federal tax update – 2021 mid - year

Federal Tax Update – 2021

Mid - YearWhat is New… and Why??

Presenter:

John M. Lawrence [email protected]

812-204-2280

Purpose of Session

This is YOUR session!! Please ask all of the questions that you desire regarding any issue, including actual client situations. Give your opinions! If I cannot respond during the session, I will obtain an answer and get back to you!

What the Webinar Is and Is Not

This webinar is an overview of current developments in federal tax law for 2021 and IS NOT meant to be a comprehensive study or a substitute for the in-depth reading, interpretation, study, and application of the discussed law or comments that are discussed.

Prologue to Presentation

Many of us thought that the 2020 tax season was the most chaotic and demanding in their history. Unfortunately, the 2021 season (which is continuing!) has proven in many instances to be worse!

Prologue to Presentation - Continued

Many practitioners are reporting that they are behind compared to prior years due to the retroactive law changes, slow conformity decisions with various state governments, IRS lack of actions, chaotic and slow guidance, attitude of clients, etc.


I have had practitioners confide in me that they are exhausted. Many of my colleagues have reached the “burnt out” stage, experience frustration, and feel elements of depression. It is normal to feel all of this considering what we have been through and are going through.


Look for ways to re-energize and take care of yourself. Your profession needs you! Your clients depend on you! Your family needs you! You need you!

Try to strike a healthy balance.

Polling Question #1

The 2021 tax season has been:1. More demanding than prior tax seasons.2. More frustrating than prior tax seasons. 3. About the same.4. Numbers 1 and 2 only.

Dealing With The IRS!!


The Taxpayer’s Advocate released the following information that the IRS has not released:1. The IRS has a backlog of 35 million

unprocessed individual and business returns that they require some type of manual processing.


This amount is more than five times the number that was to be manually processed in 2019.

2. Less than 50% of this backlog is due to paper returns awaiting processing.

The remainder of the backlog is electronically filed returns.


A large number of these returns were simply suspended from being processed for some type of further review.The IRS has stated that a large number of these

returns requiring further review were due to discrepancies between the recovery rebate credits claimed by the taxpayers in comparison to IRS records.


3. Returns are being reviewed that utilized the 2019 earnings instead of the 2020 earnings to claim the larger earned income tax credit and/or additional child tax credit.

4. The IRS has substantially increased the number of returns that have been determined to be suspicious.


As of May of this year, this number was 3.7 million as compared to 1.3 million in all of 2019.

5. The IRS’s telephone line for individual tax assistance recorded roughly 85 million calls through May of 2021 with only 3% accepted by an IRS representative.

Dealing With The IRS!!Continued

In addition to processing the normal filings of the tax returns, the IRS is tasked with the responsibilities for correcting many forms 1040 that were filed.

This included unemployment compensation that was retroactively exempted from income, as well as payments of advance premium tax credits that were also retroactively exempted from payment.

Dealing With The IRS!!Continued

This is in addition to being charged with the tasks of determining and mailing out stimulus payments and, beginning this past July, mailing out the advanced child tax credit payments in which 88% of the American children qualify.

Yet, it is somewhat hard to understand their predicament when:

Dealing With The IRS!!Additional Issues

1. The IRS continues to mail a large number of notices for amounts due when the taxpayers have made a timely payment.

2. They are sending out notices that notify the clients that they are reviewing their returns to confirm their accuracy before processing themand even crediting estimated payments without status updates.

Dealing With The IRS!!Additional Issues - Continued

3. Also, they are not opening their mail in a timely manner as evidenced by their cancelling installment payment agreements when the taxpayer has made a timely payment, balance due demands with interest and penalties added to the amount when the taxpayer has made a timely payment, etc.

My thoughts on what to do and…..

Dealing With The IRS!!Additional Issues - Continued

4. As discussed before, one has difficulty in speaking with the IRS if one can even get connected and one must ask why?

5. IRS representatives continue to give little or no information or solutions and give in a large number of situations conflicting or wrong information .

Still……………..

Polling Question # 2

My experience with the IRS in 2021 has been:1. Responsive to my professional needs.2. Not responsive to my professional needs.3. Frustrating.4. Numbers 2 and 3 only.

Highlights, Review, and Issues with CARES Act - 2021

Employee Retention Credits

One More Time…..Brief Review and Issues

Employee Retention Credits –American Rescue Plan Act

The American Rescue Plan Act of March 11, 2021 extends the employee retention credit through December 31, 2021.

Furthermore, the Act expanded the credit to allow it against the Medicare tax.

Polling Question #3

The American Rescue Plan Act of 2021:

1. Extends the employee retention credit through December 31, 2021.

2. Extends the employee retention credit through September 30, 2021.

3. Revokes the employee retention credit.4. None of the above.

Employee Retention Credits

There has been a great deal of confusion and frustration regarding these credits as to their application to 2021 and, especially, for the refunds applicable to the last quarter of 2020.

This discussion will highlight some of misconceptions, particularly, on amended returns.

Employee Retention Tax Credits –Retroactive Provisions

The Requirements in 2020 are: All employers are eligible even those who

receive a PPP loan (new provision).Gross receipts for any quarter in 2020 must

be less than 50% of the gross receipts in the same quarter in 2019 (prior provision).

Employee Retention Tax Credits –Retroactive Provisions - Continued

The wage limit is 50% of wages up to $10,000 for a maximum credit of $5,000 per employee for the year (prior provision). Cannot use the proceeds of the PPP loan

for the same wage expense for the forgiveness of the loans and the retention credit (prior provision).

Employee Retention Tax Credits –Retroactive Provisions - Continued

Cannot file an amended return for the first quarter of 2020 since the allowance of the credit did not begin until well into the first quarter. One of the areas of confusion is what

constitutes gross receipts. Gross receipts are….

Employee Retention Tax Credits – 2021

The following changes were made to the credit FROM 2020:

1. The credit rate is increased from 50% to 70%.2. An increase in the limit on per employee

wages subject to the credit from $10,000 for the entire year to $10,000 for each quarter.

Employee Retention Tax Credits -Continued

In 2021, the maximum credit is $7,000 per employee per quarter.

3. A gross receipts test for all of the quarters of 2021 requires that the taxpayer’s gross receipts are less than 80% of the same quarter in 2019

OR


The taxpayer can elect to meet this requirement by comparing the preceding calendar quarter compared to the same quarter in 2019.

4. A safe harbor provision which allows employers to use prior quarter gross receipts to determine eligibility.


5. An increase in the number of allowed employees from 100 to 500 when determining the relevant qualified wage base.

6. Certain rules placed into effect that allow new employers who were not in existence for all or part of 2019 to be able to claim the credit.

