Form 56- Notice Concerning Fiduciary Relationship

Form 1040-Final Individual Income Tax Return and the State Tax Return

Form 706-United States Estate (and Generatino-Skipping Transfer) Tax Return 

TAX FILINGS FOR ESTATES AND TRUSTS

FORM 56 – NOTICE CONCERNING FIDUCIARY RELATIONSHIP

This form is filed with the IRS to notify the Service that you are acting as the representative for the estate or trust. It is important to file this form as soon as possible so that the Service sends any tax notices or other correspondence to the correct address.  By filing this form, you notify the IRS that you are the responsible party for filing and paying taxes for the estate or trust.

FORM 1040 – FINAL INDIVIDUAL INCOME TAX RETURN AND THE STATE TAX RETURN

The decedent’s final individual tax returns, Form 1040 and state return.  The executor, administrator, or trustee is responsible for filing this form. It includes all income, deductions, credits, and withholdings from January 1 to through the date of death. As of the date of death, the decedent’s tax filing ends.

FORM 706 – UNITED STATES ESTATE (and GENERATION-SKIPPING TRANSFER) TAX RETURN

This return reports all the assets and liabilities of the decedent as of the date of death or an alternate valuation date. It is a snapshot of a moment in time.  It does not report income and it is not an income tax return.

The assets are reported at the fair market value as of the date of death. The executor of the estate must obtain documents to prove the date of death values of the decedent’s assets. These documents would include bank statements, CD certificates, broker statements, IRA and/or 401k statements, annuity statements, etc. dated as of the date of death or very close to it. The estate must also include life insurance proceeds on policies owned by the decedent and payable on his/her death. It will include income earned but not yet received by the decedent such as a paycheck, a bonus, and award, etc.

There will be a need for appraisals of the value of certain assets if the decedent owned any of the following:

• real estate
• a closely held business
• partnership interests
• jewelry
• art, antiques, and collectibles

The return is required if the net value is in excess of $5.43 million in 2015.  This amount is referred to as the exemption amount. This amount is estate-tax free. It is adjusted annually for inflation.

The return may be required if the surviving spouse elects to carry over her/his deceased spouse’s unused exemption amount (the DSUE).  In general, we advise a spouse to file the Form 706 to make this election if the couple’s entire estate is valued at $4 million or more at the date of the first spouse’s death.

The Form 706 is due exactly 9 months after the date of death. For example, if the date of death is February 7, the Form 706 is due by November 7. An extension may be available for the filing for 6 months.  The extension is for filing, not paying. The estate tax is due by the original filing date.

FORM 1041 – US INCOME TAX RETURN FOR ESTATES AND TRUSTS and THE STATE RETURN

Income earned or received and deductions incurred after the date of death are reported on this return. For example, if the date of the decedent’s date of death is May 6, there could be a final decedent’s return for the period January 1 through May 6 reporting income and deductions during that period. The estate or trust would file a Form 1041 reporting income and deductions for the period May 7 through December 31.  It is important to keep track of income and deductions during these two periods of time.

FORM 709 – UNITED STATES GIFT (and GENERATION-SKIPPING TRANSFER) TAX RETURN

• Every individual may gift (give a gift) up to $14,000 per gift recipient in 2015 without incurring a gift tax.
• Gifts are never taxable to the recipient.
• Gifts may be taxable to the giver. 
• You may give or bequest up to the Exclusion Amount, $5.43 million in 2015, during your lifetime or at your death.
• All gifts and the net estate value are totaled on the Form 706.
• Annually, any gifts in excess of $14,000 are reported on the Form 709.
• The Form 709 is due by 4/15 each year. The due date can be extended to 10/15.

What is Propositon 60 & 90, 58 & 193 re transfer of base year property tax values

 FAQ’s REGARDING THE TRANSFER OF THE PROPERTY TAX BASE

 What is Proposition 60?

Prop. 60 was a constitutional amendment approved by the voters of California in 1986. It allows the transfer of an existing Proposition 13 base year value from a former residence to a replacement residence, if certain conditions are met. This benefit is open to homeowners who are at least 55-years old and are able to meet all qualifying conditions, (see below).

 What is Proposition 90?

