Jan. 6 2021
On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA contains both the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). In addition to providing for stimulus payments of $600 per taxpayer and qualifying child, the CAA also contains numerous tax provisions and extenders as follows:
Do note that any of the below provisions that are applicable to income tax at the state level, California may not conform.
Individual Provisions
Increased deduction for medical expenses – The CAA permanently decreases the limitation for deducting medical expenses to 7.5% of adjusted gross income (“AGI”). Previous law only allowed for a deduction of medical expenses in excess of 10% of AGI.
Child Tax Credit & Earned Income Credit (“CTC” & “EIC”) – The CAA allows individuals to use their earned income from 2019, if greater, to calculate their CTC & EIC for 2020.
Charitable contributions for taxpayers who do not itemize deductions – The CARES act, passed earlier in 2020, created a new above-the-line deduction for charitable contributions made in 2020 for taxpayers who do not itemize deductions. The maximum allowable deduction is $300 ($600 for a married couple). The CAA extends this rule through 2021.
Income limitations for charitable contributions – Under previous law, charitable contributions to qualified organizations were generally limited to 60% of a taxpayer’s AGI. The CARES act removed the limitation for 2020; the new Act also removes the limitation for 2021.
Education credits – The CAA removes the above the line deduction for tuition and fees in exchange for an expanded application of the Lifetime Learning credit. This applies to tax years 2021 and beyond.
Exclusion from income for forgiveness of qualified principal residence indebtedness – Forgiveness of debt is generally included in taxable income. An exception applied for forgiveness of debt that was used to acquire a personal residence. The maximum which could be excluded was $2 million for a married couple. This provision was set to expire in 2020. The CAA extends this exclusion through 2025, but at a reduced amount of $750,000.
Mortgage insurance premiums – The CAA extends the deduction for qualified mortgage insurance premiums through 2021.
Retirement plan distributions – The CAA allows for distributions from retirement plans of up to $100,000 without being subject to the 10% penalty that applies to early retirement distributions. The distribution, however, will be subject to income tax over a 3-year period. This extends the relief provided in the CARES Act & expands the eligibility to all taxpayers.
Payroll Provisions
FSA Plans – Employers may choose to allow a carryover of unused funds from 2020 to 2021 and from 2021 to 2022 or to extend the grace period for spending unused FSA funds to 12 months after the plan year.
Extension of Families First Coronavirus Response Act (“FFCRA”) credits for paid sick and family leave – The FFCRA, passed earlier in 2020, provided employers a payroll tax credit for paid sick and family leave due to COVID-19. The Act extends this credit through March 31, 2021.
Employer tax credit for paid family and medical leave – Earlier tax law allowed businesses to claim a general business credit for paid family and medical leave up to 12 weeks per year. The provision was set to expire at the end of 2020; the Act extends this credit through 2025.
Work opportunity credit – The work opportunity credit is available to employers for hiring individuals from certain targeted groups. The credit was set to expire at the end of 2020. The CAA extends the credit through 2025.
Expansion of Employee Retention Credit (“ERC”) – The CARES Act provided a 50% credit for companies who continued to pay their employees during a COVID-19 imposed lockdown. The CAA expands eligibility for the ERC, increases the credit to 70%, and extends the credit through June 30, 2021.
Extension of deferred payroll taxes – President Trump signed an executive memorandum in August 2020 allowing employers to defer the employee’s share of social security taxes between September 1, 2020 and December 31, 2020. The taxes were required to be repaid through a reduction in the employee’s pay between January 1, 2021 and April 30, 2021. The CAA extends the required repayment period to December 31, 2021.
Employer payment of student loans – The CAA extends the current CARES act provision which allows employers to repay education loans incurred by their employees, which was set to expire at the end of 2020. The CAA extends the provision to 2025. The maximum annual payment is $5,250.
Business Tax Provisions
Deductions for expenses paid using PPP loan proceeds – The CAA clarifies the original intention of the PPP loan program and allows for full deduction of any expense paid for using PPP loan proceeds.
Bringing back the business lunch – The CAA temporarily allows for a full 100% deduction for meals provided by restaurants that are paid or incurred in 2021 or 2022.
Qualified disaster relief contributions – The CAA creates a new category of “qualified disaster relief contributions” for qualifying contributions made to organizations for disaster relief efforts. Contributions must be made between January 1, 2020 and 60 days after passage of the Act. Corporations could receive a deduction of up to 100% of taxable income.
