US THEIR IDENTIFICATION NUMBER?
If someone won't give you their identification number, you're not sure they're giving you the correct number, or you're not sure they're incorporated as they say, then you should send them a W-9 form (available at the IRS website) by certified mail, return receipt requested. The receipt will document your request for their number and help you avoid the penalty for filing a 1099 form without an identification number. If the W-9 form is completed and returned to you, it will take you off the hook for both the accuracy of the identification number used and as to whether they're really a corporation.

WHAT CAN SEEBA & ASSOCIATES DO TO HELP?
Please give us a call if you would like us to help in the preparation of these 1099 forms. We can:

1. Answer your questions regarding the issues discussed above,
2. Prepare 1099 forms for you from information you've gathered, consisting of name, address, identification number, and amount paid in 2022, or
3. Figure the amount you've paid for 2022 from your books and records. Along with the address and identification number supplied by you, we'll prepare the 1099 forms.
4. e-File your 1099 forms via the IRS system.

*         *         *         *         *

IMPORTANT

Please let us know as soon as possible if we can assist you since the 1099s are due by January 31st.

You should be getting an identification number or completed W-9 form from anyone you pay for services, even if less than $600, before you pay them. Otherwise, you are obligated to withhold 24% of their payment and remit it to the IRS. Please call us if you run into problems where the 24% "backup withholding" may come into effect.

You should also keep in mind that you will need to maintain records of amounts paid to independent contractors as payments are made or contracts are signed in order to comply with the 2023 Employment Development Department reporting requirement for independent contractors.

If you have any questions regarding 1099 filings, feel free to contact us.

To our business clients:

WITHHOLDING FROM EMPLOYEES' PAYCHECKS

1. 1a. Social Security - The employee portion of this tax remains at 6.2% with a wage limit of $160,200. The employer’s portion of Social Security for 2023 also remains at 6.2%, on wages up to $160,200.
   
   1b. Medicare - The employee and employer each pay 1.45% and there is no cap on the amount of payroll which will be subject to this total tax of 2.9%. Because of the unlimited ceiling on Medicare, there is no maximum tax deduction.
   
   Generally, payroll deposits will include 15.3% of wages (6.2% times 2, plus 1.45% times 2) on wages up to $160,200, and 2.9% of all wages thereafter. However, there is an additional Medicare withholding of 0.9% on employees earning over $200,000 regardless of marital status. So the employee’s normal Medicare tax rate of 1.45%, will rise to 2.35% on their earnings over $200,000, but the employer still pays only the 1.45% rate.
   
   
2. The rate for self-employment persons will be 15.3% on wages up to $160,200. The Medicare tax of 2.9% continues on amounts over $160,200. Self-employed people earning over $200,000 and those earning over a combined $250,000 on a joint return will also face the additional .9% Medicare tax. Because the Medicare tax applies to all earnings, there is no maximum self-employment tax. (There is a deduction allowed for self-employed persons for both self-employment tax and income tax computations).
   
   
3. Federal and State Income Tax - The amount of withholding will change for both Federal and State effective January 1, 2023. Please see the updated federal Employer’s Tax Guide Publication 15 (Circular E) on the Internal Revenue Service website at: https://www.irs.gov/pub.irs-pdf/p15.pdf and the California Employment Development Department’s Publication DE 44 at: https://edd.ca.gov/siteassets/files/pdf_pub_ctr/de44.pdf.
   
   
4. State Disability Insurance - The rate will change to 0.9 %, and the wage base will increase to $153,164. Therefore, the maximum deduction for SDI in 2023 will be $1,378.48.

EMPLOYER TAXES PAID QUARTERLY:

1. Federal Unemployment Tax - The 2023 federal unemployment tax rate is .6% on the first $7,000.
   
   
2. State Unemployment Insurance and Employment Training Tax - The wage limit will remain at $7,000. Rates are set individually for employers. You will receive a notice of your 2023 rate in the mail or it can be accessed in your EDD e-Services for Business account. Please send a copy of any notice you receive to your payroll report preparer.
   

2023 FEDERAL PAYROLL DEPOSIT REQUIREMENTS: 

July 1 Change to 2022 Standard Mileage Rates

Due to the gas price increase caused by Russia’s invasion of Ukraine, the IRS is increasing the standard rate for business mileage effective July 1^st to 62.5 cents per mile. The rate for January-June has been 58.5 cents per mile.

Effective July 1st 2022, standard mileage rate for the use of your car for medical expenses or deductible moving expenses will increase to 22 cents per mile. The rate for January-June has been 18 cents per mile.

The standard rate for the use of a car when providing services to a charitable organization will be remain at 14 cents per mile.

BONUSES- Just a reminder - holiday bonuses are subject to all payroll taxes.

BONUSES- Just a reminder - holiday bonuses are subject to all payroll taxes.

This is true whether the bonus is paid in cash, by check or by a gift card. For income tax withholding, the rates are 22% federal and 10.23% state. If you have a net figure in mind, the gross amount can be calculated as follows:

1. If the employee has not passed the wage limits for SDI ($145,600) or FICA ($147,000), divide the desired net by .5902 to arrive at the gross.
2. If the employee has exceeded the SDI limit only, divide the desired net by .6012 to arrive at the gross.
3. If the employee has exceeded both the SDI and FICA limits, divide the desired net by .6777 to arrive at the gross.

Example: You wish to pay Employee A a net bonus of $100.00 -

If the employee has earned $4,000.00 for 2022, they are subject to all taxes. Dividing $100.00 by .5902 (See #1 above) yields a gross of $169.43. Deductions would be:  Federal income tax $37.27 (22%); Social Security $10.51 (6.2%); Medicare $2.46 (1.45%); State income tax $17.33 (10.23%); SDI $1.86 (1.1%).

The percentages and example shown above pertain to checks dated prior to January 1, 2023. For checks dated after December 31, 2022, you must use the 2023 withholding rates and limits.

AWARDS - As part of a meaningful presentation, employers can give employees awards for length of service or safety achievements of up to $400 per year. In order to be deductible to the employer and non-taxable to the employee, the awards must be made with noncash items. Awards of cash or items readily convertible into cash, such as gift certificates, are subject to payroll taxes, no matter the amount.  Length of Service Awards are deductible to the employer if employees have more than five years of service and have not received such an award in the last four years. Safety Achievement Awards aren't deductible if given to a manager, administrator, clerical employee, or professional, nor if given to more than 10% of the other employees. We recommend that any prizes awarded be documented by corporations in their corporate minutes, although the law doesn't require this.

GIFTS - Business gifts are still limited to $25 to any individual per year. They can be made on a discriminatory basis and can be in cash. These gifts are deductible to the business and non-taxable to the recipient.

Items clearly of an advertising nature that cost $4 or less, such as promotional items, aren’t considered gifts and therefore, aren’t included in calculating the $25 limit for an individual.

In addition, gifts that are considered “de minimis” fringe benefits aren’t restricted by the $25 per recipient limit, and are considered to be made tax-free to the employee. For a gift to be considered as a de minimis fringe benefit the value must be nominal, the accounting for such a gift would be administrative nitpicking, it’s only an occasional gift, and it’s given for the purpose of promoting the health, goodwill, contentment or efficiency of the employees. Some examples of such gifts are holiday turkeys, a Christmas luncheon or party.

There is no limit on gifts made to corporations or partnerships.

So that the reporting for this fringe benefit is not so burdensome, the IRS allows employers to include the personal use of business-owned cars during November and December in the following year's W-2s. This means that W-2s for 2022 need to include the value of the personal use of the vehicles from November 1, 2021 to October 31, 2022 and that this value can be calculated now. Those clients using computerized payroll systems which prepare W-2s will have to inform the system of this fringe benefit value which needs to be included in payroll before the end of December.

The following information should serve to remind you of how to calculate the value of the personal use of business-owned cars for W-2 purposes and how to withhold taxes on it:

1. For non-officer/shareholders:  If commuting is the only personal use of a business-owned car allowed by an employer, then the employer would need to include $3 a day in the employee's wages to recognize the value of the commute, plus 5.5 cents/mile for the fuel provided by the employer.