Proposition 90 has the same provisions and qualifications as Proposition 60.  The difference is that it allows base year transfers from one county to another county in California.  The only counties that have adopted an ordinance to allow values from other counties are:

o    Alameda

o    El Dorado

o    Los Angeles

o    Orange

o    Riverside

o    San Bernardino

o    San Diego

o    San Mateo

o    Santa Clara

o    Ventura

This list can change at any time.  Please contact the local assessor to see if the value of your original property can be transferred to a replacement in that county.

How do I qualify for these property tax benefits?

1. Proposition 60 - Both the original property (former residence) and its replacement must be located in the same county.
2. Proposition 90 - The original property is located in a different county from replacement, (see Proposition 90 information above).
3. As of the date of transfer of the original property, the seller or a spouse living with the seller must be at least 55 years old.
4. The original property must have been eligible for the Homeowners' Exemption or entitled to the Disabled Veterans' Exemption.
5. The replacement dwelling must be of equal or lesser value than the original property.
6. The replacement dwelling must have been purchased or newly constructed on or after 11/06/86.
7. Without exception, the replacement dwelling must be purchased or newly constructed within two years (before or after) of the sale of the original property.
8. The original property must be subject to reappraisal at its current fair market value as the result of its transfer, in accordance with Sections 110.1 or 5803 of the Revenue and Taxation Code.
9. Without exception, a Claim for Relief must be filed within three years of the date a replacement dwelling is purchased or new construction of a replacement dwelling is completed to receive the full relief. A claim filed after the three year time period will receive a prospective relief only.

Is it true that only one claimant, out of several co-owners of a replacement dwelling, need be at least 55 as of the date of sale of an original property?

Yes, but the claimant must be an owner of record. Either the claimant or his/her spouse must also have been an occupant of the original property and at least 55 years old on the date of sale.

Can a taxpayer apply for and receive the benefit of Prop. 60/90 more than once?

 No, this is a one-time benefit. You are not eligible if you have been previously granted this benefit.

What is meant by "equal or lesser value" than the original dwelling?

In general, "equal or lesser value" means:
 
100 % of the market value of an original property if a replacement dwelling is purchased before the original property is sold.

105 % of the market value of an original property if a replacement dwelling is purchased within one year after the sale of the original property.

110 % of the market value of an original property if a replacement dwelling is purchased within the second year after the sale of the original property.

Is the "equal or lesser value" test a simple comparison of the sales price of the original property and the purchase price or cost of new construction of the replacement dwelling?

 No. The comparison must be made using the full market value of the original property and the full market value of the replacement dwelling as of its date of purchase or completion of new construction. This is important because sales prices are not always the same as market value. The Assessor must determine the market value for each property, which may differ from sales price.

If the current full cash value of my replacement dwelling slightly exceeds the full market value of my original property, can I still receive a partial benefit?

No. Unless the replacement dwelling satisfies the "equal or lesser value" test, no benefit is available.

May I give my original property to my child and still receive the Prop. 60/90 benefit when I purchase a replacement property?

No. The law provides that an original property must be sold for consideration and subject to reappraisal at full market value at the time of sale. Original property transferred to a child or disposed of by gift or devise does not qualify.  See the FAQ’s below re Propositions 58 and 193.

Can I qualify for the benefits of Prop. 60/90 when I sell my original property (owned by me alone) and purchase a replacement dwelling with several co-owners? What if I own only a 10 percent interest in the replacement dwelling?

Yes. The base year value of your original property can be transferred to your replacement dwelling, as long as you are otherwise qualified.  You may receive the benefits of Prop. 60 regardless of how many co-owners of record there are on the replacement dwelling.  In this situation, the total market value of the original property is compared to the total market value of the replacement property regardless of the fact that the qualified principal claimant may only own 10 percent of both original and replacement dwelling properties.  

You and your spouse, as the claimants, will use your "one time only" benefit.  An owner of record of the replacement property who is not the claimant's spouse is not considered a claimant, and a claim filed for the property will not constitute use of the one-time-only exclusion by the co-owner even though that person may benefit from the property tax relief.

Can two otherwise qualified taxpayers who have recently sold their separately owned original properties combine their claim for Prop. 60/90 benefit when they buy a single replacement dwelling together?

No. they can only receive the benefit if one or the other, not both together, qualifies by comparing his or her original property to the jointly purchased replacement dwelling. The implementing legislation specifically disallows combining a claim, whether or not the co-owners of the replacement dwelling are married.

May I, as a former co-owner of an original property, receive partial benefit on my replacement dwelling, along with other co-owners who purchase separate replacement dwellings?