Accelerated depreciation of residential rental property for electing real property trade or business – Real property trades or businesses subject to the interest expense limitations of 163(j) may choose to make an election. Under the election, the interest limitations will not apply; however, the taxpayer must use ADS depreciation rules resulting in a longer useful life and lower depreciation expense each year. Under prior law, residential rental property placed in service prior to January 1, 2018 was subject to a 40-year ADS useful life. The CAA changes this to a 30-year ADS useful life if the taxpayer was not subject to ADS prior to January 1, 2018.
December 27, 2020
On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA contains both the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). In addition to providing for stimulus payments of $600 per taxpayer and qualifying child, the CAA also contains numerous tax provisions and extenders as follows:
Do note that any of the below provisions that are applicable to income tax at the state level, California may not conform.
Individual Provisions
Increased deduction for medical expenses – The CAA permanently decreases the limitation for deducting medical expenses to 7.5% of adjusted gross income (“AGI”). Previous law only allowed for a deduction of medical expenses in excess of 10% of AGI.
Child Tax Credit & Earned Income Credit (“CTC” & “EIC”) – The CAA allows individuals to use their earned income from 2019, if greater, to calculate their CTC & EIC for 2020.
Charitable contributions for taxpayers who do not itemize deductions – The CARES act, passed earlier in 2020, created a new above-the-line deduction for charitable contributions made in 2020 for taxpayers who do not itemize deductions. The maximum allowable deduction is $300 ($600 for a married couple). The CAA extends this rule through 2021.
Income limitations for charitable contributions – Under previous law, charitable contributions to qualified organizations were generally limited to 60% of a taxpayer’s AGI. The CARES act removed the limitation for 2020; the new Act also removes the limitation for 2021.
Education credits – The CAA removes the above the line deduction for tuition and fees in exchange for an expanded application of the Lifetime Learning credit. This applies to tax years 2021 and beyond.
Exclusion from income for forgiveness of qualified principal residence indebtedness – Forgiveness of debt is generally included in taxable income. An exception applied for forgiveness of debt that was used to acquire a personal residence. The maximum which could be excluded was $2 million for a married couple. This provision was set to expire in 2020. The CAA extends this exclusion through 2025, but at a reduced amount of $750,000.
Mortgage insurance premiums – The CAA extends the deduction for qualified mortgage insurance premiums through 2021.
Retirement plan distributions – The CAA allows for distributions from retirement plans of up to $100,000 without being subject to the 10% penalty that applies to early retirement distributions. The distribution, however, will be subject to income tax over a 3-year period. This extends the relief provided in the CARES Act & expands the eligibility to all taxpayers.
Payroll Provisions
FSA Plans – Employers may choose to allow a carryover of unused funds from 2020 to 2021 and from 2021 to 2022 or to extend the grace period for spending unused FSA funds to 12 months after the plan year.
Extension of Families First Coronavirus Response Act (“FFCRA”) credits for paid sick and family leave – The FFCRA, passed earlier in 2020, provided employers a payroll tax credit for paid sick and family leave due to COVID-19. The Act extends this credit through March 31, 2021.
Employer tax credit for paid family and medical leave – Earlier tax law allowed businesses to claim a general business credit for paid family and medical leave up to 12 weeks per year. The provision was set to expire at the end of 2020; the Act extends this credit through 2025.
Work opportunity credit – The work opportunity credit is available to employers for hiring individuals from certain targeted groups. The credit was set to expire at the end of 2020. The CAA extends the credit through 2025.
Expansion of Employee Retention Credit (“ERC”) – The CARES Act provided a 50% credit for companies who continued to pay their employees during a COVID-19 imposed lockdown. The CAA expands eligibility for the ERC, increases the credit to 70%, and extends the credit through June 30, 2021.
Extension of deferred payroll taxes – President Trump signed an executive memorandum in August 2020 allowing employers to defer the employee’s share of social security taxes between September 1, 2020 and December 31, 2020. The taxes were required to be repaid through a reduction in the employee’s pay between January 1, 2021 and April 30, 2021. The CAA extends the required repayment period to December 31, 2021.
Employer payment of student loans – The CAA extends the current CARES act provision which allows employers to repay education loans incurred by their employees, which was set to expire at the end of 2020. The CAA extends the provision to 2025. The maximum annual payment is $5,250.
Business Tax Provisions
Deductions for expenses paid using PPP loan proceeds – The CAA clarifies the original intention of the PPP loan program and allows for full deduction of any expense paid for using PPP loan proceeds.
Bringing back the business lunch – The CAA temporarily allows for a full 100% deduction for meals provided by restaurants that are paid or incurred in 2021 or 2022.