2. For officers and shareholders:  The personal use of a business-owned vehicle must be included in their W-2. The formula for computing the value of their personal use is as follows:
    

   1. Annual lease value based on the IRS table (see attached table) prorated for the number of months the vehicle was used from November 2021-October 2022.
   2. Times this value by the personal use percentage determined from mileage records maintained throughout the year which list business and personal miles driven.
   3. Then add the lesser of the actual cost, or 5.5 cents/mile, for gasoline provided by employer that was used for personal travel
   4. Next subtract any reimbursement that the employer receives from employee.
   5. The result is the value of the personal use of the business-owned vehicle to be included in employee's W-2 compensation.
      
      

                                                                                   or                                      
                                                                 (A x B) + (C - D) = E

3. It is possible to avoid income tax withholding on the value of the personal use of an employer-provided vehicle. However, early action was required in order to avoid withholding income tax for 2022. The employer must have notified the employee in writing by January 31, 2022 or within 30 days after receiving the vehicle during the year, in order to avoid income tax withholding on this fringe benefit. If the employee is not notified of the withholding election by the specified dates, the employer must withhold income taxes on the value included in the W-2. For 2023, the employee must be notified in writing by January 31, 2023 or within 30 days of receiving the vehicle, in order to avoid 2023 withholding on this fringe benefit.

4. Even though an employer can avoid withholding income tax on the value of the personal use of a vehicle (as described in item 3 above), the Social Security tax (FICA), the Medicare tax, and State Disability Insurance (SDI) must be withheld on the value included in the W-2. However, there are some choices available on the timing of these withholdings. The employer is given the option of calculating and withholding these taxes on a pay period, quarterly, semi-annual, or annual basis. As stated previously, the annual period would run from November through October, which means that the employer could wait until the end of October to figure the taxes to be withheld. If the employee will reach the maximum Social Security wages for the year by that time, without considering the fringe benefit, only Medicare tax withholding would be necessary.

Please feel free to contact us if you need help in calculating the value of the personal usage of business-owned cars, but remember it must be done soon and included on the 2022 W-2 forms.

 Click here to view the Business Car Usage

With certain key exceptions, employers must pay nonunion, non-exempt employees (who are not working an alternative workweek schedule) at least time and one-half pay for: *Hours worked in excess of eight hours in one day, *Hours worked in excess of 40 hours in one workweek, and *The first eight hours worked on the seventh day of work in a given workweek.

In addition, employers must pay employees at least double time for any hours worked in excess of 12 hours in one day and hours worked in excess of eight hours on any seventh day of a workweek.

Under the new law compensatory time off in lieu of payment for hours worked by non-exempt employees in excess of the normal workday and workweek (as described above) is no longer permissible

Exceptions

Employees, who on July 1, 1999, were voluntarily working an alternate workweek schedule (adopted without an employee election), may continue to work that schedule, of not more than 10 hours work a day, and continue to be exempt from the overtime rules if the employer approves a written request by the employee to continue to work that schedule. In addition, employees may elect, by two-thirds vote, to work an alternative workweek of up to 10-hour work days within a 40-hour workweek without being subject to the overtime rules.

Personal Time Off

Employees may make up lost time due to a personal obligation by giving a signed, written request to an employer to make up the work. Please note however that, if an employer approves an employee's written request to make up work time that is lost as a result of a personal obligation, the hours of that makeup work time, if performed in the same workweek in which the time was lost, should not be counted toward computing the total number of hours worked in a day for purposes of the overtime pay requirements. The only exception would be in the case of an employee who works more than 11 hours in one day or 40 hours in one workweek.

All businesses are required to report independent contractors, to whom they will be issuing a 1099-MISC form, to the California Employment Development Department. The information provided will be forwarded to state and local child support agencies to help in their efforts to locate parents who are delinquent in their child support obligations.

The information must be reported to the EDD, using form DE 542 ("Report of Independent Contractors"), within twenty days of either entering a contract for $600 or more, or the date during the calendar year when total payments to the independent contractor reach $600. Form DE 542 requests the independent contractors' full name, social security number, address and the contract dates and amounts. You may obtain forms by calling the Employment Development Department at (916) 657-0529, accessing the EDD web site at www.edd.ca.gov, or contacting our office.

Only individuals working as independent contractors are to be reported. Thus, you don't need to report corporations or partnerships which you pay for services provided to your business. However, you must report all independent contractors you hire for $600 or more, regardless of whether the independent contractor lives or works in California or another state. You only need to report an independent contractor one time per each calendar year that you contract or pay the contractor $600 or more.

The completed DE 542 forms can be either mailed or faxed to the Employment Development Department. The mailing address is:Employment Development Department PO Box 997350 MIC 96 Sacramento, CA 95899-7350 And the fax number is: (916) 319-4410

The EDD may assess a $24 penalty for each failure to comply with the reporting requirements within the required time frame. Also, a penalty of $490 may be assessed for the failure to report the required information due to an agreement between you and the independent contractor to disregard the filing requirements.

California's state-run college saving program, Golden State Scholarshare Trust allows parents and others to put aside tax-deferred money for college.

Plan Features

Money that participants (parents, grandparents, businesses, etc.) contribute to the Scholarshare Trust will grow while in the participant's account and be tax free for federal and California purposes upon disbursement to the beneficiary's school of choice. The funds disbursed can cover room and board, as well as tuition fees, books, supplies and equipment required for enrollment or attendance at a "qualified institution" (defined below). The participant retains ownership of his/her deposits in the trust until disbursement, at which time ownership is transferred to the beneficiary (student). Interest earnings disbursed from the trust are not included in the beneficiary's gross income (while attending college).

Qualified Institutions

Neither the beneficiary nor the participant will have to choose a college when opening a Scholarshare account. However, the type of college the beneficiary plans to attend will affect the maximum contribution allowed, i.e., community college, state university, private institution, etc. The student may use the funds to attend any qualified institution. A qualified institution is one that offers credit toward:

A bachelor's degree; An associate's degree; A graduate level or professional degree; and Another recognized post-secondary credential. Certain proprietary and post-secondary vocational schools are also eligible institutions.

At the time the beneficiary enrolls in college, the Scholarshare Program will transfer payments from the participant's Scholarshare account directly to the college to pay the beneficiary's qualified expenses.

Transferability

If the beneficiary dies or does not attend college, the contributor has the option of canceling the account or changing the beneficiary. Cancellation results in a refund equal to the then-current market value less a penalty of no less than 10 percent of the earnings. The penalty is waived in the event of the beneficiary's death.

Without cause and before the beneficiary's admission to college, the contributor may change the beneficiary designation to relatives of the original beneficiary or relatives of the beneficiary's spouse, including the contributor if the contributor is a relative of the original beneficiary or a relative of the original beneficiary's spouse.

Income Tax Issues

There are no income tax deductions to the contributor for placing funds into a Scholarshare program. Taxation is avoided on the earnings. Amounts paid for tuition will also be eligible for both the HOPE credit and Lifetime Learning credit, subject to the rules that regularly apply to each of those credits.

Gift Tax Issues

For gift tax purposes, deposits are completed gifts of present interests to the designated beneficiary and therefore qualify for the annual gift tax and generation-skipping transfer tax exclusion of $15,000 per year per donee as indexed. They do not qualify as excludable education expenses under the gift tax rules which allow education expenses to be paid in addition to the $15,000 annual exclusion. If the deposit exceeds the annual exclusion amount, the contributor may elect to take the balance into account ratably over a five-year period on their gift tax return.

Amid a growing number of scams and fraudulent activity surrounding the Employee Retention Credit, the Internal Revenue Service will stop processing new claims, effective immediately, at least through the end of the year.

Amid a growing number of scams and fraudulent activity surrounding the Employee Retention Credit, the Internal Revenue Service will stop processing new claims, effective immediately, at least through the end of the year.

