My colleagues at the National Society of Accountants for Cooperatives are offering a 75-minute webinar on Tuesday, August 23 to discuss the requirements and pitfalls in claiming Employee Retention Credits (ERC). The cost is free to members and $56 to non-members.
The ERC has been in the news quite a bit lately due to aggressive tactics by non-CPA firms claiming to be able to apply for these credits on behalf of business owners. (We’ll have an upcoming blog covering that topic.) However, the rules regarding whether or not a business qualifies are complex, and best performed by a knowledgeable professional.
During this webinar, the panelists will provide an overview of the Employee Retention Credit (ERC) and how to qualify for ERC including:
• Partial and full shutdowns as they apply to the ERC • What constitutes “gross receipts” • Safe Harbors • Rules for Large Employers • Unsettled matters and how the IRS is examining ERC claims
Participants are encouraged to submit questions in advance at info@nsacoop.org and during the session.
If you are an accountant or bookkeeper calculating these credits for your clients, or a business owner considering a DIY approach, please make sure you are thorough about obtaining education and resources before submitting anything to the IRS. You can expect their enforcement division to ramp up audits in the next few years.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
(c) Matthew G. Bisanz, CC BY-SA 3.0 via Wikimedia Commons
After Forbes reported in early July that starting a month earlier, tax professionals had noticed a higher-than-usual volume of CP-14 notices — the type typically issued when a taxpayer has a balance due on their account — the IRS has finally admitted that this is a systemic issue.
In a statement issued last week, the IRS indicated that no immediate action or phone call is needed: Taxpayers who receive a notice but paid the tax they owed in full and on-time (electronically or by check) should not respond to the notice.
However, many taxpayers are scared and confused by letters such as this — and they may not know how to determine whether they did in fact pay their taxes on-time. Maybe the check was lost in the mail; maybe they selected the wrong period or type of payment when using the IRS Direct Pay system; maybe they reported their estimated tax payments inaccurately. Unfortunately, because tax issues can be terrifying, it’s not uncommon to presume the IRS is correct and pay any balance due on a notice.
Never fear — there are solutions. The IRS online transcript service has undergone improvements in the past few years that make it relatively painless to obtain a PDF of all payment and return activity on your account. In fact, due to the number and complexity of governmental aid such as stimulus checks and the advance child tax credit, our CPA firm requires clients to obtain a transcript before we will finalize their return preparation (I’ve written up instructions here). And the IRS Online Account Center also lists other types of useful information taxpayers can access.
But… this all begs the important question: why did this happen?
According to Amber Gray-Fenner at Forbes, “In early June tax professionals on social media started reporting problems with electronic payments made by the taxpayer listed as the spouse on jointly filed returns. Specifically, CP-14 notices were being issued for accounts where an electronic payment was made by a spouse using IRS Direct Pay and the payment was not applied to the balance due on the jointly filed return.”
Accounting Today reported that, “In general, when certain payments are processed, programming does not move the payment to the married filing jointly account when the payment is:
Not electronic and is made by the secondary spouse.
Electronic, is made by the secondary spouse, and posts before the joint return indicator is present to identify the primary taxpayer.
Made by the secondary spouse using the Online Account ‘Make a Payment’ functionality.”
While this does line up with most of the issues tax professionals and their clients are seeing with these CP-14 balance due notices, it doesn’t jibe with our experience in past years. Spouses with separate tax payments have been filing jointly for many years, and the IRS Direct Pay system is not new — yet the number of these erroneous notices is far higher than in previous seasons.
Some tax professionals who have called the IRS’ Practitioner Priority Line (PPL) on behalf of their clients have been told by some IRS representatives that “there is no way of knowing” that the payment is for the jointly filed return and not some other tax debt that is attached to the spouse’s social security number. This is, quite simply, not correct. When making a payment using Direct Pay taxpayers must specify a reason for the payment (balance due, estimated payment, etc.), the tax form to which the payment applies (Form 1040, etc.) and the tax year to which the payment applies.
Screenshot of IRS Direct Pay list of Reasons, by Nancy McClelland, August 2, 2022
If the spouse of a taxpayer makes a Direct Pay payment for a balance due on a Form 1040 for a year that they filed jointly with their spouse (the primary taxpayer on the jointly filed return) there is really no reason that payment should not be automatically and correctly applied.