Qualified disaster relief contributions – The CAA creates a new category of “qualified disaster relief contributions” for qualifying contributions made to organizations for disaster relief efforts. Contributions must be made between January 1, 2020 and 60 days after passage of the Act. Corporations could receive a deduction of up to 100% of taxable income.
Accelerated depreciation of residential rental property for electing real property trade or business – Real property trades or businesses subject to the interest expense limitations of 163(j) may choose to make an election. Under the election, the interest limitations will not apply; however, the taxpayer must use ADS depreciation rules resulting in a longer useful life and lower depreciation expense each year. Under prior law, residential rental property placed in service prior to January 1, 2018 was subject to a 40-year ADS useful life. The CAA changes this to a 30-year ADS useful life if the taxpayer was not subject to ADS prior to January 1, 2018.
Rental Real Estate as Qualified Business Income Deduction effective to December 31, 2025
If you operate a rental real estate business, you may qualify to claim the business income deduction under Section 199A in one of two ways- details in our article detail.
Rental Real Estate as Qualified Business Income Deduction
If you operate a rental real estate business, you may qualify to claim the business income deduction under Section 199A in one of two ways.
Qualified Business Income Deduction (QBID)
Congress enacted Section 199A to provide a deduction to non-corporate taxpayers of up to 20 percent of the taxpayer's qualified business income from each of the taxpayer's qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship. Individuals, estates and trusts can also deduct 20 percent of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. The deduction is effective for tax years beginning after December 31, 2017, and before January 1, 2026.
The QBI deduction is calculated as the lesser of:
i) combined qualified business income (up to 20% of qualified business income, plus 20% of REIT dividends and publicly traded partnership income); or
ii) 20% of the excess (if any) of taxable income over net capital gain.
In order to qualify for the deduction, the business must be a qualified trade or business which is defined as any trade or business other than a specified service trade or business (SSTB) or the trade or business of performing services as an employee.
Rentals meet the definition of a qualified trade or business in one of two ways:
1) rentals to a commonly owned business; or
2) under a safe harbor for certain rental real estate activities.
Rentals to a commonly owned business
A rental activity is treated as a qualified trade or business if it rents or licenses tangible or intangible property to a commonly owned trade or business. A business and a rental activity are commonly owned if the same person or group of persons directly or indirectly owns at least 50 percent of each of them. Businesses can meet this common-ownership test even if they are not otherwise eligible for aggregation.
Safe Harbor for Rental Real Estate Enterprise
Under a safe harbor, a rental real estate enterprise is treated as a trade or business for purposes of Section 199A only if:
a) separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
b) at least 250 hours of rental services are performed per year; and
c) for tax years beginning after 2019, the taxpayer maintains sufficient contemporaneous records.
For years 2021 and 2022 only, Meals and entertainment 100% deductible under certain conditions. California does not conform and will limit deduction to 50%.
2021 and 2022 Meals and entertainment deductibility:
Type of Expense | 2017 (old rules) | 2018 (new rules) | 2019 and yrs after |
Entertaining clients (concert tickets, golf games, etc.) | 50% deductible | 0% deductible | 0% deductible |
Business meals with clients | 50% deductible | 50% deductible | 50% deductible |
Office snacks and meals | 100% deductible | 50% deductible | 50% deductible |
Company-wide party | 100% deductible | 100% deductible | 100% deductible |
Meals & entertainment (included in compensation) | 100% deductible | 100% deductible | 100% deductible |
Fully deductible meals and entertainment
Here are some common examples of 100% deductible meals and entertainment expenses:
- A company-wide holiday party
- Food and drinks provided free of charge for the public
- Food included as taxable compensation to employees and included on the W-2
50% deductible expenses
Here are some of the most common 50% deductible expenses (for 2021 and 2022, they are 100% deductible if purchased from a restaurant):
- A meal with a client where work is discussed (that isn’t lavish)
- Employee meals at a conference, above and beyond the ticket price
- Employee meals while traveling (here’s how the IRS defines “travel”)
- Treating a few employees to a meal (but if it’s at least half of all employees, it’s 100 percent deductible)
- Food for a board meeting
- Dinner provided for employees working late
So what’s nondeductible?
Most work-related meal purchases you can think of are either 100 or 50 percent deductible. But there are a few exceptions. For example, if you pay for your clients’ night out but you don’t actually go with them, it’s nondeductible. The same applies to a client meal at a restaurant where you invite friends or spouses—the cost of your friends is nondeductible (but you can write off half the client bill).