"We are deeply concerned that this program is not operating in a way that was intended today, far from the height of the pandemic in 2020 and 2021," IRS Commissioner Daniel Werfel said during a September 14, 2023, conference call with reporters. "We believe we should see only a trickle of employee retention claims coming in. Instead, we are seeing a tsunami."

Werfel said the agency has received about 3.6 million claims by taxpayers taking advantage of the program and there are more than 600,000 that have yet to be processed, "virtually all of which were received within the last 90 days. That means about 15 percent of all ERCclaims received since the start of the program three and half years ago have been received in the last 90 days. That’s an incredibly large number to have so far beyond the pandemic and nearly two years after the time periods covered by the program."

He attributed the spike in claims to emergence and prevalence of so-called ERC mills.

"This great program to help small businesses has been overtaken by aggressive promoters," Werfel said. "The ads are everywhere. The program has become the centerpiece for unscrupulous marketing and profits from pushing taxpayers to claim a credit that they would not be eligible for."

The agency said in a September 14, 2023, press release that it will process claims already received, but as of today, there will be no new claims processed for the pandemic-era relief program aimed to help small businesses remain in operation while dealing with potential economic hardships due to the COVID-19 pandemic.

However, for those who have filed claims, they can expect longer wait times for the financial relief offered by the credit as the agency conducts more detailed compliance reviews of the claims that have been filed.

And that compliance work as already begun. Werfel stated that as of July 31, 2023, the IRS Criminal Investigation Division has initiated 252 investigations involving more than $2.8 billion worth of potentially fraudulent ERC claims. Fifteen of those cases have resulted in federal charges, with six cases resulting in convictions, and an average sentence of 21 months for those reaching the sentencing phase. He also stated that the agency has referred thousands of claims for audit.

"With the stricter compliance reviews in place during this period, existing ERCclaims will go from a standard processing goal of 90 day to 180 days – and much longer if the claim faces further review or audit," the agency stated in the press release. "The IRS may also seek additional documentation from the taxpayer to ensure it is a legitimate claim."

To help taxpayers who may have fallen victim to an ERC mill, the IRS will be introducing programs in the coming weeks and months to help taxpayers. First, the agency will be providing a process under which taxpayers with unprocessed claims can withdraw those claims. To help taxpayers in self-reviewing their already submitted claims or who may be thinking about submitting claims when the IRS begins processing new claims again, the agency on September 14, 2023, released an updated eligibility checklist. The process to withdraw a claim will be finalized soon.

For those who have had their claims processed, received money and then later received a determination that they were in fact ineligible for the credit, the IRS will be offering a settlement program to help taxpayers pay back funds they should not have received due to eligibility reasons. Details on the settlement program will be released in coming months.

This help may be needed because the IRS recognizes that a business or tax-exempt group c"ould find itself in a much worse financial position if you have to pay back the credit than if the credit was never claimed in the first place," Werfel said.

Werfel is encouraging those who have submitted claims to do an independent verification of eligibility with a trusted tax professional to ensure they were in fact eligible for the credit and if they were not, be ready to take the steps to withdraw the claim if it hasn’t been paid or to look for the settlement program if necessary.

By Gregory Twachtman, Washington News Editor

The Department of the Treasury is reaching out to Congress to get the appropriate tools to combat the wave of Employee Retention Credit fraud and other future issues.

The Department of the Treasury is reaching out to Congress to get the appropriate tools to combat the wave of Employee Retention Credit fraud and other future issues.

In a September 14, 2023, letter to Senate Finance Committee Chairman Ron Wyden, the agency made two specific requests. First, the IRS asked for authority to regulate paid preparers, which it sated "could help protect taxpayers from penalties, interest, or avoidable costs of litigation that result from the poor-quality advice they receive."

Second, the IRS asked for legislation specific to the ERC, but it was more vague in what it wants, asking Congress "to consider other ways to help reduce fraud and abuse associated with the ERC, while protecting honest taxpayers. For example, legislating targeting contingency fee practices would help prevent overzealous promoters from profiting off small businesses."

During a September 14, 2023, conference call with reporters, Laurel Blatchford, chief implementation officer of the Inflation Reduction Act at the Treasury Department, said that having the ability to regulate paid preparers would make it easier to target ERC mills that have popped up in recent months.

"Congress should pass legislation making clear these mills have to play by the same rules as other professionals who prepare returns for taxpayers," Blatchford said. "These mills may claim they aren’t paid preparers, but they receive compensation for their advice."

And while the IRS and Treasury could promulgate regulations for something like banning contingency fees that would prevent mills from collecting a portion of the money refunding through the credit,"a legislative prohibition takes effect far more quickly."

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service detailed plans on some of the high-income taxpayers that will be targeted for more compliance efforts in the coming fiscal year.

The Internal Revenue Service detailed plans on some of the high-income taxpayers that will be targeted for more compliance efforts in the coming fiscal year.

IRS Commissioner Daniel Werfel, during a September 7, 2023, teleconference with reporters, said that the new compliance push "makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe,"adding that the agency will simply be enforcing already-existing laws.

Werfel stated that the IRS will be "pursuing 1,600 millionaires who owe at least $250,000. … The IRS will have dozens of revenue officers focused on these high-end collection cases in fiscal year 2024,"which begins on October 1, 2023. "This group of millionaires owes hundreds of millions of dollars in taxes, and we will use Inflation Reduction Act resources to get those funds back."

He also said that the agency will be making a “dramatic shift” on large partnerships.

"These are some of the most complex cases the IRS faces, and it involves a wide range of activities and industries where it’s been far too easy for tax evaders to cut corners,"Werfel said.

To help with this effort, Werfel highlighted that the agency will be using expanded artificial intelligence programs and additional Inflation Reduction Act resources to help with the audit process for large complex partnerships.

"The selection of these partnership returns for review is the result of groundbreaking collaboration among experts in data sciences and tax enforcement," Werfel said. "They have been working side-by-side to apply cutting-edge machine learning technology to identify potential compliance risks in the area of partnership tax, general income tax, and accounting and international tax in a segment that historically has been subject to limited examination coverage."

The AI will be used to help spot trends that might not be obvious and help the agency determine which partnerships are at the greatest risk of noncompliance, starting with 75 specific partnerships with assets of more than $10 million.

"These are some of the largest [partnerships] in the U.S. that the AI tool helped us identify," Werfel said. "These organizations will be notified of the audit in the coming weeks. These 75 organizations represent a cross section of industries, including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, and other industries."

Werfel also noted that starting in October, "hundreds of partnerships will receive a special compliance alert from us in the mail. The alert relates to what we have identified as an ongoing discrepancy on balance sheets involving partnerships with over $10 million in assets," adding that taxpayers filing partnership returns are showing more and more discrepancies in recent years. Approximately 500 partnerships will be receiving this mailing.

"We will need to do more in the partnership arena," Werfel said. "But this is historic. And these are examples of how the Inflation Reduction Act funding will make a difference and help ensure fairness in the tax system."

Other areas that will get compliance attention in the coming fiscal year include those with digital assets, high-income taxpayers who use foreign banks to avoid disclosure and related tax obligations, as well as a previously announced effort to target the construction industry where companies are using subcontractors, which are shell corporations, to engage in tax fraud. The agency will also be targeting scammers such as the current trend of Employee Retention Credit mills.

Werfel also noted that there are ongoing efforts to keep hiring people to conduct these enforcement actions.

"We know we need to make more progress in our hiring efforts, as we will be accelerating these," Werfel said. "This is particularly important given our aging workforce and the relatively high attrition rate among IRS employees."

By Gregory Twachtman, Washington News Editor

The Treasury Inspector General for Tax Administration is calling on the Internal Revenue Service to improve its training of revenue agents that will be focused on auditing high-income taxpayers.

The Treasury Inspector General for Tax Administration is calling on the Internal Revenue Service to improve its training of revenue agents that will be focused on auditing high-income taxpayers.

In an August 31, 2023, report, the Treasury Department watchdog noted that despite receiving supplemental funding from the Inflation Reduction Act that has been earmarked, in part, to increase examination of high-income taxpayers, the "IRS’s efforts to train new hires do not appear to be fully leveraging" the expertise it has within the Large Business and International Division.