However, this is what the IRS currently maintains is the source of the problem. Complicating matters, the second bullet above — the one that references the “joint return indicator” — is specifically referring to taxpayers who e-filed and paid on the same day, and the payment was made by the second partner on the return. In this case, if the payment was made and posted to the IRS system before the return was electronically accepted and posted, it sounds like the IRS computers didn’t know that the balance due payment was related to the jointly filed return.
Now that the overburdened and understaffed agency recognizes that this is a systemic issue — after thousands of tax professionals reported it to the IRS Systemic Advocacy Management System (SAMS) — hopefully they will be able to rectify it soon (automatically removing the associated penalties and interest)… and more importantly, prevent it from causing problems next year. The AICPA has mentioned numerous times on their regular Town Hall series that erroneous notices just compound the problems at the IRS. They aren’t just stress-inducing for the client and irritating for their CPAs — they actually further gum up the works at an already struggling government agency. The IRS has as a result, put a temporary hold on certain types of automated notices, but the CP-14 is unfortunately not on the list.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
On June 27th I woke to find dozens of notifications from MyTax Illinois in my email inbox — one for each and every client of ours who files sales taxes.
Just in case you got one or more of these yourself and haven’t logged in to check it out yet, here’s what it looks like —
It doesn’t give you much to go on — just a sort of “hey we saw you’re registered to file sales taxes, so you should read these four bulletins which may or may not apply and you’re unlikely to understand anyway” note.
But, if you dig through the bulletins you’ll find two in particular that could be important to a small business owner. One of them I covered in a recent blog post — Illinois Grocery Sales Tax Reduced by 1% For The Next 12 Months — it’s only likely to apply if you sell groceries that qualify for the low-tax food rate.
If you want to skip my rant and go to the section on what a small business owner should do next, scroll down to the next line in bold.
While I’m super-supportive about giving working families a break on prices — this is a terrible way to do it! It costs small businesses more in accounting and bookkeeping work than it could possibly save anyone.
It requires a small business owner — already overworked and without sufficient staff, and having in most cases barely survived the pandemic and still scraping to get by — to paw through every item in their Point of Sale system and change sales tax on an item-by-item basis. It’s hard enough to change sales tax amounts on a department-by-department basis… but item-by-item? Honestly, it will cost them so much more to figure this out than anyone will ever save on this “holiday”. And worse are the folks who don’t keep inventory in an automated system. They are stabbing in the dark and have no way to implement it at all. I just have to hope they don’t get audited by IDOR.
To make matters worse, the guidance says that the retail selling price per clothing item must be less than $125, and that supplies must be used by students in the course of study, in order to qualify. It’s simply impossible to program any Point of Sale system to create a sales tax discount on certain dollar-amounts of products and not others, or to change the sales tax rate on an individual item for some sales but not others (i.e., only after finding out that it will be used in the course of study at school). If small business owners are going to be able to comply with any of these rules, it will have to apply to all sales of a certain product — not just some sales.
This type of well-intentioned law — like the bag tax, carbonated beverage tax, and ill-fated sweetened beverage tax — has my full support from a social perspective. But they are so poorly-worded, difficult-to-enact, and misguided, that no small business could ever properly implement any of them cost-effectively.
This is just like that. Well-intentioned but completely out of touch and indicative that our representatives don’t have a clue what’s going on “on the ground”.
I received a hilarious text from a client when she read the IDOR notice:
Texts from a client when she read the IDOR notice.
As an aside, I wrote my state rep and begged him not to support this kind of thing in the future, and to work with other elected officials to find more reasonable, sustainable ways to provide relief to hard-working families, without crushing small business owners along the way. His response was truly wonderful, and he apologized profusely for not involving stakeholders in the last-minute rush to get it passed.
“Looks like we really did a terrible job here. You’re absolutely right that this was an example of government decision making at its worst. I think in the abstract these are largely good ideas, but looking at that guidance, it’s clear that implementation is going to be a nightmare. You have my word that I’ll try to do a better job of asking questions like “yes but is this feasible?” or “how much of an administrative burden is it placing on our small business owners?” when we’re contemplating things like this in the future.”
What does this mean for you, the small business owner? What are your next steps?
Follow these steps, in order, to determine what actions to take:
Step 1 – Check this list to see if you sell any products on it:
The great news is, that if you don’t sell any of these products, then you do not need to make any changes or do any extra work. However, I’d recommend rehearsing the phrase, “the sales tax holiday is only for back-to-school clothing and supplies, and as we don’t sell any items that would qualify, we aren’t able to offer you the 5% sales tax discount.” Because for sure there are going to be people who think that anything they buy during the 10-day period will be at a lower sales tax rate.