Employee Retention Credit – Step by Step Application - 2021

1. Determine the eligibility by meeting either the requirement of a suspended operations test or the gross receipts test.

Compare your 2021 gross receipts for a quarter to the same quarter in 2019.

2. Determine the amount of qualified wages which includes the business owner’s and spouses wages and health insurance.

Employee Retention Credit – Step by Step Application - 2021 - Continued

More than 2% of shareholders qualify since their health insurance must be included in their wages. An employer can obtain a credit of up to

$10,000 in qualified wages per employee. 3. Multiply the credit rate of 70% by the

qualified wages.

Polling Question #4

Wages for calculating the employee retention credit includes:1. Health insurance of a 2% or more

shareholder and their spouse.2. Health insurance of family members.3. Both 1 and 2 above.4. None of the above.

Employee Retention Credit – Step by Step Application – 2021 - Continued

4. Claiming the credit requires that you select one of the two following options:

Reduce the payroll tax deposits by the amount of the anticipated credit or Claim the credit on the form 941 or 941X

(amended) quarterly payroll tax returns which may trigger a refund.

Employee Retention Credits -Continued

The IRS has admitted that as of late June they were just now processing forms 941X for the second quarter of 2020 and are starting to process the forms 941X for the third quarter of 2020.

Therefore, there is a substantial waiting time before the actual refunds are made.

Employee Retention Credits – Client’s Responsibilities

The client or practitioner should be keeping a spreadsheet, worksheets, etc. that mathematically details their compliance with the requirements to obtain the credits.

Practitioner’s Planning Note

A key result of these credits is that they have created an issue which is being overlooked in planning. The issue is that the total amount received in 2020 and 2021 for employee retention and family leave and sick credits is income to the client.

Thus, estimate tax payments as well as other strategies should be utilized to minimize the tax impact of their inclusion into income.

Deductibility of Meals

In 2020 and 2021 the meals deduction is expanded to qualify at 100% of the cost in the following instances:1. Meals with client and prospects in a

restaurant. 2. Meals for employees at a business meeting

that are purchased from a restaurant.

Deductibility of Meals - Continued

3. Meals consumed in a restaurant while in overnight travel status.

4. Meals served at a professional group’s meeting when they are prepared and served at the restaurant in that location.

5. Meals at parties for employees and their spouses.

6. Meals at recreational outings for employees and spouses.


7. Meals that are prepared on premises for employee seminars, etc.

8. Meals with a client or prospective customer at a country club.

Employee meals for convenience of the employer served in-house including those break room snacks are still only 50% deductible.

Deductibility of Meals -Continued

Notice 2021-25The IRS issued guidance in this Notice as

to what constitutes a restaurant.A restaurant is a business that prepares

and sells food or beverages to retail customers regardless of whether the food or beverages are consumed on the business’s premises.

Deductibility of Meals -Continued

The Notice states that a restaurant does not include a business that primarily sells prepackaged food or beverages not for immediate consumption.This includes grocery stores, specialty

food stores, liquor stores, drug stores, convenience stores, and similar places of business.

NOPE


In summary, the cost of meals that are prepared by a restaurant and not self-prepared are the only ones that qualify for the 100% deduction. Note: Entertainment expenses apart from

prepared meals by a restaurant for prospective or existing clients are still not allowable as a deduction. My thoughts are……

Polling Question #5

Restaurant meals with clients, prospective clients, and employees are 100% deductible:1. In 2020 only.2. In 2021 only.3. Both 2020 and 2021.4. None of the above.

The American Rescue PlanAct of 2021

Advance Child Tax Credit


We are going to cover this section in a in-depth manner because it is this issue that is currently creating the most questions and controversy.

Child Tax Credit

The Child Tax Credit Is:1. Increased from $2,000 to $3,600 for

qualifying children ages 5 and under at the end of 2021.

2. Increased from $2,000 to $3,000 for children ages 6 through 17 at the end of 2021.

3. For 2021 only.

Child Tax Credit- Continued

4. The $500 nonrefundable credit for other dependents has not changed and is not included in the advance payments.


General RulesThe advanced child tax credit will be 50% of

the estimated amount allowed based upon the information that the IRS has on file.

The credit for qualifying children is fully refundable regardless of the existence of earned income or any tax liability.

The credit will include children who turn 17 in 2021.

Advance Child Tax Credit – Example

A qualified child age 5 or under would be allowed a child tax credit of $3,600.The $3,600 multiplied by 50% would result

in $1,800,Six monthly (July through December)

payments of $300 would be made for that child.

General Rules - Continued

The advanced child tax credit payment amounts are not based on the Credit for Other Dependents which is not refundable.

Taxpayers may receive part of their credit in 2021 in advance of filing their 2021 form 1040.

If the credit is not directed deposited into a bank account, a check will be mailed.


The distribution of the advanced credits began on July 15th.

After July 15th, the credits are to be disbursed on a monthly basis through December 2021.

Receipt of the advance credits will not cause a delay in a client’s refund when their 2021 form 1040 is filed.

Polling Question #6

The advanced child tax credit payment for a child under 6 will be computed as:1. 50% of $3,600 or $1,800 divided by 6

equaling $300 per month.2. $3,600 per month. 3. $1,800 per month.4. None of the above.

General Rules - ContinuedThe advance child tax credits are not

taxable. Again, the advanced child tax credits will

be made even if the taxpayer has no income.

The advance child tax credits do not affect income eligibility for any government benefits under any federal program or any state or local program that is financed in whole or part with federal funds.


State and local programs that are financed in whole or part with federal funds cannot count advance child tax credit payments as a resource for purposes of determining eligibility for at least 12 months after the amounts are paid.


The advanced child tax credit will not be reduced by any outstanding tax balances that the client owes nor any outstanding state debts owed. However, if any child tax credit is claimed

on the 2021 form 1040 and results in a refund, the total refund, including the child tax credit, is subject to seizure for outstanding federal or state debts owed.


The advance child tax credit payments are not subject to seizure or for offsetting any past due child support owed. The advanced child tax credit is subject to

garnishment by non-federal creditors including debts pursuant to a court order, which can include fines related to a crime, administrative court fees, restitutions, etc.


If a spouse owes a federal or state debt, the client does not need to file an injured spouse claim (Form 8379).However, if you file a joint return in

2021and receive a refund, any child tax credits in your refund may be subject to offset for tax obligations and/or other federal and state debts your spouse owes.

General Rules - ContinuedThe IRS has mailed out Letter 6417 advising

taxpayers of the advanced child tax credit.Just because the client had received the

letter does not mean they are qualified to receive the payments. They still must meet the qualifications test. The advanced child tax credit will be

reconciled on the taxpayer’s 2021 form 1040 (discussed separately later).