"The IRS treats this training as specialized and only offers it when necessary for employees auditing in this specialized area," that current continued, recommending that with the new IRA funding, "the IRS should revise its training paradigm and expose new hires to the types of issues associated with high-incometaxpayer returns."

TIGTA also criticized the agency for not having"a unified or updated definition for individual high-incometaxpayers," noting that"current examination activity code schema still uses $200,000 as the main threshold" as established in the Tax Reform Act of 1976. This threshold exists even as the IRS continually uses $400,000 as the income threshold, with the population underneath it not expecting to see a rise in audit rates against historical levels from a decade ago.

"The IRS’s Inflation Reduction Act Strategic Operating Plan sets forth leveraging data analytics to improve the IRS’s understanding of the tax filings of high-wealth individuals and to address potential noncompliance," the report states. "Consequently, the IRS needs to update its high-incometaxpayer definition to better identify and track examination results and manage examination priorities."

IRS in its response to the TIGTA findings, published in the report, did not agree with the recommendation related to the definition of high-income taxpayers, stating that "a static and overly proscriptive definition of high-incometaxpayers for the purposes of focusing on income levels above which taxpayers have unique and varied opportunities for tax would serve to deprive the IRS of the agility to address emerging issues and trends."

By Gregory Twachtman, Washington News Editor

The IRS has provided additional interim guidance in Notice 2023-64 for the application of the new corporate alternative minimum tax (CAMT). This guidance clarifies and supplements the CAMT guidance provided in Notice 2023-7, I.R.B. 2023-3, 390, and Notice 2023-20, I.R.B. 2023-10, 523, which were issued earlier this year. The IRS anticipates that the forthcoming proposed regulations on the CAMT will be consistent with this interim guidance and that they will apply for tax years beginning on or after January 1, 2024. Taxpayers may rely on the interim guidance for tax years ending on or before the date the forthcoming proposed regulations are published, and for any tax year that begins before January 1, 2024.

The IRS has provided additional interim guidance in Notice 2023-64 for the application of the new corporate alternative minimum tax (CAMT). This guidance clarifies and supplements the CAMT guidance provided in Notice 2023-7, I.R.B. 2023-3, 390, and Notice 2023-20, I.R.B. 2023-10, 523, which were issued earlier this year. The IRS anticipates that the forthcoming proposed regulations on the CAMT will be consistent with this interim guidance and that they will apply for tax years beginning on or after January 1, 2024. Taxpayers may rely on the interim guidance for tax years ending on or before the date the forthcoming proposed regulations are published, and for any tax year that begins before January 1, 2024.

CAMT and Prior CAMT Guidance

For tax years beginning after 2022, a 15-percent CAMT is imposed on the adjusted financial statement income (AFSI) of an applicable corporation (generally, a corporation with a three-year average annual AFSI in excess of $1 billion) (Code Secs. 55(a) and (b), and 59(k)). To determine if the threshold is met, corporations under common control are generally aggregated and special rules apply in the case of foreign-parented multinational groups. The CAMT does not apply to S corporations, regulated investment companies (RICs), and real estate investment trusts (REITs).

A corporation’s AFSI is the net income or loss reported on the corporation’s applicable financial statement (AFS) with adjustments for certain items, as provided in Code Sec. 56A. Special rules apply in the case of related corporations included on a consolidated financial statement or filing a consolidated return. Applicable corporations are allowed to deduct financial statement net operating losses (FSNOLs), subject to limitation, and can reduce their minimum tax by the CAMT foreign tax credit (CAMT FTC) and the base erosion and anti-abuse tax (BEAT). They can also utilize a minimum tax credit against their regular tax and the general business credit.

Notice 2023-7 announced that the IRS intends to issue proposed regulations (forthcoming proposed regulations) addressing the application of the CAMT, and provided interim guidance regarding time-sensitive CAMT issues that taxpayers may rely on until the forthcoming proposed regulations are issued.

Notice 2023-20 provided additional interim guidance that taxpayers may rely on until the issuance of the forthcoming proposed regulations, including interim guidance intended to help avoid substantial unintended adverse consequences to the insurance industry arising from the application of the CAMT.

Considering the challenges of determining the CAMT liability, Notice 2023-42, 2023-26 I.R.B. 1085, provided relief from the addition to tax under Code Sec. 6655 in connection with the application of the CAMT (specifically, the IRS will waive the penalty for a corporation’s estimated income tax with respect to its CAMT for a tax year that begins after December 31, 2022, and before January 1, 2024).

Additional Interim Guidance Provided in Notice 2023-64

The IRS intends to propose rules in the forthcoming proposed regulations consistent with the interim guidance in Notice 2023-64, which provides taxpayers with additional clarity in applying the CAMT before the issuance of the forthcoming proposed regulations. Specifically, Notice 2023-64 sets forth the following guidance:

• Definition of a taxpayer for purposes of the guidance - a taxpayer includes any entity identified in Code Sec. 7701 and its regulations, including a disregarded entity, regardless of whether the entity meets the definition of a taxpayer under Code Sec. 7701(a)(14).
• Determining a taxpayer’s AFS - the guidance provides a definition of an AFS, a list of financial statements that meet the AFS definition, priority rules for identifying a taxpayer’s AFS; rules for certified financial statements, restatements, annual and periodic financial statements; and special rules for an AFS covering a group of entities.
• Determining a taxpayer's AFSI - the guidance provides definitions of financial statement income (FSI) and AFSI; general rules for determining FSI and AFSI, including federal tax treatment not relevant for FSI or AFSI; and rules for determining FSI from a consolidated AFS.
• Determining the FSI, AFSI, and CAMT of tax consolidated groups – rules are provided for priority of consolidated AFS; calculation of FSI of a consolidated group; and calculation of the CAMT of a tax consolidated group.
• Determining AFSI with respect to certain foreign corporations – special rules are provided for the application of Code Sec. 56A(c) to certain foreign corporations.
• Determining the AFSI adjustment for certain taxes under Code Sec. 56A(c)(5).
• Determining the AFSI adjustment for depreciation – the new guidance modifies and clarifies the guidance for the AFSI depreciation adjustments provided in Notice 2023-7, and provides other AFSI rules for Section 168 property. Taxpayers that choose to rely on the interim guidance in section 4 of Notice 2023-7 on or after September 12, must apply the guidance in section 4 of Notice 2023-7, as modified and clarified by Notice 2023-64.
• Determining the AFSI adjustment for qualified wireless spectrum.
• Determining adjustments to prevent certain duplications and omissions of AFSI – rules are provided for adjustments resulting from a change in financial accounting principle or restatement of a prior year’s AFS; and adjustments for amounts disclosed in an auditor’s opinion.
• Determining the use of financial statement NOL (FSNOL) carryovers - the amount of an FSNOL carried forward to the first tax year a corporation is an applicable corporation (and subsequent tax years) is determined without regard to whether the taxpayer was an applicable corporation for any prior tax year.
• Determining an applicable corporation status – specific rules are provided for the application of the aggregation rules under Code Sec. 59(k)(1)(D); for determining an applicable corporation status of members of a foreign-parented multinational group; and for disregarding the distributive share adjustment.
• Determining the CAMT foreign tax credit (CAMT FTC) - generally, a foreign income tax is eligible to be claimed as a CAMT FTC in the tax year in which it is paid or accrued for federal income tax purposes by either an applicable corporation or a CFC with respect to which the applicable corporation is a U.S. shareholder, provided the foreign income tax has been taken into account on the AFS of the applicable corporation or CFC.

Applicability Dates, Request for Comments, and Effect on Other Documents

The IRS intends to publish forthcoming proposed regulations regarding the application of the CAMT that would include proposed rules consistent with the interim guidance provided in Notice 2023-7, as modified and clarified by Notice 2023-64, Notice 2023-20, and Notice 2023-64. It is anticipated that the forthcoming proposed regulations would apply for tax years beginning on or after January 1, 2024. Taxpayers may rely on the interim guidance provided in these Notices for tax years ending on or before the date forthcoming proposed regulations are published. However, in any event, a taxpayer may rely on such interim guidance for any tax year that begins before January 1, 2024.