If you do sell products on the list above, then move on to the next step.
Step 2 – Identify all the products you sell that are on the list above. If any of the clothing items are priced at $125 or more, cross them off. Then make sure none of the remaining products you just identified are on this list of non-qualifying items:
Step 3 – Look at the items that made it onto your “qualified” list, and ask yourself who your clients generally are that buy these items — are they likely to be used for school? If the answer is definitely no, then again — no worries. You do not need to make any changes or do any additional work. (Except rehearsing that phrase from above and teaching it to your staff.)
However, if the answer is maybe or likely, then we’ve got some work to do.
Step 4 – If the answer is maybe, then you have to decide whether it’s worth your effort to go through your Point of Sale system and change the tax rate on each product that qualifies (and then change it back 10 days later) — or if you don’t have a POS system, if it’s worth it to figure out how to manually change the tax rate on each sale of one of these items, and to track how many were sold during the period of Aug 5-14. Because an alternative might be to just leave everything at the higher sales tax rate unless a customer specifically states that they are buying it for school use (you could even ask each customer who buys one of these items during that period if it’s for school use or not) — and then just give them a discount and write down the sale somewhere so that later on when you file your ST-1, you know how much to enter onto the Schedule GT so you get your money credited back to you — yes, I know that this means your cash drawer and your Sales Tax Payable accounts will be off. You can just have your accountant book an adjustment after the correct amount of tax is paid to the state. Or, in all honesty, you could even give them the discount out of the business’ own pocket and it would still be cheaper than reassigning tax rates in your POS system.
Step 5 – On the other hand, if the answer is likely, then you need to:
Create a new tax rate in your POS system called “holiday rate” that is 5 points lower than the current sales tax rate (in Chicago, 10.25% — so the new rate will be 5.25%). Hopefully your system allows enough rate slots to accommodate this. If not, maybe consider the approach outlined in Step 4.
After close of business on August 4th, assign that new rate to all the items that qualify.
Make a note to reassign the old rate to all those items after the close of business on August 14th.
Be sure you can run a report of all the items that sold at this rate, since you’ll need to declare that total on a separate tax form (Schedule GT) when you prepare your monthly sales tax return (ST-1).
If you do not have inventory or non-inventory sales-taxable items stored in your POS system — or if you have a cash register instead of a POS — then you’ll need to look at how you charge sales taxes to each item and come up with a plan that mimics the approach I just outlined. For example, if your system allows you to manually edit the sales tax rate on a sale-by-sale basis, you could keep a list of all the qualifying items by the register, and simply adjust for each qualifying sale. The problem is that only some of the items get the discounted rate, so if this is how your system works, you’d have to run a separate sale for all the qualifying items and then one for the non-qualifying items. You also will need to keep a list of all the sales made at the lower rate, since as mentioned above, you’ll have to note those on a separate schedule when you prepare your sales tax return. And if your system doesn’t allow you to manually edit the sales tax rate, you’ll have to take the approach I mentioned earlier, whereby you just give the customer a discount and adjust the inaccurate books later, hoping it all comes out in the wash.
Step 6 – Once the time comes to file your monthly (or quarterly) ST-1 sales tax return, you’ll notice there is an additional form– Schedule GT, Sales and Use Tax Holiday and Grocery Tax Suspension Schedule. This was created for retailers to report sales of qualifying items sold during the sales tax holiday. Per IDOR:
Form ST-1 has not changed. Retailers should continue to report their normal taxable sales, including sales of qualifying items, on Lines 4a and 4b, Lines 6a and 6b, or Lines 12a and 12b, of Form ST-1 and will then use Lines 2a and 2b, Lines 3a and 3b, or Lines 4a and 4b on Schedule GT to calculate a credit against the tax reported on those lines for the tax they are not collecting during the state sales tax holiday.
So you’ll report the sales of these items, on which you charged the lower tax amount, on Schedule GT and it will flow onto your ST-1 as a credit so that you’re not remitting more to the IDOR than you collected.
Whichever approach you take, make sure to rehearse the phrase, “the sales tax holiday is only for back-to-school clothing and supplies, and as we don’t sell any items that would qualify, we aren’t able to offer you the 5% sales tax discount.” Lots of folks read the headlines, but not the small print.
Hopefully this was all clearer to read than it felt to write it! And please make sure your state representative knows how you feel about having had to think about it in the first place. Small businesses have enough to deal with these days!