Qualifications For The Child Tax Credit and Advance Payment

1. Must have a qualifying child and2. The taxpayer and their spouse, if married

– filing joint, must have their main home in one of the 50 states or the District of Columbia for more than half of the year.

3. Do not need a permanent address.4. Temporary absences do not disqualify

eligibility for the credit.

How Will The Amount of the Child Tax Credit be Initially Determined?

The IRS has stated that “we will determine your advanced child tax credit payment amounts by estimating the amount of the child tax credit that you will claim on your 2021 tax return during the 2022 tax filing season.”One can reasonably expect that this will

not be exact!

How Will The Amount of the Child Tax Credit be Initially Determined? - Continued

The estimate is based on the information on the processed 2020 return. Please note that the IRS ( ) is way

behind (again) in processing even electronically filed returns. If they have not processed the 2020 return

or it has not been filed, it will be based on the 2019 form 1040.


Information entered into the Non-Filer tool on IRS.gov in 2020.Information entered on the Get My

Payment tool in 2020.A federal agency that provides benefits

such as the Social Security Administration, Department of Veterans Affairs, or the Railroad Retirement Board.


The IRS notes that once they process the 2020 return, the advanced child tax credit will be recalculated and adjustments made to any remaining monthly payments. Do not file amended returns to receive the

advanced child tax credit.

Polling Question #7

The IRS will determine the amount of the child tax credit to be paid in advance based on:1. The taxpayer’s processed 2020 form 1040.2. Their estimate of how much of a credit the

taxpayer is entitled to when they file their 2021 form 1040.

3. Both 1 and 2. 4. None of the above.

Use of Non-Filer Sign-up Tool

The IRS has revised the Non-Filer Sign-up Tool.

The tool was developed in partnership with Intuit and delivered through the Free File Alliance.

Information to be provided includes all names, addresses, etc. of recipient, qualifying children age 17 and under, and other dependents as well as bank deposit information.

Use of Non-Filer Sign-up Tool -Continued

The IRS warns that taxpayers who already filed or plan to file 2019 or 2020 income tax returns SHOULD NOT USE THIS TOOL.

Change in Personal Information

If the taxpayer’s information has changed, use the IRS’s new Child Tax Credit Update Portal to update:Mailing address.Bank account information.Add or subtract the number of qualifying

children including births and adoptions.

Change in Personal Information -Continued

Change in marital status.Change in income. The portal will also be used to un-enroll

from the advance child tax credit payments (discussed separately later).

Payment – Direct Deposit

The taxpayer can use a bank account (it is critical to use and reconfirm the correct account and routing numbers as there have been errors which are very difficult to correct), prepaid debit card, or mobile app for the direct deposit.

Phase-Out of Enhanced Amount

The Increased Child Tax Credits are Phased-Out At:

$150,000 for married-filing joint and qualifying widow and widowers. $112,500 for heads of household.$75,000 for all other taxpayers.

Phase-Out of Payments - Continued

The phase out will occur in two different steps based upon your modified adjusted gross income.The first phase-out reduces the child tax

credit to $2,000 per child. After computing the first phase-out, the

second one can reduce the child tax credit below $2,000.


The phase-out for the 2021 child tax credit to reduce the $2,000 credit amount will begin when the modified adjusted gross income exceeds:

1. $400,000 if married filing a joint return or $200,000 for all other filing status.

Please note that the phase-out limitations are different for the advanced child tax credit and the regular $2,000 child tax credit.


The second phase-out reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold described above that is applicable to a phase-out level of a given taxpayer.

Definition of Modified Adjusted Gross Income

Modified Adjusted Gross Income is defined as:1. Any amount on line 45 or line 50 of the 2020

or 2019 form 2555 (Foreign Earned Income).2. Any amount excluded from gross income

because is was received from sources in Puerto Rico or American Samoa.

Otherwise, it is your AGI.

Reconciliation of the Advanced Child Tax Credit

The advanced child tax credit payments that are received must be reconciled on the form 1040 for 2021with the correct amount reflected on that return.

Reconciliation of the Advanced Child Tax Credit – Allowable Additional Amount

If the amount of the child tax credit exceeds the total amount of your advanced child tax credit payments, the remaining amount of the child tax credit can be claimed on the 2021 form 1040.

Polling Question #8

In reconciling the advanced child tax credit to the 2021 form 1040:

1. Any amount in excess of advanced payments can be claimed.

2. Is fully refundable.3. Both 1 and 2.4. None of the above.

Reconciliation of the Advanced Child Tax Credit – Repayment of Excess

However, if the total amount of advanced payments exceed the allowable child tax credit, then the excess payments are recaptured and paid back on the 2021 form 1040.

Again, the calculation of the payment of the advanced child credits are based on the current information the IRS has in their database.

Reconciliation-Repayment of Excess –Full Repayment Protection

There is an exception to the repayment provision which is entitled the Full Repayment Protection.

Qualifications for Full Repayment ProtectionThe main residence was in the United

States for more than six months of 2021 and…

Reconciliation-Full Repayment Protection - Qualifications

Qualifications – ContinuedThe modified adjusted gross income is at

or below:1. $60,000 for married-joint and qualifying

widow or widower filings.2. $50,000 filing as head-of-household.

Reconciliation-Full Repayment Protection - Qualifications

Qualifications – Continued3. $40,000 if filing as single or filing as

married-separate.The repayment protection will be

restricted if the client fails to meet the residency qualification and/or modified adjusted gross income exceeds the previous dollar amounts.

Reconciliation-Full Repayment Protection – Amount

As the modified adjusted gross income exceeds the previously cited dollar limitations, the repayment protection will be phased out or reduced. However, the tax liability resulting from

any excess advance child tax credit is reduced by an amount up to the full repayment protection amount which is $2,000 multiplied by:

Reconciliation-Full Repayment Protection – Amount - Continued

1. The number of qualifying children that the IRS used in their initial estimate of the advanced child tax credit payments

MINUS2. The number of qualifying children properly

taken into account in determining the allowed child tax credit on the 2021 form 1040.

Reconciliation-Full Repayment Protection - Amount - Continued

Once again, the repayment protection amount is phased-out or reduced as the modified adjusted gross income exceeds the previous amounts.However, the repayment protection amount

will equal $0 and the repayment amount will not be reduced when the modified AGI is at or above the greater amount based upon the following filing statuses for 2021:

Reconciliation-Full Repayment Protection - Amount - Continued

1. $120,000 if filing married-joint and as a qualifying widow or widower.

2. $100,000 if filing as head of household.3. $80,000 if filing as single or married-

separate.