And of course, with the Tax Cuts and Jobs Act, client entertainment is also nondeductible—no more golf games or courtside tickets.
WASHINGTON—The Internal Revenue Service will be resuming issuing collections notices to taxpayers that were previously suspending during the COVID-19 pandemic, although a date on when they will begin to be sent out has not been set.
WASHINGTON—The Internal Revenue Service will be resuming issuing collections notices to taxpayers that were previously suspending during the COVID-19 pandemic, although a date on when they will begin to be sent out has not been set.
"Right now, we are planning for restarting those notices," Darren Guillot, commissioner for collection and operation support in the IRS Small Business/Self Employment Division, said May 5, 2023, during a panel discussion at the ABA May Tax Meeting. "We have a very detailed plan."
Guillot assured attendees that the plan does not involve every notice just starting up on an unannounced day. Rather, the IRS will "communicate vigorously" with taxpayers, tax professionals and Congress on the timing of the plans so no one will be caught off guard by their generation.
He also stated that the plan is to stagger the issuance of different types of notices to make sure the agency is not overwhelmed with responses to them.
"The notice restart is really going to be staggered," Guillot said. "We’re going to time it at an appropriate cadence so that we believe we can handle the incoming phone calls that it can generate."
Guillot continued: "We want to also be mindful of the impact that it will have on the IRS Independent Office of Appeal. Some of those notices come with appeals rights and we want to make sure that we give taxpayers a chance to resolve their issues without the need to have to go to appeal or even get to that stage of that notice. So, it will be a staggered process."
In terms of helping to avoid the appeals process and getting taxpayers back into compliance, Guillot offered a scenario of what taxpayers might expect. In the example, if a taxpayer was set to receive a final Notice of Intent to Levy right before the pause for the pandemic was instituted, "we’re probably going to give most of those taxpayers a gentle reminder notice to try and see if they want to comply before we go straight to that final notice. That’s good for the taxpayer and it’s good for the IRS. And it’s good for the appellate process as well."
Guillot also said the agency is going to look at the totality of the 500-series of notices and taxpayers and their circumstances to see if there is a more efficient way of communicating and collecting past due amounts from taxpayers.
He also stressed that the IRS has been working with National Taxpayer Advocate Erin Collins and she has offered "input that we’re incorporating and taking into consideration every step of the way."
Collins, who also was on the panel, confirmed that and added that the IRS is "trying to take a very reasonable approach of how to turn it back on," adding that the staggered approach will also help practitioners and the Taxpayer Advocate Service from being overwhelmed as well as the IRS.
Guillot also mentioned that in the very near future, the IRS will start generating CP-14 notices, which are the statutory due notices. This is the first notice that a taxpayer will receive at the end of a tax season when there is money that they owe and those will start to be sent out to taxpayers around the end of May.
By Gregory Twachtman, Washington News Editor
The Internal Revenue Service will use 2018 as the benchmark year for determining audit rates as it plans to increase enforcement for those individuals and businesses making more than $400,000 per year.
The Internal Revenue Service will use 2018 as the benchmark year for determining audit rates as it plans to increase enforcement for those individuals and businesses making more than $400,000 per year.
The agency is "going to be focused completely on … closing the gap," IRS Commissioner Daniel said April 27, 2023, during a hearing of the House Ways and Means Committee. "What that means is the auditrate, the most recent auditrate, we have that’s complete and final is 2018. That is the rate that I want to share with the American people. The auditrate will not go above that rate for years to come because for the next several years, at least, we’re going to be focused on work that we’re doing with the highest income filers."
Werfel added that even if the IRS were to expand its audit footprint a few years from now, "you’re still not going to get anywhere near that historical average for quite some time. So, I think there can be assurances to the American people that if you earn under $400,000, there’s no new wave of audits coming. The probability of you being audited before the Inflation Reduction Act and after the Inflation Reduction Act are not changed at all."
He also noted that many of the new hires that will be brought in to handle enforcement will focus on the wealthiest individuals and businesses. Werfel said that there currently are only 2,600 employees that cover filings of the wealthiest 390,000 filers and that is where many of the enforcement hires will be used.
"We have to up our game if we’re going to effectively assess whether these organizations are paying what they owe," he testified. "So, it’s about hiring. It’s about training. And it’s not just hiring auditors, it’s about hiring economists, scientists, engineers. And when I [say] scientists, I mean data scientists to truly help us strategically figure out where the gaps are so we can close those gaps."