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Effective July 1, the IRS standard mileage rate — the amount that can be deducted per-mile in lieu of reporting actual costs — is increasing by 4-cents, to $0.65/mile, per Annoucement 2022-13.
The adjustment is being made in recognition of recent increases in the cost of gasoline. Normally, the adjustment is made annually, but in special cases such as this, the IRS Commissioner will make an exception.
Not only is this amount the official deductible amount when the optional standard method is used, but many businesses, and the federal government, also use it as the reimbursement rate for employee travel and transportation.
If you use a mileage-tracking template, make sure to update the per-mile multiplier. Most programs like Mile IQ do not track actual costs — they simply report the number based on a report’s date range, and the taxpayer or their CPA will do the math on the tax return. In 2011, the last time this happened, the IRS had a field for the number of miles driven Jan 1-June 30 and a separate field for those from July 1-Dec 31 — which is likely to be the case this year as well.
The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
A short article in today’s Accounting Today newsletter (which I highly-recommend) included an extremely helpful snippet that I want to make sure to spread far-and-wide.
For those waiting on their 2020 tax return to be processed, enter $0 (zero dollars) for last year’s AGI on the 2021 tax return.
For those who used a non-filer tool in 2021 to register for an advance Child Tax Credit or third Economic Impact Payment in 2021, enter $1 (one dollar) as the prior-year AGI.
All others should enter the prior year’s AGI from last year’s return. Tax preparation software that was used last year will auto-populate this field.
And my personal suggestion to add to this list — make sure to get a transcript before trying these, since there is some possibility that your tax return has already been processed and you are unaware of it, or that the answers you’re looking for will show up on a wage and income transcript (stimulus and child tax credit payments, as well as estimated tax payments, for example).
Hopefully these tips will help expedite your tax return filing and processing — but as the article points out, “significant backlogs, lack of adequate staffing, difficulty reaching tax authority agents by phone and pandemic-related IRS and state and local office closures” are making this tax season particularly challenging one for tax professionals and taxpayers.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
I often write and speak about my experiences as a co-op accountant, and how challenging it was to become an expert in the field with so few resources. Things have changed a lot since back then, with the National Society of Accountants for Co-ops (NSAC), National Cooperative Business Association (NCBA), and the Co-op Professionals Guild (CPG) all offering online education.
The NSAC line-up for the next few months is seriously powerhouse. For anyone in the field or looking to get into it, I strongly recommend a membership, which gets you into all of these webinars below at no extra charge. That said, if you only want to know the specifics of one topic or another, they are affordably priced at $56 each for non-members.
Note: I am not paid or given a discount to promote NSAC — I just think they’re great!
Behavioral Ethics March 9, 2022 | 11:00 AM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour As we continue to be challenged by an increasingly complex business environment, it is important to develop ethical reasoning skills that allow us to put ethical decision-making into practice. In this session, attendees will discover how to identify ethical paradigms and learn how stakeholders are impacted by their ethical choices. Additionally, participants will explore real-life cases that will allow them to rehearse ethical practices. Be prepared for any ethical dilemma and register now! Click for more info.
Agricultural Economic Outlook April 5, 2022 | 11:00 AM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour Want to know more about current and expected market conditions affecting agricultural co-ops? This CLN will address the core issues impacting the macroeconomy, agricultural commodity markets, and the agricultural economy with particular focus on the effects of COVID-19 and inflation. Attendees will get an outlook on the agricultural commodity markets; including corn, wheat, soybeans, rice, cotton, hay, cattle, hogs, and dairy, as well as the impact of rising production costs. Gain valuable insight into current market conditions by registering today!Click here for more info.
Financial Ratios for Agricultural Co-ops April 20, 2022 | 11:00 AM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour Designed specifically for Agricultural Co-ops, this session will explore how to analyze company performance based on an evaluation of financial statements, and introduce ratios used in the financial analysis of cooperatively structured organizations. Learn what to look for when comparing a company to its peers and industry norms, and how to analyze company performance compared to strategic business objectives. Take advantage of this revealing CLN today! Click here for more info.
Financial Ratios for Electric Co-ops April 20, 2022 | 2:00 PM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour Designed specifically for Electric Co-ops, this session will explore how to analyze company performance based on an evaluation of financial statements, and introduce ratios used in the financial analysis of cooperatively structured organizations. Learn what to look for when comparing a company to its peers and industry norms, and how to analyze company performance compared to strategic business objectives. Don’t miss out on this engaging session! Click here for more info.