Reconciliation-Full Repayment Protection – Letter 6419

Do you remember the difficulty that you had this tax season to obtain from the clients the letters that were mailed to them that detailed the amount of the stimulus payments?What was your level of success in

obtaining them or ascertaining the amounts received?

Polling Question #9

The repayment protection will equal zero when the modified adjusted gross income is or above:1. $120,000 if filing married-joint or as a

qualifying widow or widower.2. $100,000 if filing as head of household.3. $80,000 if filing as single or married-

separate.4. All of the above.

Reconciliation-Full Repayment Protection – Letter 6419 - Continued

Get ready!!!!The IRS will issue a Letter 6419 to the

recipients of the advanced child tax credit that detail the total payments that were disbursed to them during 2021.This letter will serve as a form of an

information return document.


This letter which is a de facto information return document will serve as the basis for the IRS reconciling what was paid to the recipient to what is shown on the return and…..serve as the basis for the correctness of the 1040s seeking refunds of the child tax credit and amounts owed because of overpayments of the advanced credits.


The Letter 6419 will be sent to the mailing address on file which is the most recent, previously filed return or address that was updated in the Child Tax Credit Update Portal.

Issues and Warnings!!Practitioners Take Heed!

The advanced child tax credit payments are having the unintended effect of creating, in some cases, a nation of tax debtors who have long spent the payments and do not have the funds to repay them.

We are hearing from our clients that the opt-out features are way too complex for many of them, thus, making it difficult for them to prevent repayments of the excess credits.

Issues and Warnings!!Practitioners Take Heed! - Continued

While the inability to obtain from the client the stimulus letters did not have an immediate impact because the practitioner was not required to reconcile the stimulus payments since there was not any pay back provision, this is not the case with the advanced child tax credit since there is a requirement to pay back any excess.


Aside from obtaining Letter 6419, the practitioner will have to obtain, particularly in the case of separated or divorced parents, a detailed knowledge of who is entitled to claim the dependents for 2021 and who claimed them in 2020 as well as the qualifications of both parties as a couple to claim the dependents in 2021.


You can expect aggressiveness by one party or the other, particularly in the case of parties that do not get along, in claiming these lucrative, refundable credits and in many instances both parties claiming the credit on their form 1040 resulting in an IRS mismatch and notice probing what happened and/or seeking a repayment of the credit.


The presence of these large, refundable credits has the IRS resurrecting the importance of Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent).

This form is necessary for the noncustodial parent to have obtained in order that he or she may claim these credits.


This is necessary to counter the position taken by the IRS that the custodial parent is allowed the dependency exemption regardless of what the divorce decree states.

Without it, the custodial parent is entitled to the child tax credit for each qualifying dependent.


It becomes even more important when the IRS makes the advance child tax credit payments to the noncustodial parent based upon the 2020 or 2019 tax returns with no updates to the portal, the custodial parent refuses to execute a form 8332, and claims the credit.


Recent IRS literature on the advanced child tax credit has expressly stated that the form 8332 is necessary and, therefore, the practitioner can be certain that this is the their position.

The failure of the parties to make quick updates of their information to the portal.


The obviously deepened involvement of the practitioner in ascertaining the facts of which party in a separated or divorce situation and who is reliable vs. who is not requires that whenever you have a doubt – obtain a representation letter from the client!


Review your client base and identify those clients that have a number of children that as such the child tax credit has played a significant role in reducing or eliminating the need to make estimated tax payments and/or greatly reduced their tax liability.


The possible negative effect is particularly true in instances of self-employed individuals with a large number of children.

Advise the clients of the eventual, possible, liability of accepting these payments and failing to unenroll from the program and/or bank the payments (if that is possible) for repayment.

However, estimated tax penalties may still apply.


Update your annual engagement letter and/or tax information packet that you furnish to the client with the specific request for the Letter 6419 and a warning as to the tax consequences of a failure to furnish the letter.


Be certain that your engagement letter, if you use one, indemnifies you against claims resulting from the failure of the client to provide the Letter 6419 and/or accurate information because of the greatly enhanced liability resulting from the prepayment of the credit and subsequent accountability on the form 1040 for 2021.


As of the date of this presentation, the IRS has not given any guidance on what to do if a check is lost or stolen as well as a lost or failure to receive a Letter 6419.

There are no check replacement provisions as of the date of this presentation.


As of the Date of This Presentation:If a check is issued to a client by the IRS

for the advanced child tax credit, it is presumed to have been received.

If a client refuses to cash a check, such as certain members of the Amish sect, they are presumed to have received the advanced payments and must account for it on their form 1040 for 2021.


Consider increasing your billings to reflect all of the additional work and liability resulting from the claiming and reconciliation of the new child tax credit as well as the planning in advance that you may invest with your clients.


One can expect an increase in the identity theft of children’s personal information due to the fact that the law provides that a claimant does not have to have filed a previous return or have any income to claim the child tax credit. How many people really focus on

protecting the identity of a minor child?


Now, it is very important since there is an enhanced incentive to steal the identities of children. Counsel your clients on the protection of

their children’s identities and warn them of scams that have already begun against giving out any personal information.

Opting Out – Unenroll From The Advance Payments

To unenroll, the taxpayer must use the IRS Child Tax Credit Update Portal and cannot do so by written correspondence or a telephone call.

There is one exception (explained later) to contacting the IRS by telephone.

The portal itself is still undergoing updates and enhancements.

It is very possible that it will “jam.”

Opting Out – Unenroll From The Advance Payments - Continued

The IRS announced on June 22nd that it had launched the Child Tax Credit Update Portal and that “future versions of the tool planned in the summer and fall will allow people to view their payment history, adjust bank account information or mailing address or other features.”


The IRS has also announced they have added the online tool entitled the Child Tax Credit Eligibility Assistant which “allows families to answer a series of questions to quickly determine whether they qualify the advance credit.”


Since we have passed the unenrollment deadline for August, the future unenrollment and payment dates are:Month Unenrollment Payment Date

DeadlineSeptember 8-30-21 9-15-21


Month Unenrollment Payment DateDeadline

October 10-04-21 10-15-21November 11-01-21 11-15-21December 11-29-21 12-15-21

Please remember that “close” counts only in horseshoes.


If a client misses an unenrollment deadline the scheduled payment will be made.

The unenrollment process takes up to seven days (at least!).

The taxpayer is advised to “check back” after unenrolling to make sure the request was processed.


If filing a joint return, both spouses have to unenroll.

If one spouse unenrolls and the other does not, then one-half of the joint payment that was supposed to be received will be issued by the IRS.

Once a client has unenrolled, they cannot re-enroll until a target date of September of 2021.