No. The law provides that only one co-owner of an original property that is, or was, qualified for the Homeowners' Exemption may receive the benefit in a situation like this where all co-owners purchase separate replacement dwellings. The co-owners must determine, between themselves, which one should receive the benefit. Only in the case of a multiple-residential original property, where several co-owners qualify for separate Homeowners' Exemptions, may portions of the factored base year value of that property be transferred to several qualified replacement dwellings.

What if I am the co-owner of a property with more than one residential unit?

 A portion of the original property may qualify for the Homeowners' Exemption for you. The base year value of that portion can be transferred to your replacement dwelling. The other portion(s) of the original property may qualify for a separate Homeowners' Exemption(s). The base year value(s) of that other portion(s) can be transferred to another replacement dwelling(s).

Does a person qualify for the Prop. 60/90 benefit when he/she sells an original property, then buys a replacement dwelling within two years, but no longer qualifies for a Homeowners' Exemption on the original property that sold nearly two years before?

Yes. The statute requires that the original property be eligible for the Homeowners' Exemption at the time of sale. It is eligible if the claimant owns and occupies the property as his or her principal residence at the time of sale.

Can I receive Prop 60. benefits if my original property is outside Orange County but my replacement dwelling is inside Orange County?

No. Both properties must be within Orange County. 

Can I receive Prop. 60 benefits if my original property is inside Orange County but my replacement dwelling is in another county in California?

You may qualify under Prop. 90. Call the county Assessor's Office where the replacement dwelling is located and ask if that county allows transfers of base year values between counties.

If the transfer of my base year value to the replacement dwelling results in a supplemental assessment that is a refund, do I still have to pay the existing annual roll tax bill on the replacement property or will that bill be adjusted to reflect the new, lower value?

Unfortunately, you must pay the existing annual roll tax bill on your replacement property. That bill cannot be adjusted or canceled to reflect the Prop. 60 benefit. Additionally, you must pay that bill before any refund resulting from the Prop. 60 benefit will be sent to you.

However, after the existing bill has been paid, you will later receive a refund that will reflect the Prop. 60 benefit. In other words, when the entire process is complete, you will not have overpaid any taxes,.

May parents transfer the family home to their children without a property tax reassessment?

YES.  Proposition 58 allows parents to transfer by gift, bequest, or sale their principal residence to their child(ren) and there will be no property tax reassessment. There is no limit on the value of the principal residence.  The parents must have a Homeowner’s or Disabled Veterans Exemption on the home.

May parents transfer other property to their children without a property tax assessment?

Yes. Each parent may transfer up to a total of $1 million of other property to their children without a property tax assessment. 

May grandparents transfer property to their grandchildren without a property tax assessment?

Proposition 193 expanded the benefits of family transfers of real property to grandparents.  They may transfer the property to a grandchild(ren) without a tax reassessment if the middle generation had already died.

How do the transferor and transferee obtain the relief of Propositions 58 and 193?

In order to obtain such relief, a Claim for Reassessment Exclusion for Transfer form must be signed by  both the property owner or deceased owner’s estate and by the person to whom title is being transferred.  The Claim must be filed within three years of the date of the transfer of the real property.  It is filed with the county Assessor.

The IRS announced broad-based penalty relief for taxpayers affected by the COVID-19 pandemic. The relief applies to failure to file penalties and certain international information return (IIR) penalties with respect to tax returns for tax years (TY) 2019 and TY 2020, filed on or before September 30, 2022.

The IRS announced broad-based penalty relief for taxpayers affected by the COVID-19 pandemic. The relief applies to failure to file penalties and certain international information return (IIR) penalties with respect to tax returns for tax years (TY) 2019 and TY 2020, filed on or before September 30, 2022. Relief is also provided to banks, employers and other businesses from certain information return penalties with respect to TY 2019 returns filed on or before August 1, 2020, and with respect to TY 2020 returns that were filed on or before August 1, 2021.

The relief will also help the IRS focus resources on processing backlogged tax returns and tax correspondence.

In response to the COVID-19 pandemic, the IRS issued a series of notices and other guidance to provide relief to affected taxpayers, including:

• postponing the due date for certain Federal income tax payments ( Notice 2020-17, I.R.B. 2020-15, 590);
• expanded relief postponing the due date for filing Federal income tax returns originally due April 15, 2020, to July 15, 2020, among other things ( Notice 2020-18, I.R.B. 2020-15, 590); and
• postponing the due date for filing Federal income tax returns in the Form 1040 series and making certain Federal income tax payments that were originally due on April 15, 2021, due on May 17, 2021 ( Notice 2021-21, I.R.B. 2021-15, 986.