Tax Update April 28, 2022 | 11:00 AM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour This session will bring attendees the latest and up-to-date tax law changes and new tax return reporting items. Additionally, the CLN will explore any anticipated future tax law changes. Some of the topics that will be covered include: Meals and Entertainment, 163(j) Interest Expense Limitation, Net Operating Losses, R&D Tax Credit Update, and State Taxes Post Wayfair. Stay informed about the latest developments that are most likely to affect your organization with this 60-minute zoom! Click here for more info.
Processing of Work Orders for Electric Co-ops May 5, 2022 | 2:00 PM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour In this CLN, participants will review the accounting process for construction and retirement of utility plant from the work order stage to unitization. This will include the audit perspective of this process, along with industry trends and common mistakes to avoid. Sign up today for this exclusive guidebook to processing work orders!Click here for more info.
Navigating New FASB Guidance: Your 2022 Guide May 12, 2022 | 2:00 PM EST FREE NSAC Members | $56 Non-Members CPE: 1 Credit Hour Join us for an informative overview of new FASB standards that could impact your organization. This session will explore recent developments in the financial accounting standards relevant to cooperatives. Guest speakers Randy Throener and Amy Schreck will discuss the latest FASB guidance so attendees can successfully implement these recent amendments. Take advantage of this educational CLN!Click here for more info.
How Electricity and Demand Really Work & How it Impacts Rates May 19, 2022 | 11:00 AM EST FREE NSAC Members | $56 Non-Members CPE:1 Credit Hour As cooperatives consider moving from traditional to more innovative rate design structures, it is increasingly important to understand the different billing units required for each innovative design. Three-part, Four-part, Time-of-use, Critical peak, Super off-peak, and other innovative rate designs require an understanding of and access to a range of billing units. These include Non-coincident demands, Coincident demands, Time-based energy usage, KVar, and more. In this encore session from TFACC 2021, attendees will learn some of the billing units required for innovative rate designs, and explore some of the challenges involved in obtaining, using, and explaining them to members. Don’t miss out on this specialized presentation! Click here for more info.
This Journal of Accountancy article walks through the particular scenario where this relief — only for tax year 2021 — applies. They note that:
The relief announced Wednesday applies where:
In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts.
In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign-source income (see Regs. Sec. 1.861-9(g)(3)).
In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders, nor did the partners or shareholders request, the information on the form or its attachments regarding:
Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
Line 20c, Form 1065, Schedules K and K-1 (controlled foreign corporations, passive foreign investment companies, 1120-F, Sec. 250, Sec. 864(c)(8), Sec. 721(c) partnerships, and Sec. 7874) (line 17d for Form 1120-S).
The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.
To learn more, I recommend this excellent Compass Tax Free 10-Minute Webinar update from 2/17/22 on the new FAQ relief for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA.
(Our original blog post is below, for context and reference.)
K-2 Mountain (courtesy of Wikimedia Commons)
Yes, that photo is of K-2, the second-highest mountain on Earth, where apparently one person dies on the mountain for every four that reach the summit. (Didn’t expect that to show up in my search for a common-usage-right image of an IRS K-2 form.)
The good news is that — as frustrating and arduous as this new IRS K-2 and K-3 reporting requirement is — no one is likely to die while attempting to complete it, and therefore I think we should just all keep this extremely challenging K-2 mountain in mind before we get too frustrated about additional complexities in tax preparation.
In all seriousness, here’s the story: 1) The IRS, in an attempt to deter fraud, for 2021 began requiring all pass-through entities to disclose foreign transactions as part of the tax returns and the K-1 package to shareholders and partners. 2) Initially, the new schedules were only to be used by entities with international transactions to report. 3) In mid-January, the IRS issued revised instructions for the schedules that may require domestic partnerships and S corporations without any foreign source income or assets to prepare Schedules K-2 and K-3. 4) If even one of the partners or shareholders plans to or is required to report foreign tax credits on Form 1116, Foreign Tax Credit, the Partnership or S-Corp must prepare Schedules K-2 and K-3. 5) As a result, the complex and comprehensive “reporting requirement applies to a much larger percentage of pass-through-entity (PTE) returns than perhaps the IRS intended”, as Forbes pointed out.