The IRS has requested comments on any questions arising from the interim guidance provided in Notice 2023-64 as well as comments addressing specific questions listed in the guidance.

Sections 3, 4, and 7 of Notice 2023-7 are modified and clarified.

Taxpayers may rely on a notice that describes proposed regulations that will address the amortization of qualified research and experimentation (R&E) expenses. Before 2022, R&E expenses were currently deductible, but the Tax Cuts and Jobs Act (P.L. 115-97) replaced the deduction with a five-year amortization period (15 years for foreign research).

Taxpayers may rely on a notice that describes proposed regulations that will address the amortization of qualified research and experimentation (R&E) expenses. Before 2022, R&E expenses were currently deductible, but the Tax Cuts and Jobs Act (P.L. 115-97) replaced the deduction with a five-year amortization period (15 years for foreign research).

The notice provides guidance on:

• the capitalization and amortization of specified research or experimental expenditures;
• the definition of specified research or experimental (SRE) expenditures and software expenditures;
• the treatment of SRE expenditures performed under contract with a third party, including long term contracts under Code Sec. 460;
• the application of Code Sec. 482 to cost sharing arrangements involving SRE expenditures; and
• the disposition or abandonment of SRE expenditures.

The guidance generally applies to tax years ending after September 8, 2023. The notice is not intended to change the rules for determining eligibility for or computation of the Code Sec. 41 research credit, including rules for "research with respect to computer software," and the definitions of "qualified research" and "qualified researchexpenses."

The notice obsoletes section 5 of Rev. Proc. 2000-50. Comments are requested.

Capitalization of SRE Expenditures

The notice requires taxpayers to capitalize SRE expenditures and amortize them ratably over the applicable amortization period beginning with the midpoint of the tax year. The midpoint is the first day of the seventh month of the tax year in which the SRE expenditures are paid or incurred.

However, the midpoint of a short tax year is the first day of the midpoint month. If the short tax year has an even number of months, the midpoint month is determined by dividing the number of months in the short tax year by two and then adding one. For example, for a short tax year with ten months, the midpoint month is the sixth month ((10 / 2) + 1 = 6)). If the short tax year has an odd number of months, the midpoint month is the month that has an equal number of months before and after it. For example, for a short tax year with seven months, the mid-point month is the fourth month.

If a short tax year includes part of a month, the entire month is included in the number of months in the tax year, but the same month may not be counted more than once. If a taxpayer has two successive short tax years and the first short tax year ends in the same month that the second short tax year begins, the taxpayer should include that month in the first short ta year and not in the second short year.

For purposes of the 15-year amortization period, foreign research is any research conducted outside the United States, the Commonwealth of Puerto Rico, or any U.S. territory or other possession of the United States.

SRE Expenditures and Activities

The notice clarifies the scope of Code Sec. 174 by defining SRE expenditures and SRE activities. Otherwise, the notice adopts the definitions provided in Reg. §1.174-2.

SRE expenditures for tax years beginning after 2021 are research or experimental (R&E) expenditures that are paid or incurred by the taxpayer during the tax year in connection with the taxpayer’s trade or business. R&E expenditures must

• satisfy the Reg. §1.174-2 requirements, or
• be paid or incurred in connection with the development of computer software (defined below), regardless of whether they satisfy Reg. §1.174-2.

SRE activities are software development costs (defined below), or research or experimental activities defined in Reg. §1.174-2.

Costs that may be SRE expenditures include labor costs, materials and supplies costs, cost recovery allowances, operation and management costs and travel costs that are used in the performance or direct support of SRE activities, as well as patent costs. Costs that are not SRE expenditures include general and administrative costs, interest on debt, costs to input content into a website, website hosting and registration costs, amounts representing amortization of SRE expenditures, and expenses listed in Reg. § 1.174-2(a)(6).

Costs are allocated to SRE expenditures on the basis of a cause-and-effect relationship between the costs and the SRE activities or another method that reasonably related the costs to benefits provided to SRE activities. A taxpayer may use different allocation method for different types of costs, but must apply each method consistently. SRE expenditures must also be treated consistently for all provisions under subtitle A of the Code.

Computer Software Development

The notice defines computer software as a computer program or routine (that is, any sequence of code) that is designed to cause a computer to perform a desired function or set of functions, and the documentation required to describe and maintain that program or routine. The code may be stored on a computing device, affixed to a tangible medium (for example, a disk or DVD), or accessed remotely via a private computer network or the Internet (for example, via cloud computing).

Software includes a computer program, a group of programs, and upgrades and enhancements, which are modifications to existing software that result in additional functionality (enabling the software to perform tasks that it was previously incapable of performing), or materially increase the software’s speed or efficiency. Computer software can include upgrades and enhancements to purchased software.

The notice provides several examples of activities that constitute software development, such as planning the development, designing, building a model, and testing the software or updates and enhancements; and writing and converting source code.

As mentioned above, computer software may include upgrades and enhancements to purchased software. However, software development does not include the purchase and installation of purchased computer software, including the configuration of pre-coded parameters to make the software compatible with the business and reengineering the business to make it compatible with the software, and any planning, designing, modeling, testing, or deployment activities with respect to the purchase and installation of such software.

Contract Research

The notice also provides clarity in the treatment of costs paid or incurred for research performed under contract. For purposes of these rules, a research provider is the party that contracts to perform research services or develop an SRE product for a research recipient. An SRE product is a pilot model, process, formula, invention, technique, patent, computer software, or similar property (or a component thereof) that is subject to protection under applicable domestic or foreign law. For example, mere know-how gained by the research provider that is not subject to legal protection is not an SRE product.

Costs incurred by the research recipient are governed by Reg. §1.174-2(a)(10) and (b)(3). A provider may incur SRE expenditures under the contract if the provider:

• bears financial risk sunder the terms of the contract (that is, the provider may suffer a financial loss related to the contract research); or
• has a right to use any resulting SRE product in its own trade or business or otherwise exploit through sale, lease or license. The provider does not have such rights if it must obtain approval from another party to the research arrangement that is not related to the provider.

Disposition, Retirement or Abandonment of Property

The notice provides clarity in the treatment of unamortized SRE expenditures if the related property is disposed of, retired, or abandoned in certain transactions during the applicable amortization period. The disposition, retirement or abandonment generally does not accelerate the recovery of unamortized SRE expenditures (that is, the amortized SRE expenditures that have not yet been recovered). Thus, the taxpayer must continue to amortize the expenditures over the remainder of the applicable amortization period.

If a corporation ceases to exist in a Code Sec.381(a) transaction or series of transactions, the acquiring corporation will continue to amortize the distributor or transferor corporation’s unamortized SRE expenditures over the remainder of the distributor or transferor corporation’s applicable amortization period beginning with the month of transfer.

However, a corporation that ceases to exist in any other transaction or series of transactions may generally deduct the unamortized SRE expenditures in its final tax year, unless a principal purpose of the transaction(s) is to allow the corporation to deduct the expenses.

Taxpayers may not rely on these rules for SRE expenditures paid or incurred with respect to property that is contributed to, distributed from, or transferred from a partnership.

Long-Term Contracts and Cost-Sharing Regs

The notice provides that costs allocable to a long-term contract accounted for using the percentage-of-completion method (PCM) include amortization of SRE expenditures under Code Sec. 174(a)(2)(B), rather than the capitalized amount of such expenditures. This amortization is treated as incurred for purposes of determining the percentage of contract completion as deducted.

The notice also makes changes to regulations for cost sharing transaction payments (CST payments) between controlled participants in a cost sharing arrangement (CSA) that are made to ensure that each controlled participant’s share of intangible development costs (IDCs) is in proportion to its share of reasonably anticipated benefits from exploitation of the developed intangibles (RAB share).