Opting Out – Unenrolling – Accessing the Update Portal

The IRS requires that to access the Child Tax Credit Update Portal, the taxpayer must first verify their identity.

A person must have an existing IRS username or ID.me account with a verified identity.

If they have the above they “can easily sign in” according to the IRS.

Opting Out – Unenrolling – Accessing the Update Portal - Continued

If a client does not have an account, they will have to confirm their identity using a form of photo identification using ID.me.

There is one exception to the use of a telephone to contact the IRS about unenrolling.

This exception applies to taxpayers who lack internet access or otherwise cannot use the online tool.

Polling Question #10

When opting out of the advanced child tax credit payments:

1. Both spouses must unenroll when filing joint.

2. If one spouse unenrolls and the other does not, the joint payment will be only one-half of the intended amount.

3. 1 and 2 above.4. None of the above.

Opting Out – Unenrolling – Accessing the Update Portal - Continued

Such individuals should unenroll by contacting the IRS at the telephone number contained in the “outreach letter.”

You will be startled at the depth of the questions the IRS will ask.

Now, what do you think are the chances of getting through to the IRS at this telephone number?

Opting Out – Unenrolling – Practitioner’s Note

I would seriously caution the practitioner that they should avoid trying to unenroll the client on their behalf.

This is because of the time consuming process of doing this for each person and the need to have knowledge of specialized, personal identification information which the practitioner may not have.

Opting Out – Unenrolling – Practitioner’s Note - Continued

Furthermore, such efforts greatly enhances your exposure to liability issues regardless of the temptation to do so because as you have just learned, the average client will not have either the patience and/or expertise to do so.


In summary, the failure to unenroll a client from the advanced child tax credit program or the failure to update the client’s information on file with the IRS:Because of too high an income to qualify. Someone else qualifies to claim the child or

children as dependents (especially disputes on this issue).


The home was outside the United States for more than half of 2021.

Other issues such as value of offsetting the client’s total tax liability and impact on estimated tax payments.

Will result in that client receiving the payments and being held responsible for the repayment of some, if not all, of the total amount.

Practitioner ActionsIn summary, the advanced child tax credit

payments are having the unintended effect of creating in some cases a nation of tax debtors who have long spent the payments and do not have the funds to repay them.

We are hearing from our clients that the opt-out features are way too complex for many of them, thus, making it difficult for them to prevent repayments of the excess credits.

Practitioner Actions

Once again, this issue, like others we have encountered, has created confusion, frustration, and the need for a lot of extra work.

Postscript

Do you remember the debacle and fraud that accompanied the advanced earned income credit that Congress was forced to eliminate years ago?

Child and Dependent Care Tax Credit

Child and Dependent Care Tax Credit

The American Rescue Plan Act expanded the child and dependent care tax credit by:1. Increasing the amount of work related

expenses taken into account.2. Increasing the percentage of allowed

work related expenses.3. Increasing the income limitations.

Child and Dependent Care Tax Credit -Continued

4. The credit is now refundable for a taxpayer who lives in any of the 50 states and the District of Columbia for more than half the year in 2021.

These changes to expand the credit are for 2021 only but there is legislation to make the changes permanent.

Child and Dependent Care Tax Credit -Eligibility

The taxpayer must pay someone to care for one or more qualifying persons in order that the taxpayer may work or look for work. The income level must be within the

income limits set for the credit.

Child and Dependent Care Tax Credit -Eligibility

The taxpayer must file a joint return if married.If legally separated or living apart from the

spouse, the taxpayer must qualify for the ability to file a separate return. The taxpayer and spouse (in the case of a

joint return) must have earned income during the year to claim the credit.

Child and Dependent Care Tax Credit -Qualified Persons

A dependent who is under age 13 when the care is provided.A spouse in the case where they aren’t

mentally or physically able to care for themselves and they live with the taxpayer more than half of the year.

Child and Dependent Care Tax Credit -Qualified Persons - Continued

A dependent who is not able to mentally or physically able to care for himself or herself and lives with the taxpayer for more than half of the year. Practitioner’s Note: Obtain a letter from a

physician certifying to the above conditions.


There is an exception to the dependency rule for a person who is not mentally or physically able to care for themselves:

1. The person would have been a dependent except that they receive more than $4,300 in 2021.

2. The person files a joint return.


3. You or your spouse (in the case of a joint return) can be claimed as a dependent on someone else’s return.

The person must live with you for more than half the year.

Child and Dependent Care Tax Credit -Percentage of Work Related ExpensesThe percentage of work related expenses

that are allowed as a credit to the income tax liability increased.The new maximum is 50%.In 2021, the 50% amount begins to be

phased out if the adjusted gross income is more than $125,000 with a complete phase out if the adjusted gross income is more than $438,000.

Child and Dependent Care Tax Credit -Amount Of Work-Related Expenses

In 2021 only, the maximum amount of work related expenses is $8,000 for one qualifying person and $16,000 for two or more qualifying persons. Therefore, the maximum total credit is

$4,000 (50% of $8,000) if the taxpayer has one qualifying child and $8,000 (50% of $16,000) if there are two or more qualifying persons.

Child and Dependent Care Tax Credit -Amount Of Work-Related Expenses -

ContinuedThe amount of work related expenses that

can be taken into account in computing the credit cannot exceed the taxpayers earned income.If married and filing a joint return, the work

related expenses that can be taken into account are limited to the lesser of one spouse’s income.

Child and Dependent Care Tax Credit -Earned Income Requirement

When filing a joint return, there must be earned income by both spouses to claim the credit even if one spouse is out of work during 2021.


In 2021 only, the amount of the child and dependent care credit is:

1. 50%.2. Subject to a maximum of $8,000 work

relate expenses for one qualifying person and $16,000 for two or more qualifying persons.

3. Both 1 and 2.4. None of the above.

Child and Dependent Care Tax Credit -Earned Income Requirement – Continued

If the taxpayer or their spouse are full time students or are mentally or physically incapable of caring for themselves, the taxpayers will be treated as having $250 earned income for one qualifying person or $500 for two or more qualifying persons for any month a taxpayer was a full time student or unable to care for themselves.

Child and Dependent Care Tax Credit -Earned Income Requirement – Continued

An important provision of the earned income requirement is that if in the same month either spouse did not work and were full time students or not physically or mentally capable of caring for themselves, only one of the individuals can be treated as having earned income for that month.

Child and Dependent Care Tax Credit -Refundable

In 2021, the credit is refundable. Therefore, any credit in excess of a tax liability is refundable.

Child and Dependent Care Flexible Savings Account

For 2021 only, the maximum amount of tax free employer provided care benefits is increased from $5,000 to $10,500.The employer must formally adopt this

change.If the employer does so, the employee

may set aside $10,500 in a dependent care FSA.