Waiver and Abatement of Certain Penalties

The IRS will not impose penalties with respect to specifically identified tax returns for TY 2019 and TY 2020, filed on or before September 30, 2022. The relief will be automatically applied-taxpayers do not have to request relief.

The IRS will not impose additions to tax under Code Sec. 6651(a)(1) for failure to file the following income tax returns:

• Form 1040, U.S. Individual Income Tax Return, and others in the series;
• Form 1041, U.S. Income Tax Return for Estates and Trusts, and others in the series;
• Form 1120, U.S. Corporation Income Tax Return, and others in the series;
• Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return; and
• Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation and Form 990-T, Exempt Organization Business income Tax Return (and Proxy Tax under Code Sec. 6033(e)).

Further, certain penalties will not be imposed under Code Secs. 6038, 6038A, 6038C, 6038F [ 6039F] and 6677 for failure to timely file several IIRs, such as Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.

Comment. Note that the Notice refers to Code Sec. 6038F, which does not exist. The context indicates that the reference should be to Code Sec. 6039F. The IRS may issue a correction.

Certain penalties will not be imposed under Code Sec. 6698(a)(1) and (2) for failure to timely file and show the required information on a Form 1065, U.S. Return of Partnership Income.

Certain penalties will not be imposed under Code Sec. 6699(a)(1) and (2) for failure to timely file and show the required information on a Form 1120-S, U.S. Income Tax Return for an S corporation.

In addition, the IRS will not impose the penalties under Code Sec. 6721(a)(2)(A) for failure to timely file any information return as defined under Code Sec. 6724(d)(1) that includes (1) 2019 returns that were filed on or before August 1, 2020, with an original due date of January 31, 2020, February 28, 2020 (if filed on paper) or March 31, 2020 (if filed electronically) or March 15, 2020; and (2) 2020 returns that were filed on or before August 1, 2021, with an original due date of January 31, 2021, February 28, 2021 (if filed on paper) or March 31, 2021 (if filed electronically) or March 15, 2021.

Exceptions

The penalty relief does not apply to any penalties not listed. Additionally the penalty relief does not apply to returns for which the penalty for fraudulent failure to file under Code Sec. 6651(f) or the penalty for fraud under Code Sec. 6663 apply. The penalty relief also does not apply to penalties in an accepted offer in compromise under Code Sec. 7122 or any penalty settled in a closing agreement under Code Sec. 7121 or finally determined in a judicial proceeding.

NTA Applauds IRS Move To Provide Late Filing Penalty Relief

National Taxpayer Advocate Erin Collins applauded the Internal Revenue Service’s decision to provide late-filing penalty relief to taxpayers who filed late tax returns for tax years 2019 and 2020.

"The IRS has taken a major step in providing broad, taxpayer-favorable relief from late-filing penalties for 2019 and 2020 tax years," Collins said in an August 24, 2022 blog post, adding that the agency " deserves substantial credit for its willingness to listen to Congress, stakeholders, and TAS [Taxpayer Advocate Service], and undertake a bold step requiring significant administrative effort and resources to benefit all taxpayers affected by the pandemic".

The IRS has issued guidance to taxpayers, who have inappropriately received forgiveness of their Paycheck Protection Program ('PPP') loan, and has encouraged them to take steps towards compliance, such as filing amended returns that include the forgiven loan amounts, as income.

The IRS has issued guidance to taxpayers, who have inappropriately received forgiveness of their Paycheck Protection Program ('PPP') loan, and has encouraged them to take steps towards compliance, such as filing amended returns that include the forgiven loan amounts, as income. The PPP loan program was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to assist small US businesses that were adversely affected by the COVID-19 pandemic in paying certain expenses and was further extended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act. The IRS has discovered that, some recipients received forgiveness of their PPP loan through misrepresentation or omission and either did not qualify to receive a PPP loan or misused the loan proceeds. Under the terms of the PPP loan program, lenders could forgive the full amount of the loan, if the loan recipient meets three conditions, namely:

• Eligible Recipient: The loan recipient was eligible to receive the PPP loan if they were a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity, and was in business on or before February 15, 2020, and had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.
• Eligible Expenses: The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.
• Application for loan forgiveness: The loan recipient had to apply for loan forgiveness, which requires a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.