Werfel did sidestep a question about the potential need for actually increasing the number of audits for those making under $400,000. When asked about a Joint Committee on Taxation report that found that more than 90 percent of unreported income actually came from taxpayers earning less than $400,000, he responded that "there is a lot of mounting evidence that there is significant underreporting or tax gap in the highest income filers. For example, there’s a study that was done by the U.S. Treasury Department that looked at the top one percent of Americans and found that as much as $163 billion of tax dodging, roughly."
And while answering the questions on the need for more personnel to handle the audits of the wealthy, he did acknowledge that "a big driver" of needing such a large workforce to handle the filings of wealthy taxpayers is due to the complexity of the tax code, in addition to a growing population, a growing economy, and an increasing number of wealthy taxpayers.
Other Topics Covered
Werfel’s testimony covered a wide range of topics, from the size and role of the personnel to be hired to the offering of service that has the IRS fill out tax forms for filers to technology and security upgrade, similar to a round of questions the agency commissioner faced before the Senate Finance Committee in a hearing a week earlier.
He reiterated that a study is expected to arrive mid-May that will report on the feasibility of the IRS offering a service to fill out tax forms for taxpayers. Werfel stressed that if such a service were to be offered, it would be strictly optional and there would be no plans to make using such a service mandatory.
"Our hope and our vision [is] that we will meet taxpayers where they are," he testified. "If they want to file on paper, we’re not thrilled with it, but we’ll be ready for it. If they want the fully digital experience, if they want to work with a third-party servicer, we want to accommodate that."
Werfel also reiterated a commitment to examine the use of cloud computing as a way to modernize the IRS’s information technology infrastructure.
And he also continued his call for an increase in annual appropriations to compliment the funding provided by the Inflation Reduction Act. He testified that modernization funds were "raided" so that phones could be answered and to prevent service levels from declining while still being able to modernize the agency, more annual funds will need to be appropriated.
By Gregory Twachtman, Washington News Editor
The Supreme Court has held that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) does not apply where a delinquent taxpayer has a legal interest in accounts or records summoned by the IRS under Code Sec. 7602(a). The IRS had entered official assessments against an individual for unpaid taxes and penalties, following which a revenue officer had issued summonses to three banks seeking financial records of several third parties, including the taxpayers. Subsequently, the taxpayers moved to quash the summonses. The District Court concluded that, under Code Sec. 7609(c)(2)(D)(i), no notice was required and that taxpayers, therefore, could not bring a motion to quash.
The Supreme Court has held that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) does not apply where a delinquent taxpayer has a legal interest in accounts or records summoned by the IRS under Code Sec. 7602(a). The IRS had entered official assessments against an individual for unpaid taxes and penalties, following which a revenue officer had issued summonses to three banks seeking financial records of several third parties, including the taxpayers. Subsequently, the taxpayers moved to quash the summonses. The District Court concluded that, under Code Sec. 7609(c)(2)(D)(i), no notice was required and that taxpayers, therefore, could not bring a motion to quash. The Court of Appeals also affirmed, finding that the summonses fell within the exception in Code Sec. 7609(c)(2)(D)(i) to the general notice requirement.
Exceptions to Notice Requirement
The taxpayers argued that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) applies only if the delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS. However, the statute does not mention legal interest and does not require that a taxpayer maintain such an interest for the exception to apply. Further, the taxpayers’ arguments in support of their proposed legal interest test, failed. The taxpayers first contended that the phrase "in aid of the collection" would not be accomplished by summons unless it was targeted at an account containing assets that the IRS can collect to satisfy the taxpayers’ liability. However, a summons might not itself reveal taxpayer assets that can be collected but it might help the IRS find such assets.
The taxpayers’ second argument that if Code Sec. 7609(c)(2)(D)(i) is read to exempt every summons from notice that would help the IRS collect an "assessment" against a delinquent taxpayer, there would be no work left for the second exception to notice, found in Code Sec. 7609(c)(2)(D)(ii). However, clause (i) applies upon an assessment, while clause (ii) applies upon a finding of liability. In addition, clause (i) concerns delinquent taxpayers, while clause (ii) concerns transferees or fiduciaries. As a result, clause (ii) permits the IRS to issue unnoticed summonses to aid its collection from transferees or fiduciaries before it makes an official assessment of liability. Consequently, Code Sec. 7609(c)(2)(D)(i) does not require that a taxpayer maintain a legal interest in records summoned by the IRS.
An IRS notice provides interim guidance describing rules that the IRS intends to include in proposed regulations regarding the domestic content bonus credit requirements for:
An IRS notice provides interim guidance describing rules that the IRS intends to include in proposed regulations regarding the domestic content bonus credit requirements for:
The notice also provides a safe harbor regarding the classification of certain components in representative types of qualified facilities, energy projects, or energy storage technologies. Finally, it describes recordkeeping and certification requirements for the domestic content bonus credit.