“This seems like an overly burdensome requirement to quietly clarify in the middle of filing season.” – Tom Gorczynski, EA
All is not lost. Yes, we’re talking about well-over 20 additional pages of tax forms — but it’s likely that you won’t have to fill them all out. An exception from filing Part II and Part III, Section 2, on Schedule K-3 may apply for a pass-through-entity that:
only has US-source income;
does not have income or deductions that the partners can source or allocate and apportion; and
only has limited partners owning less than 10% of the capital and profits of the partnership at all times during the tax year.
(Though the IRS clarified that a business with no foreign-source income must still file Part II (foreign tax credit limitation) and Part III (information for preparing Forms 1116 or 1118) on Schedules K-2 and K-3 if their partners have items of international tax relevance.)
From the NATP Blog: “For preparers who are handling the returns of both the partnership and the partner, the partner can choose alternatives to filing Form 1116 and triggering the Schedules K-2 and K-3 filing requirements if one of the following applies:
The partner neither paid nor accrued any foreign taxes and there was no foreign tax credit carryover for the tax year;
The foreign tax paid was under the $300 individual reporting threshold ($600 for married filing jointly) for Form 1116, or an election is made under Section 904(j) of the Tax Code to report the credit without the form;
Schedule A is used to report a deduction for foreign taxes (which also avoids the $10,000 SALT cap).
“Preparers who are not completing returns for the partner reporting foreign tax payments will need to ask the partners/shareholders directly for their information. If they fail to respond to the request, the preparer will at least have made a documented, good-faith effort to obtain the required information and should be eligible for the good-faith relief outlined in Notice 2021-39.”
Therefore, for preparers who have to file Schedules K-2 or K-3, there are three options. – One is to extend the returns, as e-filing is not available until after the current due date of both the S corporation and partnership returns. – Another option is to paper-file the return, which will cause delays in processing. – The third option (what we will likely do for those returns we cannot reasonably extend) is to prepare the K-2/K-3 forms and attach them to e-filed S-Corp and Partnership returns as a PDF. Generally the IRS is not great about referring to these attachments, and some tax software programs have problems delivering them; but at least it will show a good-faith attempt in the case of an audit.
Per Amber Gray-Fenner in Forbes, “These alternatives, while prudent, present some potentially serious unintended consequences:
The IRS may be inundated with PDF attachments that it is not prepared to process and review. PDF attachments are often separated from original returns never to be seen again—at least not until the taxpayer receives a notice looking for the “missing” information.
Many more PTE returns may be put on extension than would normally be the case.
Extended PTE returns mean extended 1040s, which is unsatisfactory to many taxpayers and tax professionals.”
In that same article, my colleague Fred Stein hopes “Occam’s Razor ‘kicks in and IRS realizes the unintended consequences this creates for many small businesses.’ If not, the additional work involved could cause PTE return preparation prices to increase by thirty to fifty percent.”
A summary from last week’s AICPA Town Hall:
We will be reaching out to all our S-Corp and Partnership clients to let them know about these new rules, and to ask that they obtain signed confirmation from each of their owners as to any personal requirement to file Form 1116 or another foreign-related tax form on the 1040 returns.
As you may have guessed, this unexpected new guidance will cause additional time, effort, and cost to all our small business S-Corps and Partnerships — almost none of whom actually have any foreign transaction exposure. After all the requests we’ve made of the IRS to reduce the tax preparation burden on small business owners and their CPAs, I wish I could say this is laughable.
In case that wasn’t enough for you, we’ve compiled a rich list of resources for your reading and watching enjoyment.
Compass Tax Resources: • 2/10/22 Free 15-Minute Webinar – discussion on the new requirements for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA Compass Tax Resources: • 2/17/22 Free 10-Minute Webinar – update on the new FAQ relief for partnerships and S corporations with Thomas Gorczynski, EA USTCP, and Kevin J. Todd, EA, CPA
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
They were effective in getting a bi-partisan group of nearly 200 members of Congress to send a letter to the US Treasury Secretary requesting the IRS implement the following:
Halt automated collections from now until at least 90 days after April 18, 2022;
Delay the collection process for filers until any active and pending penalty abatement requests have been processed;
Streamline the reasonable cause penalty abatement process for taxpayers impacted by the COVID-19 pandemic without the need for written correspondence;
Provide targeted tax penalty relief for taxpayers who paid at least 70 percent of the tax due for the 2020 and 2021 tax year; and
Expedite processing of amended returns and provide TAS and congressional caseworkers with timely responses.”