The IRS has stipulated that, if the above conditions are not met, then the amount of the loan proceeds that were forgiven, must be included in income and any additional income tax must be paid. The IRS has also informed that, reporting tax-related illegal activities relating to PPP loans, may be done through submission of Form 3949-A, Information Referral.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country. September is declared as the National Preparedness Month. The IRS advised taxpayers to:

• secure critical documents such as tax returns, birth certificates, deeds, titles, and insurance policies inside waterproof containers in a secure space;
• duplicate and scan key documents for backup storage on electronic media that provide security and easy portability, such as a flash drive, a CD, or in the cloud;
• reconstruct records after a disaster for tax purposes, getting federal assistance or insurance reimbursement; and
• record all property, especially expensive and high value items—the IRS disaster-loss workbooks in Publication 584 and Publication 584-B can help individuals and businesses compile lists of belongings or business equipment.

In addition, the IRS recommends the following for employers:

• employers should create an Electronic Federal Tax Payment System account at EFTPS.gov to monitor their payroll tax deposits and receive email alerts; and
• employers who use payroll service providers should check the payroll service provider’s fiduciary bonds as they could protect the employer in the event of default by the provider.

Taxpayers who have lost some or all their records during a disaster can visit the IRS's Reconstructing Records webpage. In addition, taxpayers residing in a federally declared disaster can check for the available disaster tax relief on the IRS Tax Relief in Disaster Situations or Around the Nation webpages.

The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. Taxpayers affected by a disaster can contact the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues. Further, taxpayers affected by a disaster outside of a federally declared disaster area may qualify for disaster relief. This includes taxpayers who are not physically located in a disaster area but who have records essential for filing or payment deadlines postponed during the relief period that are located in a covered disaster area. In addition, a special rule allows both individuals and businesses to choose to deduct uninsured or unreimbursed disaster losses on either the tax return for the year the disaster occurred, or the return for the previous year.

The IRS has released information regarding the pre-screening and certification process for employers taking advantage of the Work Opportunity Tax Credit (WOTC). 

The IRS has released information regarding the pre-screening and certification process for employers taking advantage of the Work Opportunity Tax Credit (WOTC). The information relates to hiring designated categories of workers who face significant barriers to employment, including:

• Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients;
• Certain veterans, including unemployed or disabled veterans;
• Qualified long-term unemployment recipients; and
• Long-term family assistance recipients

The WOTC, which succeeded the Targeted Jobs Tax Credit (TJTC), included the requirement for employers to pre-screen job applicants. To pre-screen a job applicant, on or before the day a job offer is made, a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by the job applicant and the employer. After pre-screening a job applicant, the IRS requires the employers to make a request for certification by submitting Form 8850 to the appropriate state workforce agency, no later than 28 days after the employee begins work.

The Service also notified that, tax-exempt organizations can claim the WOTC against the employer’s share of social security tax for hiring qualified veterans, by filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. Further information can be found in the Form 8850 instructions or on the WOTC page on IRS.gov.

Businesses are still waiting for pandemic relief made available to them during the COVID-19 outbreak amid ongoing processing delays at the Internal Revenue Service, according to the Treasury Inspector General for Tax Administration.

Businesses are still waiting for pandemic relief made available to them during the COVID-19 outbreak amid ongoing processing delays at the Internal Revenue Service, according to the Treasury Inspector General for Tax Administration.

According to an August 31, 2022, report posted to the TIGTA web site, the IRS "did not begin processing claims for qualified Sick and Family Leave Credits and the Employee Retention Credit for 12 months and claims for the Social Security Tax Deferral for 16 months after the pandemic relief legislation was enacted."

TIGTA attributed this delay to a "lack of updated programming and procedural guidance," as well as a "lack of training, erroneously suspended claims, and a lack of prioritization of claims" that contributed to the delays in processing claims.

Employers filing claims for these pandemic benefits would have filed a Form 941-X, which would have amended a previously filed Form 941 if they did not make the initial claim for these benefits on the Form 941 or if they needed to amend the amount of original claim on the already-filed Form 941.

"As of February 1, 2022, there were 447,435 Forms 941-X waiting to be processed," the report states. "Over 90 percent (402,814) of these Forms 941-X were over-aged, i.e. have not been processed within 45 calendar days. In addition, 60,885 (13.6 percent of the Forms 941-X were not processed within 180 calendar days."