Taxpayer Reliance
Taxpayers may rely on the notice for any qualified facility, energy project, or energy storage technology the construction of which begins before the date that is 90 days after the date of publication of the forthcoming proposed regulations in the Federal Register.
The IRS intends to propose that the proposed regs will apply to tax years ending after May 12, 2023.
Domestic Content Bonus Requirements
The notice defines several terms that are relevant to the domestic content bonus credit, including manufactured, manufactured product, manufacturing process, mined and produced. In addition, the notice extends domestic content test to retrofitted projects that satisfy the 80/20 rule for new and used property.
The notice also provides detailed rules for satisfying the requirement that at least 40 percent (or 20 percent for an offshore wind facility) of steel, iron or manufactured product components are produced in the United States. In particular, the notice provides an Adjusted Percentage Rule for determining whether manufactured product components are produced in the U.S.
Safe Harbor for Classifying Product Components
The safe harbor applies to a variety of project components. A table list the components, the project that might use each component, and assigns each component to either the steel/iron category or the manufactured product category.
The table is not exhaustive. In addition, components listed in the table must still meet the relevant statutory requirements for the particular credit to be eligible for the domestic content bonus credit.
Certification and Substantiation
Finally, the notice explains that a taxpayer that claims the domestic content bonus credit must certify that a project meets the domestic content requirement as of the date the project is placed in service. The taxpayer must also satisfy the general income tax recordkeeping requirements to substantiate the credit.
A taxpayer certifies a project by submitting a Domestic Content Certification Statement to the IRS certifying that any steel, iron or manufactured product that is subject to the domestic content test was produced in the U.S. The taxpayer must attach the statement to the form that reports the credit. The taxpayer must continue to attach the form to the relevant credit form for subsequent tax years.
A married couple’s petition for redetermination of an income tax deficiency was untimely where they electronically filed their petition from the central time zone but after the due date in the eastern time zone, where the Tax Court is located. Accordingly, the taxpayers’ case was dismissed for lack of jurisdiction.
A married couple’s petition for redetermination of an income tax deficiency was untimely where they electronically filed their petition from the central time zone but after the due date in the eastern time zone, where the Tax Court is located. Accordingly, the taxpayers’ case was dismissed for lack of jurisdiction.
The deadline for the taxpayers to file a petition in the Tax Court was July 18, 2022. The taxpayers were living in Alabama when they electronically filed their petition. At the time of filing, the Tax Court's electronic case management system (DAWSON) automatically applied a cover sheet to their petition. The cover sheet showed that the court electronically received the petition at 12:05 a.m. eastern time on July 19, 2022, and filed it the same day. However, when the Tax Court received the petition, it was 11:05 p.m. central time on July 18, 2022, in Alabama.
Electronically Filed Petition
The taxpayers’ petition was untimely because it was filed after the due date under Code Sec. 6213(a). Tax Court Rule 22(d) dictates that the last day of a period for electronic filing ends at 11:59 p.m. eastern time, the Tax Court’s local time zone. Further, the timely mailing rule under Code Sec. 7502(a) applies only to documents that are delivered by U.S. mail or a designated delivery service, not to an electronically filed petition.
Internal Revenue Service Commissioner Daniel Werfel said changes are coming to address racial disparities among those who get audited annually.
Internal Revenue Service Commissioner Daniel Werfel said changes are coming to address racial disparities among those who get audited annually.
"I will stay laser-focused on this to ensure that we identify and implement changes prior to the next tax filing season," Werfel stated in a May 15, 2023, letter to Senate Finance Committee Chairman Ron Wyden (D-Ore.).
The issue of racial disparities was raised during Werfel’s confirmation hearing an in subsequent hearings before Congress after taking over as commissioner in the wake of a study issued by Stanford University that found that African American taxpayers are audited at three to five times the rate of other taxpayers.
The IRS "is committed to enforcing tax laws in a manner that is fair and impartial," Werfel wrote in the letter. "When evidence of unfair treatment is presented, we must take immediate actions to address it."
He emphasized that the agency does not and "will not consider race as part of our case selection and audit processes."
He noted that the Stanford study suggested that the audits were triggered by taxpayers claiming the Earned Income Tax Credit.