The IRS identified the suspended letters and notices as:
CP80, notice of an unfiled tax return. The IRS sends this when it has credited payments or other credits to the taxpayer’s account but has not received a tax return for the tax period.
CP59, unfiled tax return, first notice. The IRS sends this when it has no record of a prior-year return’s having been filed. The Spanish-language version, CP759, is included.
CP516, unfiled tax return, second notice. This is a request for information on a delinquent return for which there is no record of filing. The Spanish-language version, CP616, is included.
CP518, final notice — return delinquency. The Spanish-language version, CP618, is included.
CP501, balance due, first notice. This letter is a reminder of an outstanding balance on the taxpayer’s accounts.
CP503, balance due, second notice.
CP504 balance due, third and final notice. This also is a notice of intent to levy.
2802C, withholding compliance letter. This letter notifies taxpayers whom the IRS has identified as having underwithheld taxes from their wages, with instructions on correcting their withholding amount.
CP259, business return delinquency. The IRS has no record of a prior-year return’s having been filed. The Spanish-language version, CP959, is included.
CP518, final notice of a business return delinquency. The Spanish-language version, CP618, is included.
Per the Journal of Accountancy: “How long the letters and notices will be suspended or at what point the backlog can be considered sufficiently cleared to resume them remains unclear. The news release Feb. 9 said the IRS “will continue to assess the inventory of prior year returns to determine the appropriate time” to start sending them again. And there has been no mention of relieving taxpayers from their obligation to file returns or pay taxes that are the subject of the letters and notices, if those returns and taxes are indeed unfiled and unpaid.”
While this is a welcome step, it falls seriously short of what is needed.
A key takeaway: “What we’re trying to do with these recommendations is to lessen the need to reach out to the IRS. In theory, if we’re having to call the IRS less then the IRS will be able to get to people who have other types of problems and get those problems resolved.”
In testimony before the House Ways and Means Committee on Tuesday, National Taxpayer Advocate Erin Collins noted that as of late December, the IRS had a backlog of 6 million unprocessed individual returns and 2.3 million unprocessed amended individual returns. In addition, more than 2 million Forms 941, Employer’s Quarterly Federal Tax Return, and its amended version remained unprocessed. Many of the latter included claims of the employer retention credit emergency pandemic relief provision.
But all this isn’t enough — they need to hear actual stories from real taxpayers about what you’ve gone through. If you had a challenge with the IRS in the past couple years, and especially if you have an ongoing issue, please contact your Senators and Representatives to tell your personal story. This generally moves them to action, and what we need now is continued and increased pressure on the IRS to make short-term immediate changes that will affect the here-and-now of this tax season.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Heads-up: this article is outdated and a new one serves to replace it; please check it out!
Last year we began requiring all clients to submit a copy of their IRS Account Transcript along with their Tax Organizer and other annual tax prep documentation.
The initial issue was that not everyone kept the Form 1444 notices regarding how much stimulus was received. Why would this matter? If a taxpayer did not receive the full amount, then they are entitled to recoup the difference on their annual tax return. (But don’t worry: if you received too much, you don’t have to pay it back — unless it was obtained fraudulently.) Not only does this issue remain for 2021, but the problem is exacerbated, because now we also have child tax credit payments to track — some folks received advances while others decided to opt out (and unlike stimulus payments, any excess child tax credit payments may have to be repaid).
In addition, we’ve also noticed quarterly estimated taxes are often reported incorrectly by clients — especially with additional complexities due to recent state legislation to get around federal limits on deducting state taxes.
We’ve come to the conclusion that the best solution to these concerns is to continue to ask clients to download their annual Account Transcript and provide it to us via secure upload. It’s free, reasonably easy, and reliable.
Instructions for obtaining the Account Transcript for folks who have already registered for an IRS online account follow — if you did this last year, you don’t need to follow all the steps in last year’s post about how to create an account. Just sign in to the system and you should be golden.
(Yes, the IRS will ask you to create a new ID.me account “as soon as possible” and you won’t be able to log in with your existing IRS username and password starting in summer 2022. But for now, no need to create a new account in the new system — the old one works just fine.)
You’ll need to select the reason you need a transcript.
In this case, you would select “Other”.
4. Leave the Customer File Number blank and click “Go”.
5. The screen will display all four types of transcript options and the available years.
6. Select “2021” under “Account Transcript” (the box in the lower-left).
Make sure you are selecting the right kind of transcript — in this case you want an Account Transcript. (Click here for information on what each of the types of transcripts are.)