Earned Income Tax Credit

Childless EITC – 2021 Only

The EITC has been expanded for 2021 only to cover more childless individuals.

There is legislation in Congress to make the 2021 changes permanent.

In 2021, the maximum credit for taxpayers with no dependents is $1,502 which is an increase from $538 in 2020.

Childless EITC – 2021 Only - Continued

This amount is available to filers with an AGI below $27,380 and can be claimed by eligible workers who are at least 19 years of age.

In the past the credit was available only to individuals 25 to 64.

However, full time students under age 24 do not qualify.

Childless EITC – 2021 Only - Continued

If a taxpayer has dependents, they can calculate their EITC using the 2019 income as long as that amount was higher than their 2021 income.

Earned Income Tax Credit Changes for 2021 and the Future

The Following Provisions For 2021 and Future Years

1. Individuals and taxpayers filing married joint who have social security numbers may now claim the credit even if their children do not have social security numbers.

Earned Income Tax Credit Changes for 2021 and the Future - Continued

In this instance, they would receive the smaller credit available to childless workers.

2. The limit on investment income has increased to $10,000 which is raised from the current limit of $3,600.

After 2021, the $10,000 limit raise is indexed to inflation.


3. Married but separated individuals can elect to be treated as not married for EITC purposes.

Required Conditions:I. The spouse claiming the credit cannot

file jointly with the other spouse.


Required Conditions - Continued:II. Cannot have the same principal

residence with the other spouse for at least six months out of the year.

III. Must have a qualifying child living with them for more than half of the year.


The expansion of the earned income tax credit provisions includes:

1. Increasing the adjusted gross income for taxpayers with no dependents to $27,380.

2. Increasing the maximum amount to $1,502 for taxpayers with no dependents.

3. Lower the eligibility age to 19. 4. All of the above.

Family and Sick Leave Credits

Family and Sick Leave Credits

The sick and family leave credits are extended through September 30, 2021.

They are fully refundable.The limit on a credit for paid family leave

is increased to $12,000.The paid leave credits will be allowed for

leave that is due to COVID 19 vaccinations.

Family and Sick Leave Credits -Continued

The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.

The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.

Family and Sick Leave Credits -Continued

The credits can now be claimed by Section 501(c)(1) governmental organizations.


With regards to sick and family leave credits, the American Rescue Plan Act:

1. Increased the limit to $12,000.2. Extended the allowable period to

September 30, 2021. 3. Extended the allowable period to

December 31, 2021.4. Numbers 1 and 2 above only.

Premium Tax Credit

Premium Tax Credit

Effective for the years 2021 and 2022, the eligibility is expanded to household income in excess of 400 percent of the federal poverty line and increases the amount of the premium tax credit that is available.

Premium Tax Credit - Continued

The effect of the modified percentages is to increase the amount of the credit for individuals that already are eligible for the premium tax credit. It also effectively eliminates the income

cap for premium subsidies.


For 2021 only, individuals that have received unemployment compensation will be treated as if the taxpayer’s income was no higher than 133% of the federal poverty line regardless of their actual income.


The effect of the modified percentages is to increase the amount of the credits for individuals that already are eligible for the premium tax credit. It also effectively eliminates the income

cap for premium subsidies.

Excess Premium Tax Credit - 2020

Congress made it retroactive to 2020 that taxpayers are not required to repay any excess premium tax credits.We will discuss later the requirement not to

file an amended tax return for amounts repaid for 2020.


For the tax years 2021and 2022, the eligibility for the premium tax credit has been:

1. Expanded to households in excess of 400% of the federal poverty line.

2. Increases the amount of the premium tax credit that is available.

3. Both 1 and 2 above.4. None of the above.

Form 1099-K

Prior Law – Form 1099-K

Prior to the American Rescue Plan Act, the law required that third party settlement organizations such as Pay Pal, credit card companies, or Payable had to issue a form 1099-K when the client had gross earnings that were more than $20,000 AND more than 200 transactions.

New Law – Form 1099-K

The American Rescue Plan Act provides that effective January 1, 2022, the prior threshold is replaced with the simple requirement that a form 1099-K is to be issued when the third party processor, including credit card companies, has processed just $600 or more for the entire year.

New Law – Form 1099-K- Continued

Effective March 12, 2021The law has been clarified that the forms

1099-K are only goods and services.If a service such as PayPal or similar ones

are utilized to reimburse individuals such as family members, no form 1099-K is to be issued.


The American Rescue Plan Act Requires That a Form 1099-K:

1. Is issued whenever the amount paid to one recipient is $600 or more in year.

2. Is issued for only goods and services.3. Both 1 and 2.4. None of the above.

New Law – Form 1099-K- Continued

No form 1099-K is to be issued if the payer uses a third party processor to make charitable contributions.

New Law – Form 1099-K - Continued

The payers that are affected by the new requirements include PayPal, Uber, Lyft, Instacart, Grubhub, eBay, Etsy, etc.The Joint Committee on Taxation has

stated this new provision will raise at least $8 billion in additional taxes over the next ten years.

New Law – Form 1099-K - Continued

The IRS is telling Congress in support of this change and others (that we will later discuss under the Administration’s tax proposals) that it estimates that 55% of income from sources where there is no information return requirement is not reported. Whereas, when information returns are issued, only 5% is unreported.

New Law – Form 1099-K – What This Means

The form 1099-K is a darling of the IRS.Since its inception, it has maintained a

vigorous audit program based upon this form. The new requirements is specifically

targeting the “gig economy” in an effort to capture taxes from it.

New Law – Form 1099-K – What This Means - Continued

The states will now be aware of a new source of sales tax and income tax assessments resulting from the enhanced form 1099-K reporting.A number of states are on the prowl for

additional revenue from the forms 1099-K.


Massachusetts, Maryland, Mississippi, Vermont, and Virginia currently require a form 1099-K from a third party processor if they pay a resident $600 or more during the year. New Jersey and Illinois have $1,000

threshold.


Missouri has a $1,200 threshold.Arkansas has a $2,500 threshold.

New Law – Form 1099-K – Practitioner’s Planning

Practitioners Have To Plan For:The client receiving notices from various

states probing for additional sales taxes.Pennsylvania is very aggressive in this area.The effort to nexus the client in that state for

income tax purposes and assess income taxes, etc.

New Law – Form 1099-K – Practitioner’s Planning - Continued

Enhanced awareness of the client’s “casual” income producing activities including expanding the interview and making certain that one’s engagement/representation letters cover the subjects of “side” income, gig income, etc. In some cases, this may require a schedule C

for even casual sales on E-bay.