Accounting Method Changes

The IRS intends to issue additional guidance for taxpayers to obtain automatic consent to change methods of accounting to comply with this notice. Until the issuance of such procedural guidance, taxpayers may rely on section 7.02 of Rev. Proc. 2023-24 to change their methods of accounting under Code Sec. 174 to comply with this notice. Unless specifically authorized by the IRS or by statutes, a taxpayer may not request or make a retroactive change in accounting method by filing an amended return.

Comments Requested

The IRS request comments on issues arising from the interim guidance provided in the notice, as well as issued that are not addressed. Written comments should be submitted by November 24, 2023; however, the IRS will consider late comments if doing so will not delay the issuance of the forthcoming proposed regulations. Comments may be submitted by mail or electronically via the Federal eRulemaking Portal at www.regulations.gov. The subject line for the comments should include a reference to Notice 2023-63.

Taxpayers may rely on proposed regulations that detail how to satisfy the prevailing wage and apprenticeship (PWA) requirements for bonus amounts that may apply to several energy and business credits. The regs also explain the correction and penalty provisions that allow taxpayers to claim the bonus credits even if they failed to satisfy the PWA tests. Comments are requested.

Taxpayers may rely on proposed regulations that detail how to satisfy the prevailing wage and apprenticeship (PWA) requirements for bonus amounts that may apply to several energy and business credits. The regs also explain the correction and penalty provisions that allow taxpayers to claim the bonus credits even if they failed to satisfy the PWA tests. Comments are requested.

PWA Requirements

The Inflation Reduction Act of 2022 (P.L. 117-169) provided bonus credits as part of several new and existing components of the general business credit. The initial credit amount is increased for taxpayers that satisfy the PWA requirements during the construction, alteration and repair of a credit facility.

The bonus credits apply to the following 11 credits, plus one deduction:

• the business credit component of the Code Sec. 30C Alternative Fuel Vehicle Refueling Property Credit
• the Code Sec. 45 renewable electricity production credit
• the Code Sec. 45L New Energy Efficient Home Credit (prevailing wage test only)
• the Code Sec. 45Q carbon sequestration credit
• the Code Sec. 45U Zero-Emission Nuclear Power Production Credit (prevailing wage test only)
• the Code Sec. 45V Credit for Production of Clean Hydrogen
• the Code Sec. 45Y Clean Electricity Production Credit
• the Code Sec. 45Z Clean Fuel Production Credit
• the Code Sec. 48 energy investment credit
• the Code Sec. 48C Advanced Energy Project Credit
• the Code Sec. 48E clean energy investment credit and
• the Code Sec. 179D Energy Efficient Commercial Buildings Deduction (increased deduction).

The IRS previewed these proposed regs in Notice 2022-61 (TAXDAY, I.1, 11/30/2022).

Prevailing Wage Requirements in General

In determining prevailing wages, the proposed regs largely incorporate the Davis-Bacon Act (DBA), as administered by the Wage and Hours Division of the Department of Labor (DOL), to the extent it is relevant and consistent with sound tax administration. However, the regs do not adopt the DBA’s federal contracting provisions, or its exemptions for Tribal governments and the Tennessee Valley Authority. The definition of “employed” is also broader for the PWA tests than it is for other purposes of the Code.

Under the proposed regs, the taxpayer that claims the increased credit would be solely responsible for:

• making sure the PWA requirements are satisfied,
• keeping appropriate records, and
• the correction and penalty provisions and the good faith effort exception.

“Taxpayer” includes an applicable entity that elects to treat the credit as a federal tax payment under Code Sec. 6417, and an eligible taxpayer that elects to transfer the credit to an unrelated person under Code Sec. 6418. Thus, the PWA requirements apply to the eligible taxpayer, not the transferee taxpayer.

The proposed regs define several relevant terms, including applicable wage determination, laborer, mechanic, construction, alteration, repair, locality or geographic area (including DOL site of work definitions), and prevailing wage rate. The proposed regs generally adopt DOL rules that allow lower prevailing wage rates for apprentices.

Prevailing Wage Determinations

The proposed regs would require taxpayers to use the general wage determination in effect when the construction of the facility begins, but would not require taxpayers to update those rates during construction. However, consistent with DOL guidance under the DBA, a new general wage determination would be required when a contract is changed to include additional, substantial construction, alteration, or repair work, or to require work to be performed for an additional time period. Taxpayers would also need to update wage rates for alteration or repairs after the facility has been placed in service.

A general wage determination would be one issued and published by the DOL that includes a list of wage and bona fide fringe benefit rates determined to be prevailing for laborers and mechanics for the various classifications of work performed with respect to a specified type of construction in a geographic area. The proposed regulations would largely incorporate the definition of “wages” from 29 CFR 5.2 for the Prevailing Wage Requirements. This definition is not relevant in determining wages or compensation for other federal tax purposes.

The proposed regs would provide special procedures when a general wage determination does not provide applicable wage rates; as, for example, when no general wage determination has been issued for the geographic area, for the specified type of construction, or for a labor classification. According to the DOL, these situations should be rare. The taxpayer, contractor, or subcontractor would need to request a supplemental wage determination or prevailing wage rate for an additional classification from the DOL. However, taxpayers could not use these requests to split, subdivide, or otherwise avoid classifications in a general wage determination.

A request for a supplemental wage determination or a prevailing wage rate for an additional classification would need to include information consistent with the information that must be provided by a contracting agency when requesting a project wage determination or a conformance for purposes of the DBA. After review, the Wage and Hour Division will notify the taxpayer as to the labor classifications and wage rates to be used. The proposed regulations would also adopt the review and appeal procedures available to any interested party under the DBA with respect to wage determinations generally.

If construction of a credit facility spans adjacent geographic areas, the prevailing wage rate would the highest rate for each classification. For an offshore facility, taxpayers could rely on the general wage determinations in the geographic area closest to the area where the qualified facility will be located.

Prevailing Wage Correction and Penalty Provisions

A taxpayer that fails to satisfy the PWA requirements may still qualify for the increased credit or deduction by satisfying correction and penalty provisions. The proposed regulations would provide that the obligation to make correction payments and pay the penalty would not become binding until the taxpayer files a return claiming the increased credit. The taxpayer generally would have to make correction payments to the underpaid workers before filing the return, and pay any penalty when the return is field.

In addition, the taxpayer would have to make the correction and penalty payments within 180 days after the IRS makes a final determination that a taxpayer failed to satisfy the Prevailing Wage Requirements, which would come in the form of a notice sent by the IRS. Although deficiency procedures would not apply to the penalty payment, deficiency procedures would apply to any IRS disallowance of the increased credit.

Taxpayers that cannot locate the underpaid workers are not excused from the correction requirements. The IRS expect that taxpayers will be able to establish correction payments by using existing state and tax withholding procedures. Taxpayers that underpay workers while waiting for a supplemental wage or additional classification determination would have 30 days after the determination to make correction payments. For purposes of credit transfers under Code Sec. 6418, the correction and penalty requirements would continue to apply to the eligible taxpayer, not the credit transferee.

For purposes of the increased correction and penalty amounts for intentional disregard of the PWA requirements, the proposed regs would provide that failures would be due to intentional disregard if they are knowing or willful, based on all relevant facts and circumstances. There would be a rebuttable presumption against intentional disregard if the taxpayer makes the correction and penalty payments before receiving a notice of an examination.

The proposed regs would provide limited penalty waivers when PWA failures are small in amount or occur in a limited number of pay periods. The penalty also would not apply with respect to a laborer or mechanic employed under a project labor agreement that meets certain requirements, if correction payments are made by the time the taxpayer claims the increased credit. The proposed regs would use the IRS’s general enforcement discretion to allow taxpayers to correct limited failures to pay prevailing wages if the taxpayers pay the mechanics and laborers back wages and interest in a timely manner before claiming the increased credit.

Apprenticeship Requirements

To satisfy the apprenticeship requirement, taxpayers must satisfy:

The proposed regs explain that the Labor Hours Requirement generally is subject to the Ratio Requirement, and the Participation Requirement applies in addition to those two requirements.