"We are deeply concerned by these findings and committed to doing the work to understand and address any disparate impact of the actions we take," he wrote, adding that the agency has been studying the issue since he has taken over as commissioner and that the work is ongoing. Werfel suggested that initial findings of IRS research into the issue "support the conclusion that Black taxpayers may be audited at higher rates than would be expected given their share of the population."
Werfel added that elements in the Inflation Reduction Act Strategic Operating Plan include commitments to "conducting research to understand any systemic bias in compliance strategies and treatment. … The ongoing evaluation of our EITC audit selection algorithms is the topmost priority within this larger body of work, and we are committed to transparency regarding our research findings as the work matures."
By Gregory Twachtman, Washington News Editor
The American Institute of CPAs expressed support for legislation pending in the Senate that would redefine when electronic payments to the Internal Revenue Service are considered timely.
The American Institute of CPAs expressed support for legislation pending in the Senate that would redefine when electronic payments to the Internal Revenue Service are considered timely.
In a May 3, 2023, letter to Sen. Marsha Blackburn (R-Tenn.) and Sen. Catherine Cortez Masto (D-Nev.), the AICPA applauded the legislators for The Electronic Communication Uniformity Act (S. 1338), which would treat electronic payments made to the IRS as timely at the point they are submitted, not at the point they are processed, which is how they are currently treated. The move would make the treatment similar to physically mailed payments, which are considered timely based on the post mark indicating when they are mailed, not when the payment physically arrives at the IRS or when the agency processes it.
S. 1338 was introduced by Sen. Blackburn on April 27, 2023. At press time, Sen. Cortez Masto is the only co-sponsor to the bill.
The bill adopts a recommendation included by the National Taxpayer Advocate in the annual so-called "Purple Book" of legislative recommendations made to Congress by the NTA. The Purple Book notes that IRS does not have the authority to apply the mailbox rule to electronic payments and it would need an act of Congress to make the change.
"Your bill would provide welcome relief and solve a problem that taxpayers have been faced with, i.e., incurring penalties through no fault of their own because they believed their filings or payments were timely submitted through an electronic platform," the AICPA letter states. This legislation would provide equity by treating similarly situated taxpayers similarly. It would also improve tax administration by eliminating IRS notices assessing unnecessary penalties when the taxpayer or practitioner electronically submits a tax return by the deadline regardless of when the IRS processes it.
Tax policy and comment letters submitted to the government can be found here.
By Gregory Twachtman, Washington News Editor
WASHINGTON—The Inflation Reduction Act Strategic Operating Plan was designed to be a living document, an Internal Revenue Service official said.
The plan, which outlines how the IRS plans to spend the additional nearly $80 billion in supplemental funds allocated to it in the Inflation Reduction Act, was written to be a "living document. It’s not meant to be something static that stays on the shelf and never gets updated, and just becomes an historic relic," Bridget Roberts, head of the IRS Transformation and Strategy Office, said May 5, 2023, at the ABA May Tax Meeting.
WASHINGTON—The Inflation Reduction Act Strategic Operating Plan was designed to be a living document, an Internal Revenue Service official said.
The plan, which outlines how the IRS plans to spend the additional nearly $80 billion in supplemental funds allocated to it in the Inflation Reduction Act, was written to be a "living document. It’s not meant to be something static that stays on the shelf and never gets updated, and just becomes an historic relic," Bridget Roberts, head of the IRS Transformation and Strategy Office, said May 5, 2023, at the ABA May Tax Meeting.
Roberts also described the plan as a tool to help bring the agency together and more unified in its mission.
"We intentionally wrote the plan to sort of break down some of those institutional silos," she said. "So, we didn’t write it based on business unit or function."
She framed the development of the plan a "cross-functional, cross-agency effort," adding that it "wasn’t like, ‘here’s how we’re going to change wage and investment or large business.’ It was, ‘here’s how we’re going to change service and enforcement and technology. And those pieces touch everything."
Roberts also highlighted the need for better data analytics across the agency, something that the SOP emphasizes particularly as it beings to ramp up enforcement activities to help close the tax gap.
"We are never going to be able to hire at a level that you can audit everybody," she said. "So, the ability to use data and analytics to really focus our resources on where we think there is true noncompliance," rather than conducting audits that result in no changes. "That’s not helpful for taxpayers. That’s not helpful for the IRS."
By Gregory Twachtman, Washington News Editor
The IRS Independent Office of Appeals, in coordination with the National Taxpayer Advocate, has invited public feedback on how it can improve conference options for taxpayers and representatives who are not located near an Appeals office, encourage participation of taxpayers with limited English proficiency and ensure accessibility by persons with disabilities. Taxpayers can send their comments to ap.taxpayer.experience@irs.gov by July 10, 2023.