And like magic, a pdf pops up in a new tab of your browser with a letter from the IRS — and if you scroll down to the bottom, there’s section detailing all the transactions you need.
At this point, print the file to pdf and save somewhere safe, along with the rest of your tax season documents.
What about state information?
To get a list of the estimated tax payments you’ve made to the state of Illinois, go to https://mytax.illinois.gov/?link=1040EPy and enter your SSN, Name, and the year (in this case 2021).
If you also made payments from a corporation or partnership, you’ll need to log into your MyTaxIllinois business account to get those.
Done! Let the tax return preparing begin!
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
In an already unprecedented year, the IRS is taking an unprecedented approach toward managing taxpayer expectations, and with good reason: with tax season officially beginning this coming January 24th, the IRS is dealing with a severe lack of staffing — facing workforce headcounts at 1970s levels — and a backlog of tax returns from the past two years. They say to expect frustration this tax season.
The IRS has been dealing with budget shortages for many years now, and Covid forced their mailrooms to close down for months at a time, creating a massive backlog from which they have not yet recovered. Add to that the unbelievable number of new demands placed upon the agency: three rounds of stimulus payments, Employee Retention Credits for both 2020 and 2021, and demands for guidance in an unbelievable number of groundbreaking areas of code… it is certainly understandable that they would not be able to meet taxpayer needs.
So what can taxpayers do to avoid additional problems? Filing electronically with direct deposit, and avoiding a paper tax return — at almost any cost — is more important than ever this year. Additionally, those who received an Economic Impact Payment or an advance Child Tax Credit last year should be especially careful to order an IRS transcript ahead-of-time to confirm these amounts before filing a return. (We are requiring all clients to submit both federal and state transcripts this year, in their own interest.)
Also, keep in mind that by law, the IRS cannot issue a refund involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February, though eligible people may file their returns beginning on January 24. The law provides this additional time to help the IRS stop fraudulent refunds from being issued.
Due to the Emancipation Day holiday falling on Friday, April 15th, the filing deadline to submit 2021 tax returns or an extension to file is Monday, April 18, 2022. Taxpayers requesting an extension will have until Monday, Oct. 17, 2022, to file (but not an extension to pay; make sure to pay an estimate of tax with your extension).
The American Institute of CPA’s VP of Tax, Ed Karl, has repeatedly shared in AICPA Town Halls and articles that the IRS Commissioner himself testified that during busy season the IRS gets 1500 calls per second — this translates into their only being able to answer 2% of calls. “No, that is not a typo.” The AICPA strongly supports penalty relief measures that are fair, reasonable and practical, and would mitigate the negative effect of the coronavirus on taxpayers and require less contact with the IRS. Such an approach would alleviate the daily struggles that taxpayers, their advisers and the IRS face. Specifically, the AICPA urges Treasury and the IRS to:
Stop compliance actions until the IRS is prepared to devote the necessary resources for a proper and timely resolution of erroneous notices, missing refunds and other matters. At a minimum, stop automatic collections at least for 90 days after the filing deadline.
Align requests for account holds with the time it takes the IRS to process any penalty abatement requests.
Provide taxpayers with targeted relief from underpayment of estimated tax penalty and the late payment penalty.
Offer a COVID-19 reasonable cause relief, similar to the procedures of first-time abatement and generally facilitate the easier adoption of reasonable cause relief.
In the meantime, here are several important dates from Tax Practice Advisor that taxpayers should keep in mind for this year’s filing season:
January 14: IRS Free File opens. Taxpayers can begin filing returns through IRS Free File partners; tax returns will be transmitted to the IRS starting January 24. Many tax software companies also are accepting tax filings in advance.
January 18: Due date for tax year 2021 fourth-quarter estimated tax payments.
January 24: IRS begins 2022 tax season. Individual 2021 tax returns begin being accepted and processing begins.
January 28: Earned Income Tax Credit Awareness Day to raise awareness of valuable tax credits available to many people – including the option to use prior-year income to qualify.
April 18: Due date to file 2021 tax return or request extension and pay tax owed.
April 19: Due date to file 2021 tax return or request extension and pay tax owed for those who live in MA or ME due to Patriots’ Day holiday.
October 17: Due date to file for those requesting an extension on their 2021 tax returns.
Best of luck — and please remember to be kind and patient with your tax preparer and agency representatives. We’re all human beings struggling with an imperfect system during a difficult time.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