Failure to Satisfy Apprenticeship Requirements

The proposed regs provide addition guidance regarding the good faith effort exception to the apprenticeship requirements when a taxpayer’s request for a qualified apprentices is denied. The taxpayer may need to submit requests to multiple apprenticeship programs, and each request must include prescribed information. A taxpayer would have to submit a second request within 120 days of a first denial. The good faith exception would apply only to a particular denied request. A taxpayer that does not qualify for the good faith exception may be treated as satisfying the apprenticeship requirements by paying a penalty to the IRS. The proposed regs spell out how taxpayers determine correction amounts are determined.

Failures to meet the Apprenticeship Requirements would be due to intentional disregard if they are knowing or willful under all relevant facts and circumstances. The proposed regulations provide a non-exhaustive list of relevant facts and circumstances.

The proposed regulations would also provide the penalty payment requirement for failures to meet the Labor Hours or Participation Requirement would not apply if a project labor agreement that meets certain requirements is in place. In addition, there would be a rebuttable presumption against intentional disregard if the taxpayer makes the penalty payments before receiving a notice of an examination.

As with the prevailing wage requirements, the proposed regulations would provide that a penalty payment would remain the responsibility of the eligible taxpayer that transfers the increased credit under Code Sec. 6418. The obligation to meet the Apprenticeship Requirements would not be binding until the eligible taxpayer files its return for the year the credit is determined or, if earlier, the transferee taxpayer files its return taking the transferred credit into account.

Recordkeeping Requirements

The proposed regulations would require taxpayers to establish compliance with the Prevailing Wage Requirements at the time a return claiming the increased credit is filed. These requirements are generally consistent with the recordkeeping requirements under the DBA regime. Taxpayers would also have to maintain and preserve sufficient payroll records to establish compliance.

Similarly, the proposed regulations would require taxpayers subject to the Apprenticeship Requirements to maintain sufficient records to establish compliance with the Labor Hours, Ratio and Participation Requirements. It would be the responsibility of the taxpayer to maintain the relevant records for each apprentice engaged in the construction, alteration, or repair on the qualified facility, regardless of whether the apprentice is employed by the taxpayer, a contractor, or a subcontractor.

Finally, if an eligible taxpayer transfers any portion of a credit that includes the increased amount for satisfying the PWA requirements, these recordkeeping requirements would remain with an eligible taxpayer.

Effect on Other Documents

The provisions of sections 3 and 4 of Notice 2022-61 would be obsoleted for facilities, property, projects, or equipment the construction, or installation of which begins after the date these regulations are published as final.

Proposed Applicability Date

The regulations are proposed to apply to facilities, property, projects, or equipment placed in service in tax years ending after the date they are published as final, and the construction or installation of which begins after hat date. However, taxpayers may rely on the proposed regulations with respect to construction or installation of a facility, property, project, or equipment beginning on or after January 29, 2023, and on or before the date the regulations are published as final, provided that beginning after October 30, 2023, the taxpayer follows the proposed regulations in their entirety and in a consistent manner.

Comments Requested

The IRS requests comments on the proposed regs, and a public hearing is scheduled for November 21, 2023, at 10 am EST. Comments and requests to speak at the hearing must be received by October 30, 2023, and requests to attend the hearing must be received by November 17, 2023. Comments and requests may be mailed to the IRS, or they may be submitted electronically via the Federal eRulemaking Portal at https://www.regulations (indicate IRS and REG-100908-23).

The IRS has provided guidance on the income tax treatment of payments made by states in 2023 and later years. In IRS News Release 2023-23, February 10, 2023, the IRS clarified the federal tax status of special payments made by 21 states in 2022 that were mainly related to the COVID-19 pandemic, with varying terms in the types of payments, payment amounts, and eligibility rules.

The IRS has provided guidance on the income tax treatment of payments made by states in 2023 and later years. In IRS News Release 2023-23, February 10, 2023, the IRS clarified the federal tax status of special payments made by 21 states in 2022 that were mainly related to the COVID-19 pandemic, with varying terms in the types of payments, payment amounts, and eligibility rules.

State Tax Refunds

The exclusion of state income tax refunds is largely dependent on whether an individual itemized deductions and deducted the amount of state income tax paid. A state income tax refund will be excluded from an individual's gross income if the person claimed the standard deduction for the tax year in which the state income tax was paid. On the other hand, an individual who itemized deductions and deducted the amount of state income tax paid will include a state income tax refund to the extent that the individual received a federal income tax benefit from the prior federal income tax deduction.

A similar rule applies to state property tax refunds.

2022 Payments Covered by IR-2023-23

IR-2023-23 described some 2022 programs that intended to make payments in early 2023. To the extent an individual could exclude such a payment received in 2022 pursuant to the news release, an individual may exclude a state payment received in 2023 under a 2022 program from federal income tax.

General Welfare Payments

Payments that are made under a state program for the promotion of the general welfare are not includible in federal income tax. To be excluded as a payment for the general welfare, the payment must: (1) be made from a governmental fund; (2) be for the promotion of the general welfare, meaning based on individual or family need; and (3) not represent compensation for services.

Comments Requested

The IRS requests comments on the application of these rules and on specific aspects of state payment programs or additional situations where federal guidance would be helpful. Comments should be submitted on or before October 16, 2023. Comments may be mailed to the IRS or submitted electronically via the Federal eRulemaking Portal at https://www.regulations.gov.

National Taxpayer Advocate Erin Collins is calling on the Internal Revenue Service to alter how it deals with supervisory review of penalties.

National Taxpayer Advocate Erin Collins is calling on the Internal Revenue Service to alter how it deals with supervisory review of penalties.

"The IRS’s approach to supervisoryreview of penalties is heavy-handed and burdensome on taxpayers," Collins wrote in an August 29, 2023, blog post.

She noted that the while some penalties require supervisory approval before they can be assessed, the statue providing authority "is vague regarding the point at which this approval must occur," which has led to conflicting decisions in tax court about how they should be treated.

Collins noted that the IRS is currently working on the problem and has issued proposed regulations on the subject. A public hearing on this issue will be held on September 11, 2023.

"The proposed regulations succeeded in providing clarity, but it would be nice if they did so in a way that helps taxpayers rather than harming them."

According to Collins, the proposed regulations set up a process by which a supervisory approval can be obtained anytime before the statutory notice of deficiency is issued for pre-assessment penalties subject to Tax Court review. For those penalties not subject to pre-assessment Tax Court review, they can be approved up until the time of assessment itself.

"The IRS’s proposed approach is problematic because the ability to raise potential penalties with taxpayers in the absence of oversight could lend itself to the improper assertion of penalties," Collins wrote. "Practitioners and Congress expressed concerns that some IRS examiners may be tempted to propose a penalty with no real intention of actually imposing it. Rather, the penalty is put forth as a bargaining chip to be negotiated away as part of the case resolution process. The IRS is quick to point out that this practice is unauthorized and is strongly discouraged. Nevertheless, the structure perpetuated in the proposed regulations does nothing to protect taxpayers from potential abuse."

Collins stated that supervisory review "should occur before applicable penalties are communicated to the taxpayer in writing," adding that the proposed regulations "provide the IRS with an excellent chance to reconsider its approach to supervisoryreview. This is an opportunity that the IRS has so far declined to embrace, but there is still time. I urge the IRS to reexamine its policy and I request that Congress consider clarifying the law to protect taxpayers’ rights."

By Gregory Twachtman, Washington News Editor

Taxpayers, and the accounting and legal professionals who represent them, need to be prepared as the Internal Revenue Service has begun compliance work on those who own and trade in cryptocurrencies.

Taxpayers, and the accounting and legal professionals who represent them, need to be prepared as the Internal Revenue Service has begun compliance work on those who own and trade in cryptocurrencies.

"A CPA needs to advise their clients that the IRS is looking into this," Paul Miller, CPA and managing partner at Queens, N.Y.-based Miller and Company LLP, said in interview. He recalled that one of his clients was recently audited for his crypto transactions going all the way back to 2018.

Miller suggested that the tip off that the agency would be more closely examining taxpayers’ crypto transactions was the simple question added to Form 1040 asking whether the taxpayer engaged in any transactions.