The IRS Independent Office of Appeals, in coordination with the National Taxpayer Advocate, has invited public feedback on how it can improve conference options for taxpayers and representatives who are not located near an Appeals office, encourage participation of taxpayers with limited English proficiency and ensure accessibility by persons with disabilities. Taxpayers can send their comments to ap.taxpayer.experience@irs.gov by July 10, 2023.
Appeals resolve federal tax disputes through conferences, wherein an appeals officer will engage with taxpayers in a way that is fair and impartial to taxpayers as well as the government to discuss potential settlements. Additionally, taxpayers can resolve their disputes by mail or secure messaging. Although, conferences are offered by telephone, video, the mode of meeting with Appeals is completely decided by the taxpayer. Recently, appeals expanded access to video conferencing to meet taxpayer needs during the COVID-19 pandemic. Further, taxpayers and representatives who prefer to meet with Appeals in person have the option to do so as, appeals has a presence in over 60 offices across 40 states where they can host in-person conferences.
The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance.
The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance. The guidance addresses (1) timing issues; (2) partner and consolidated group member basis adjustments; and (3) filing of amended partnership returns and information statements.
Timing of Tax-exempt Income
A taxpayer that received a PPP loan may treat tax-exempt income resulting from the partial or complete forgiveness of the PPP loan as received or accrued as follows:
- As the taxpayer pays or incurs eligible expenses. Under the safe harbor that allows certain taxpayers who relied on prior guidance and did not deduct certain PPP-related expenses on a tax return filed before the COVID Tax Relief Act was enacted, to deduct the expenses in the next tax year. A taxpayer that has elected to use the safe harbor will be treated as paying or incurring the eligible expenses during the taxpayer’s immediately subsequent tax year following the taxpayer’s 2020 tax year in which the expenses were actually paid or incurred, as described in Rev. Proc. 2021-20;
- When the taxpayer files an application for forgiveness of the PPP loan; or;
- When the PPP loan forgiveness is granted.
The timing treatment also applies to the extent tax-exempt income resulting from the partial or complete forgiveness of a PPP loan is treated as gross receipts under a federal tax provision.
If a taxpayer received PPP loan forgiveness of less than the amount that the taxpayer previously treated as tax-exempt income, the taxpayer must file an amended return, information return, or administrative adjustment request as applicable.
Partnership Allocations and Basis Adjustments
If covered partnerships meet certain requirements, the IRS will treat the covered taxpayer’s allocation of amounts treated as tax exempt income and allocation of deductions as determined in accordance with Code Sec. 704(b). A partner's basis in its interest is increased by the partner’s distributive share of tax exempt income and is decreased by the partner’s distributive share of deductions. If certain conditions are met, the treatment generally applies in connection with:
- deductions and amounts treated as tax exempt income arising in connection with the forgiveness of a PPP loan;
- deductions and amounts treated as tax exempt income arising in connection with payments made by the SBA on behalf of the taxpayer with respect to a covered loan under § 1112(c) of the CARES Act; and
- the allocation of deductions and amounts treated as tax exempt income arising in connection with the taxpayer receiving a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant.
Consolidated Group Members
For consolidated group members, the IRS will treat any amount excluded from gross income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a)(1) of the COVID Tax Relief Act, as applicable, as tax exempt income for purposes of Reg. §1.1502-32(b)(2)(ii) investment adjustments. For the treatment to apply, the consolidated group must attach a signed statement to its consolidated tax return.
Amended Returns
Eligible partnerships subject to the centralized partnership audit regime (BBA partnerships) that filed a Form 1065 and furnished all required Schedules K-1 for tax years ending after March 27, 2020 and before Rev. Proc. 2021-50 was issued may file amended partnership returns and furnish amended Schedules K-1 on or before December 31, 2021. The amended returns must take into account tax changes under Rev. Proc. 2021-48 or Rev. Proc. 2021-49, but eligible BBA partnerships may make any additional changes on their amended returns.
The amended return applies to any partnership tax year ending after March 27, 2020 and before the issuance of Rev. Proc. 2021-48 and Rev. Proc. 2021-49. The BBA partnership must clearly indicate the application of this revenue procedure on the amended return and write "FILED PURSUANT TO REV PROC 2021-50" at the top of the amended return and attach a statement with each amended Schedule K-1 furnished to its partners with the same notation.
Special rules apply to pass-through partners. A partnership under examination that wishes to use this amended return procedure must notify the revenue agent coordinating the partnership’s examination.