TIGTA described the over-aged inventory as "an ongoing challenge for the IRS."

Additionally, the IRS watchdog found claims that should have been reviewed but were not resulted "in $45 million in potentially erroneous nonrefundable employer tax credits being allowed" when they otherwise might not have had proper reviews been conducted.

TIGTA recommends that IRS develop a plan to prioritize processing backlogged claims, update the examination referral process, and update training for IRS employees regarding referrals. IRS did not agree with the latter recommendations, but did all others stated in the report.

"Management stated they completed subsequent review of completed Form 941-X claims and determined no additional training was needed," the report states. "However, the IRS’s subsequent reviews do not address the concerns identified in our report. Accounts Management employees cited unclear guidance and training as to why 73 percent of claims were not referred when required."

The IRS has released a list of exceptions for the inclusion of a cancelled student loan debt in income. Generally, had a taxpayer's student loan been cancelled or repaid by someone else, the taxpayer was mandated to include the cancelled or repaid loan amount as part of their gross income, for tax purposes. 

The IRS has released a list of exceptions for the inclusion of a cancelled student loan debt in income. Generally, had a taxpayer's student loan been cancelled or repaid by someone else, the taxpayer was mandated to include the cancelled or repaid loan amount as part of their gross income, for tax purposes. However, the American Rescue Plan Act of 2021 has modified the treatment of student loan forgiveness for discharges in 2021 through 2025, wherein the taxpayer may be able to exclude the repaid or cancelled loan amount from his gross income, if the loan could be categorized as one of the following:

• A loan for post-secondary educational expenses.
• A private education loan.
• A loan from an educational organization described in Code Sec. 170(b)(1)(A)(ii).
• A loan from an organization exempt from tax under Code Sec. 501(a) to refinance a student loan.

Taxpayers can find more information about the list of exceptions to canceled student loan debt in income https://www.irs.gov/forms-pubs/modified-treatment-of-student-loan-forgiveness-for-discharges-in-2021-through-2025.

Upgrading the Internal Revenue Service’s antiquated information technology infrastructure will help honest taxpayers, especially those making $400,000 or less, from being audited, Department of the Treasury Secretary Janet Yellen said.

Upgrading the Internal Revenue Service’s antiquated information technology infrastructure will help honest taxpayers, especially those making $400,000 or less, from being audited, Department of the Treasury Secretary Janet Yellen said.

Speaking September 15, 2022, at an IRS facility in New Carrollton, Md., Yellen reiterated that the $80 billion in additional funds allocated to the IRS in the recent Inflation Reduction Act would not be used to increase audits on lower earning taxpayers.

"I’ve directed that enforcement resources will not be used to raise audit rates for households making under $400,000 a year relative to historical levels," Yellen said, according to the prepared remarks posted on the Treasury Department website. "In fact, we expect audit rates for honest taxpayers to decline, once the IRS has the right technological infrastructure in place. This means a simpler tax filing season for taxpayers who are doing everything right."

The Treasury Department’s focus on getting high income individual taxpayers and corporations to pay their fair share of taxes has been a consistent message Sec. Yellen and other Treasury and IRS officials have been sending since the funding was approved.

"In 2019, the top one percent of Americans was estimated to owe over a fifth of unpaid taxes – totaling around $160 billion," Yellen said, "Data shows that less than half of all taxes from more complex sources of income are paid. Yet nearly all taxes due from wages and salaries – which are earned by ordinary Americans – are paid," adding that "working families are shouldering a disproportionate burden of investing in our roads, schools, military, and more."

She called that inequity "unacceptable," and said that the funding from the Inflation Reduction Act "will go toward auditing more high earners who have not paid their full bill. With it, we are estimated to raise hundreds of billions of dollars in revenue."

Sec. Yellen also suggested that tax filing could become simpler as the agency updates its IT infrastructure. She cited a statistic that it takes an average American 13 hours to file a tax return, while in Sweden, some can simply file with a text message.

"The Inflation Reduction Act finally provides the funding to transform the IRS into a 21st century agency," she said. "While all the improvements won’t be done overnight, taxpayers can expect to feel real differences during the next filing season."

The most immediate difference will be with those seeking assistance. Yellen said Tax Assistance Centers will be fully staffed for the next tax season, allowing for the IRS to help "at least 2.7 million Americans," up from 900,000 Americans helped in the previous year.