He also suggested that the IRS could be showing some level of leniency for these early taxpayers who are getting their crypto transactions audited.

"The IRS was pretty reasonable with this man," Miller said. "He wasn’t assessed the fraud penalty. He wasn’t assessed the 25 percent penalty. He just had to amend three or four years of his tax returns for failing to report crypto."

Miller also pointed out that the IRS gave the taxpayer"the benefit of the doubt," recognizing both that he might night have thought about the tax ramifications of his crypto transactions as well as recognizing the fact that he was unable to recover transaction data from 2018.

To that end, Miller stressed that it is very important to keep accurate records and to not necessarily rely on transaction platforms for providing that information.

"If you use Coinbase, Coinbase is pretty good because they give you a 1099," he said, adding that other trading platforms might not provide that information. "Regardless, we tell all our of our clients to keep records, keep track of it" just like they would keep track of information about money in foreign bank accounts.

On the IRS side, Miller suggested that crypto compliance could be a part of the agency’s push to utilizing artificial intelligence as part of the compliance process, noting that with everything else on the agency’s plate, the IRS "literally doesn’t have the manpower." This could make AI a tool for crypto compliance.

Miller also recommended that CPAs be sure to include very specific questions on crypto in their engagement letters.

"It’s all about getting the client to take responsibility off of me and putting it on them," he said. "Because at the end of the day, I’m just preparing the tax return."

He stressed that it does not mean the goal of a CPA is not to give their clients the best advice.

"The goal is that you have a responsibility to pay your taxes," he said. "You have a responsibility to report the information, If you disagree or if you deviate from that, you have to deal with the consequences, not me."

By Gregory Twachtman, Washington News Editor

The U.S. Supreme Court has granted a petition for certiorari in the case of A. Bittner, CA-5, 2021-2 USTC ¶50,242 . In Bittner, the U.S. Court of Appeals for the Fifth Circuit held that each failure to report a qualifying foreign account on the annual Report of Foreign Bank and Financial Accounts (FBAR) constituted a separate reporting violation subject to penalty. This means that the penalty applies on a per-account basis, not a per-form basis. The Fifth Circuit disagreed with a Ninth Circuit panel that adopted a per-form interpretation ( J. Boyd, CA-9, 2021-1 USTC ¶50,112).

The U.S. Supreme Court has granted a petition for certiorari in the case of A. Bittner, CA-5, 2021-2 USTC ¶50,242 . In Bittner, the U.S. Court of Appeals for the Fifth Circuit held that each failure to report a qualifying foreign account on the annual Report of Foreign Bank and Financial Accounts (FBAR) constituted a separate reporting violation subject to penalty. This means that the penalty applies on a per-account basis, not a per-form basis. The Fifth Circuit disagreed with a Ninth Circuit panel that adopted a per-form interpretation ( J. Boyd, CA-9, 2021-1 USTC ¶50,112).

—

Background

U.S. citizens and residents must keep records and/or file reports when the person makes a transaction or maintains a relation for any person with a foreign financial agency ( 31 USC 5314). Each person with a financial interest in a financial account in a foreign country must report the relationship to the IRS for each year the relationship exists by providing specified information on and filing the FBAR. The FBAR generally must be filed by June 30 of each calendar year for foreign financial accounts over $10,000 maintained during the previous calendar year (31 C.F.R. §§1010.350, 1010.306).

If the person fails to file the FBAR, the IRS can impose a penalty of up to $10,000 for non-willful violations, unless the violation was due to reasonable cause. For a willful violation, the maximum penalty is the greater of $100,000 or 50 percent of (1) the amount of the transaction when a violation involves a transaction, or (2) the balance in the account at the time of the violation when a violation involves a failure to report the existence of an account. There is no reasonable cause exception for willful violations ( 31 USC 5321).

Fifth Circuit: FBAR Penalty Per Account

In A. Bittner, the Fifth Circuit ruled that the text, structure, history, and purpose of the relevant statutory and regulatory provisions showed that the "violation" of 31 USC 5314 contemplated by the 31 USC 5321 penalty was the failure to report a qualifying account, not the failure to file an FBAR. Therefore, the $10,000 penalty cap applied on a per-account basis, not a per-form basis.

The Fifth Circuit agreed with the government that the district court had erred in determining what constituted a "violation" under 31 USC 5314 by focusing on the regulations under section 5314 to the exclusion of section 5314 itself. Section 5314 does not create the obligation to file a single report, stated the Fifth Circuit, but instead gives the Treasury Secretary discretion to prescribe how to fulfill the statute’s requirement of reporting qualifying accounts.

The Fifth Circuit observed that by authorizing a penalty for any "violation of ... any provision of section 5314," as opposed to the regulations under section 5314, section 5314 "naturally reads" as referring to the statutory requirement to report each account, not the regulatory requirement to file FBARs in a particular manner. Further, the circuit court stated that the reasonable cause exception for non-willful violations was framed in terms of "the transaction" and "the account," and thus it also "naturally reads" as excusing the failure to report a transaction or account, not the failure to file an FBAR.

Ninth Circuit: FBAR Penalty Per Form

In J. Boyd, the Ninth Circuit ruled that the IRS can impose only one non-willful penalty when an untimely but accurate FBAR is filed, regardless of the number of foreign financial accounts. The Ninth Circuit determined that the statutory and regulatory scheme under 31 USC 5314 authorizes a single non-willful penalty for the failure to file a timely FBAR, and that the taxpayer’s conduct in failing to timely file the FBAR amounted to one non-willful violation.

The Ninth Circuit was not persuaded by the government's argument that, based on the statutory scheme as a whole and legislative intent, the penalty amount could be assessed on a per-account basis. The Ninth Circuit found nothing in the statute or regulations to suggest that the penalty could be calculated that way for a single failure to file a timely FBAR that is otherwise accurate. The Ninth Circuit presumed that Congress had purposely excluded the per-account language from the non-willful penalty provision because it had included such language in the previously-enacted willful penalty provision. Further, the inclusion of per-account language in the reasonable cause exception supported the view that Congress had intentionally omitted per-account language from the non-willful penalty provision.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Nearly one-third of all new vehicles (and up to 75% of all new luxury cars) are leased rather than purchased. But the decision to lease or buy must ultimately be made on an individual level, taking into consideration each person's facts and circumstances.

Buying

Advantages.

• You own the car at the end of the loan term.
• Lower insurance premiums.
• No mileage limitations.

Disadvantages.

• Higher upfront costs.
• Higher monthly payments.
• Buyer bears risk of future value decrease.

Leasing

Advantages.

• Lower upfront costs.
• Lower monthly payments.
• Lessor assumes risk of future value decrease.
• Greater purchasing power.
• Potential additional income tax benefits.
• Ease of disposition.

Disadvantages.

• You do not own the car at the end of the lease term, although you may have the option to purchase at that time.
• Higher insurance premiums.
• Potential early lease termination charges.
• Possible additional costs for abnormal wear & tear (determined by lessor).
• Extra charges for mileage in excess of mileage specified in your lease contract.

Before you make the decision whether to lease or buy your next vehicle, it makes sense to ask yourself the following questions:

How long do I plan to keep the vehicle? If you want to keep the car or truck longer than the term of the lease, you may be better off purchasing the vehicle as purchase contracts usually result in a lower overall cost of ownership.

How much am I going to drive the vehicle? If you are an outside salesperson and you drive 30,000 miles per year, any benefits you may have gained upfront by leasing will surely be lost in the end to excess mileage charges. Most lease contracts include mileage of between 12,000-15,000 per year - any miles driven in excess of the limit are subject to some pretty hefty charges.

How expensive of a vehicle do I want? If you can really only afford monthly payments on a Honda Civic but you've got your eye on a Lexus, you may want to consider leasing. Leasing usually results in lower upfront fees in the form of lower down payments and deferred sales tax, in addition to lower monthly payments. This combination can make it easier for you to get into the car of your dreams.

If you have any questions about the tax ramifications regarding buying vs. leasing an automobile or would like some additional information when making your decision, please contact the office.