New Law – Form 1099-K – Practitioner’s Planning - Continued

Requiring that the practitioner obtain from the client the actual forms 1099-K and reconcile them to the clients actual reported gross receipts to make certain that the gross receipts at least equal if not exceed the amount reported.


The IRS has historically conducted audits utilizing form 1099-K matchings in which the agents have maintained that there is a “formula” (which they will not reveal) by which the gross receipts should exceed the total amounts on the forms 1099-K for cash transactions.This is applied to certain retail businesses.


Make the client aware that this is a “hot” IRS enforcement area which has the possibility of the audit being conducted by correspondence (currently 80% of all audits are conducted by correspondence).

Miscellaneous Provisions

Miscellaneous ProvisionsAdvance Premium Tax Credit – Amended

Returns

A number or practitioners missed the fact that the excess premium tax credit (incurred for whatever reason) does not have to be paid back nor does it have to be reported.

This was for 2020 only.

Miscellaneous ProvisionsAPTC Amended - Continued

Now here is the kicker!The IRS has stated that you do not have to

file amended returns.They have stated that they will

automatically reduce the repayment amount to zero.

Miscellaneous ProvisionsAPTC - Continued

Additionally, the IRS has stated that they will “automatically reimburse anyone who has already repaid their 2020 excess advance premium tax credit.”In a number of instances, this still has not

been done, so please monitor it closely to make sure that it is done.

Miscellaneous ProvisionsAPTC - Continued

Ironically, there are instances where notices have been sent out about nonpayment of the excess APTC.


Regarding the IRS statement that they will adjust and make refunds of the advanced premium tax credit that were paid in, is it

your opinion that they will do it:1. Correctly.2. Mostly correctly.3. Somewhat correctly.4. Not at all.

Miscellaneous ProvisionsUnemployment Compensation

The IRS has begun correcting the returns that had reported the $10,200 in federal unemployment benefits before the law was retroactively changed to exempt that amount for 2020 only. Just a Reminder: The exemption applies

only to individuals in all filing categories with a modified adjusted gross income under $150,000.

Miscellaneous Provisions -Unemployment Compensation - Continued

In many instances, taxpayers expecting a refund are still waiting.The IRS is sending out 2.8 million refunds

initially and has identified 13 million taxpayers who may be eligible. Like with the APTC, you will need to

monitor that the refund is received and it is the correct amount.

Unemployment Compensation – State of Ohio

For the State of Ohio - After The IRS Makes the Adjustment Do the Following:

1. File an amended Ohio IT-1040 and an amended SD-100 for clients that reside in a traditional school district to report the revised adjusted gross income reflecting the $10,200 exemption.

Unemployment Compensation – State of Ohio - Continued

2. Include a copy of the taxpayer’s Tax Account Transcript from the IRS that reflects the revised federal adjusted gross income exempting the $10,200 unemployment compensation.

Go to the website irs.gov/individuals/get-transcript or call 1-800-908-9946 (good luck in getting through).


Identification will be needed in the form of the last eight digits of a credit card, a car loan or mortgage account number, a valid e-mail address, and a cell phone that can have a text verification delivered to it.

Note: If the taxpayer has a “fraud block” on their credit reporting transcripts, this may not work.


To obtain a transcript to be mailed which will take up to 10 days, go to the same website as previously cited and apply.

3. Complete the Ohio form IT RE or, in a traditional school district income tax district, form SD RE – Reasons and Explanations of Corrections.


4. On the form “Reasons and Explanation of Corrections,” check the box for “Federal adjusted gross income decreased” and in the detailed section explanation cite “federal unemployment amount exempted.”


If the taxpayer has filed an amended return with the IRS to claim a refund for the unemployment compensation exemption, they must wait until the IRS has processed and accepted their form 1040X.

Good luck!!


When filing an Ohio amended tax return to claim a refund for the previous inclusion of the exempted

federal unemployment compensation, the practitioner must:

1. Include an IRS Tax Account Transcript.2. Explain the reason for filing the amended return.3. Both numbers 1 and 2.4. None of the above.

COBRA Continuation Coverage

Assistance eligible individuals (AEI) are given a 100% subsidy for premiums for COBRA continuation coverage.

This is for the period beginning on April 1, 2021 and ending on September 30, 2021.

The subsidy is provided by not requiring AEIs to make premium payments but requiring the taxpayer to whom the AEI otherwise would pay the premiums to treat them as paid.

COBRA Continuation Coverage -Continued

A penalty is imposed on assistance eligible individuals if they fail to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.

AEIs who receive the COBRA continuation coverage premium assistance are not also eligible for the health coverage tax credit.

COBRA Continuation Coverage -Continued

Continuation coverage premium assistance is not includible in an assistance eligible individual’s gross income.

Student Loans

An individual’s gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after December 31, 2020 and before January 1, 2026.

Economic Injury Disaster Loan Grants

The EIDL grants received from the Small Business Administration are not included in income and this exclusion from gross income will not result in the denial of any deductions, reduction of any tax attributers, or denial of basis increases. SBA restaurant revitalization grants are

treated in the same manner.


Under the American Rescue Plan Act:1. Economic Injury Disaster Loan Grants are

not taxable.2. SBA restaurant revitalization grants are

not taxable.3. All state and local grants are nontaxable. 4. Only 1 and 2 above.

Forgiveness of Economic Injury Disaster Loan Grants And Other Grants

Therefore, be sure to make a schedule M-1 adjustment for “income recorded on books this year not included on tax return” for the amount forgiven in the year.

Thus, if it is forgiven in 2021, the entry will be made on schedule M for 2021.

Forgiveness of Economic Injury Disaster Loan Grants and Other Grants- Continued

The schedule M-1 entry lines are:1. Form 1120 – line 7.2. Form 1120S – line 5.3. Form 1065 – line 5.Note that the amount of any forgiveness is

treated as tax exempt income and increases the basis of the S corporation shareholder or partner in a partnership.

Additional Practitioner Procedures –Alert for 2022 Filing Season

Determine if the client received the proper amount of the third stimulus payment (if any).Require the client to furnish the stimulus

letter that they received and reconcile the amount received to the 2021 return. Make sure your interview and tax

package properly in-depth to ascertain the number of minor dependents.

Additional Practitioner Procedures –Alert for 2022 Filing Season - Continued

Obtain the Letter 6419 to reconcile the advanced child tax credit payment.Conduct a proper in-depth and tax

package (add questions) to ascertain the existence of casual income and their sources in order to prepare the client to the realities of reporting this income due to the new form 1099-K requirements.


Again, obtain the forms 1099-K. Caution the client in your interview against

the earning of casual income and not telling you about and/or not reporting it. Place additional emphasis on preparing a

correct form 8867 (Preparer’s Due Diligence Checklist) due to the enhanced tax credits (we will discuss later the IRS’s determination of fraud with the various credits).