Similarly, the IRS is increasing staffing at its call centers and is targeting an 85 percent level of service (meaning between 8 and 9 of every 10 calls is answered) up from the current level of 10 to 15 percent during the most recent tax filing season. It is also targeting a reduction of wait times to less than 15 minutes from the near 30 minutes of wait time during the 2022 tax filing season.

Sec. Yellen also committed to the digitization of paper tax returns through some form of scanning and moving away from the current use of manual transcribing, something both tax professionals and the National Taxpayer Advocate have been calling for.

"For taxpayers, this means faster processing and faster refunds," she said. "The IRS will also build online capabilities to enable taxpayers to fully interact with the agency digitally. Currently, when taxpayers receive a notice from the IRS, they generally must respond via mail. During this coming filing season, millions of taxpayers will be able to receive and respond to notices online."

NTA Offers Suggestions on How New IRS Funding Should Be Allocated

National Taxpayer Advocate Erin Collins offered suggestions on how the Internal Revenue Service should spend the $80 billion in additional funding it received from Congress in the Inflation Reduction Act, signed into law earlier this year.

In the first of two blog posts on the subject posted September 14, 2022, Collins focused on the immediate needs of the agency.

She wrote that before the IRS moves forward in plans to improve its overall operations, "it is imperative that it fulfills its core filing season mission by eliminating the backlog of unprocessed original and amended paper-filed tax returns, pay all pending refunds, and work through its backlog of overaged correspondence."

To achieve this, she outlined the following recommendations:

• hire or re-assign employees to process the backlog of paper-filed tax returns and correspondence;
• hire enough employees to answer 85 percent of taxpayer phone calls and institute “customer callback” technology on all toll-free lines;
• improve services for taxpayer professionals;
• continue to suspend automated collection notices until the backlog is eliminated; and
• hire enough employees to fully staff Taxpayer Assistance Centers and extend walk-in capabilities.

The recommendations preceded remarks made by Department of the Treasury Secretary Janet Yellen on September 15, 2022, in which she highlighted a number of these recommendations as priorities for the IRS, including fully staffing Taxpayer Assistance Centers and improving call center service levels.

Longer Term Recommendations

In her second blog post on the subject, posted September 15, 2022, Collins focused more on long-term initiatives the IRS can embark on to improve the taxpayer experience.

The recommendations ranged from the basic, such as hiring more human resource employees and ensuring proper training for all IRS employees to updating antiquated information technology infrastructure, improving transparency and issuing clear notices and guidance.

On the IT side, Collins’ recommendation topics touched on some of the usual suspects, including improving online functionality and access to tax records and automating the scanning process for paper filings. She also called for implementing technology to allow taxpayers and tax professionals to upload documents for auditors, as well as improving the readability of transcripts, and enabling all taxpayers to have the ability to electronically file their tax returns.

Other technology recommendations include improving the voicebots and chatbots as well as overhauling the IRS website to make it more user friendly.

In the area of improving transparency, Collins noted that during the 2020 and 2021 filing seasons, the IRS "failed to provide weekly reports proving tax return processing timeframes so that taxpayers would know what to expect when they filed their returns or submitted correspondence. This lack of proactive transparency and timely information left taxpayers confused and frustrated, reaching for the phones, searching the Internet, and looking for tax professionals to help."

As for improving notices and guidance, Collins noted that despite improvements over the years, "some critical notices remain confusing and vague, and don’t provide taxpayers with adequate IRS contact information. In some cases, the IRS limits the number of characters and words in its notices."

She noted that under the Taxpayer Bill of Rights that taxpayers have the right to be informed. If the IRS knows something, "it needs to timely, accurately, and clearly say it," Collins wrote. "Failure to do so may well lead to more complications and problems for taxpayers, requiring additional time and resources by taxpayers, tax professionals, and the IRS to resolve them."

Finally, Collins called for an increase to the Taxpayer Advocate Service funding, noting that its "case advocacy operations are already stretched thin, and we will need to hire additional employees if the IRS ramps up its compliance activities, as that inevitably will lead to more TAS cases."

"IRS leaders often tell us they agree with our recommendations in concept, but they lack the resources to implement them," Collins wrote in the second blog post. "With the supplemental funding it has received, these initiatives can now be undertaken."

All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year.  President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year.  At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.

All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year.  President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year.  At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.

Taxes and spending

Almost immediately after President Obama won re-election, Democrats and Republicans scrambled to stake out their positions over the fiscal cliff.  Unless the White House and the GOP reach an agreement, the Bush-era tax cuts will expire for all taxpayers after 2012 and across-the-board spending cuts will take effect.  Many popular but temporary tax incentives, known as tax extenders, expired after 2011, with many more scheduled to expire after 2012.  The alternative minimum tax (AMT), intended many years ago to apply to wealthy taxpayers, is on track to encroach on more middle income taxpayers because it is not indexed for inflation.  Also, the employee-side payroll tax cut is scheduled to expire after 2012.

Since winning a second term, President Obama has repeated that the Bush-era tax cuts should expire for higher income individuals after 2012.  The top two tax rates would rise to 36 percent and 39.6 percent after 2012. All of the remaining rates would be extended.  Tax rates on capital gains and dividends would also increase for higher income individuals. On the campaign trail, President Obama described higher income taxpayers as individuals with incomes above $200,000 and families with incomes above $250,000. 

President Obama has talked about trimming $4 trillion from the federal budget deficit.  Approximately $1.6 trillion would come from increased taxes on higher income individuals.  To achieve a target of $1.6 trillion in tax revenue, the Bush-era tax cuts could not be extended for higher income individuals.  Other incentives for higher income individuals would likely be curtailed or possibly eliminated under the President’s plan. These include the personal exemption phaseout (PEP) and the Pease limitation on itemized deductions. President Obama may also re-propose his “Buffett Rule,” which, the President has explained, would ensure that individuals making over $1 million a year pay a minimum effective tax rate of at least 30 percent.

The GOP, its majority reduced in the House after the November elections, has offered few details about its plans to avoid the fiscal cliff.  House Speaker John Boehner, R-Ohio, has indicated that the GOP may be open to raising revenue by closing tax loopholes and capping certain unspecified deductions for higher income individuals.  Revenue could also be raised by limiting or abolishing business tax deductions and credits.  Among the business tax incentives most often hinted at for elimination are ones for oil and gas producers. President Obama, however, has said that he will not support a deficit reduction plan that relies on closing undefined tax loopholes.

Possible scenarios

Looking ahead, several scenarios may play out before year-end.  President Obama and the GOP could agree on a tax and deficit reduction package that meets or comes close to the President’s targets.  President Obama and the GOP may agree to extend the Bush-era tax cuts and delay the spending cuts for three or six months to give everyone more time to negotiate a long-term deal.  On the other hand, both sides could fail to reach any agreement before year-end and the Bush-era tax cuts would expire as scheduled.  The spending cuts also would kick-in as scheduled.

Filing season

Whenever Congress changes the tax laws, the IRS has to reprogram its return processing systems.  Tax laws passed late in 2012 have the potential to delay the start of the 2013 filing season depending on how long it takes the IRS to reprogram its systems.

IRS officials have told Congress that they are preparing for late tax legislation, especially legislation on the AMT.  In past years, Congress has routinely “patched” the AMT to shield middle income taxpayers from its reach.  The IRS appears to be anticipating that Congress will patch the AMT for 2012.  If Congress does not, the IRS has warned that the start of the 2013 filing season could be delayed for as many as 60 million taxpayers.

The IRS also must reprogram its processing systems for the tax extenders.  These tax law changes generally do not require the level of reprogramming the AMT patch requires.  The IRS has predicted that any year-end extension of the extenders will be manageable.

Please contact our office if you have any questions about the tax and spending negotiations underway in Washington.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

Additional tax on higher-income earners

There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.

The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).

Passthrough treatment

For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.

Withholding rules

Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.

Planning techniques

One planning device to minimize the tax  would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.

Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.

If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.

Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.

Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.

To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.

Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.

The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.

If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.

Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.

If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.

More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.

Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:

• Who are your taxable workers?
• What payroll taxes apply?
• What compensation is taxable?
• When are your payroll taxes due?
• What payroll and other returns should you file?

 Taxable workers

The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.

It's more likely that you hire employees.  In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.

There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.

If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.

What taxes apply

Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.

You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.

Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.

Compensation

Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.

There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.

Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.

Deposit schedule

Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.

Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.

Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.

Forms

If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.

The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.

Penalties are costly

Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.

The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.

You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.

Reporting obligations

Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.

Staying out of trouble with the IRS

Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.