Enhance your interview and tax package to determine the amount (if any) of IRA or other distributions that were taken in 2020 and deferred for future years. Determine the amount of the various PPP

loans and other federal grants that were forgiven as well as the receipt of state and local grants.


Make the necessary entries to the schedule M of the partnership, S corporation, and C corporation returns.Adjust the basis computations of partners

and S corporate shareholders for forgiven loans and grants that are not income for federal purposes.


When a Paycheck Protection Loan, Economic Disaster Loan, or Other SBA Grant is forgiven:

1. An entry should be made on schedule M for the forgiven amount.

2. The partner’s or S corporation shareholder’s basis is increased by the forgiven amount.

3. Only 1 and 2.4. None of the above.

Proposed Legislation

Proposed Tax Legislation

Why should we study what is proposed even though it has not passed Congress?

Because such legislation is a “warning shot across the bow.”

Effectively, the legislation is such that IF any given section passes now or in the short term future, the client must be prepared and we need to consider planning NOW to avoid as many negative consequences as possible.

American Families Plan

American Families Plan – Proposed Changes - Individuals

1. Increasing the top marginal income tax rate from 37% to 39.6% for taxpayers with taxable incomes over $509,300 for individuals filing-jointly and $452,700 for taxpayers filing single.

Add the state and local tax rates and you could easily have an effective rate of 45%+.

American Families Plan – Proposed Changes – Individuals - Continued

2. Increase the tax on capital gains and dividends from the current maximum of 20% to a maximum of 39.6% on taxpayers with an adjusted gross income of $1 million or more.

3. In addition to the capital gain rate of 39.6%, the net investment income tax of 3.8% would apply for an effective federal rate of 43.4%.


When adding the state and some local tax rates the total effective rate could easily exceed 50%.Note this proposed change is likely to be

accompanied by a proposal to raise all of the underlying graduated rates and eliminate the “free zone” where a taxpayer effectively pays no tax up to a certain amount of capital gain and/or dividend income .


4. Expand the application of the net investment income tax of 3.8% to shareholders and partners of pass through entities where they earn more than $400,000 from the entity.

This provision would coordinate the NIT with the self-employment tax so that if an individual paid the SECA tax, they would pay only the NIT.


What is important about this proposal is effectively the implementation of self-employment taxes on the net income of an S corporation. For years, Congress has been debating this

issue and now with the formal introduction of legislation to implement SECA on the net income of S corporations, it is elevated to not only current consideration but future ones.


At the minimum, the NIT is being proposed on the net income of an S corporation at a certain level.Remember, once legislation is enacted it

is very easy to change and, in this case, lower the amounts subject to SECA or NIT for S corporation shareholders.


Congress is now focused on the issue of subjecting the net income of S corporations to self-employment taxes.This was the principal reason for electing S

corporation status as opposed to all of the negatives. Consider this in the future when deciding

to make an election.


5. Make permanent the expansion of the premium assistance tax credits in the American Rescue Plan Act.

6. Make permanent the expansion of the earned income tax credit in the American Rescue Plan Act.


7. Make permanent the expansion of the child and dependent tax credit provisions in the American Rescue Plan Act.

8. Make permanent the expansion of the child tax credit provisions in the American Rescue Plan Act and further expand it by making it fully refundable.


9. Limiting the deferral of gain from like-kind exchanges to $500,000 per taxpayer with a total limitation of gain to $1 million for taxpayers filing married-joint.

What this means is….10. Making permanent the excess business

loss limitation (which is to expire in 2026) for noncorporate taxpayers.

American Families Plan – Proposed Changes – Estates

Eliminate the current provision to allow a stepped up basis on the increased value of assets over the decedent’s basis in an estate for assets that are inherited or subject to a gift tax.Coupled with the above, a distribution of

the assets would result in a taxation of all gains over $1 million.

American Families Plan – Proposed Changes – Estates - Continued

Each beneficiary would be allowed a $1 million exclusion with all gains above that amount to be taxed at the capital gains rate. The $1 million exclusion would be indexed

for inflation after 2022.


While there has been a discussion to allow an exception for small businesses and farms as existed in prior estate tax law, these “exceptions” were far from perfect and often generated unintended tax consequences. One of these exceptions has been described

as not requiring the tax to be paid until the family-owned businesses including farms are sold or otherwise cease to be family owned.


Other Provisions Include:The taxation of illiquid assets would allow

the tax to be paid over a 15 year period. Recognition of gain when assets are

transferred to or out of a trust, partnership, or other non-corporate entities.


Other Provisions Include:Recognition of gain when assets are

transferred out of a revocable grantor trust to the extent that the transfer is to someone other than the deemed owner of the revocable trust, the spouse of the owner of the trust, or to liquidate a debt of the deemed owner.


Some Democratic members in Congress have suggested that instead of the provisions we have just discussed, they would favor a provision that would eliminate the stepped up basis without taxation of any gains and have the decedent’s basis carried over to their beneficiaries.


All of these proposed provisions coupled with the reversion to prior estate tax provision upon the expiration of the current ones on January 1, 2026, would further aggravate the severe tax consequences of having a taxable estate.


Regardless of what changes are finally legislated (if any), there will be a strong possibility of having to file federal estate tax returns again because….We have discussed so often in our

seminars in the past the need to keep strong proof of basis via valuations.


A possible effect of the introduction of this legislation is the reintroduction of the original IRS proposed regulations that greatly restricted and effectively eliminated valuation discounts that lowered the estate and gift tax implications.


Bottom line: Regardless of whether this legislation passes or not, this is a warning (once again) for us to counsel our clients about the urgency to do estate and gift planning now.


In counseling our clients about the possibility of proposed legislation becoming

tax law in the future we should:1. Emphasize gift, trust, and estate planning.2. Capital gain avoidance strategies. 3. Discuss like-kind exchanges of real

property.4. All of the above.

American Families Plan – Proposed Changes - Enforcement

The legislation proposes to increase funding for the Internal Revenue Service by $80 billion over a ten year period. The funding would target $30 billion for

technology implementation and upgrades.


The funding would provide the IRS with the ability to hire additional enforcement personnel in the audit and collection functions. The intended purpose is expand the audits

of wealthy individuals. However, such expertise takes time to

develop.


The problem is that the IRS is statistically driven which results in a very probable reversion to their old ways of auditing small businesses to show that they are accomplishing their mission. IRS staffing plan should instead have a

priority to rebuild their service centers and taxpayer assistance divisions which are both highly dysfunctional.


A major expansion of information provided to the IRS would be a requirement that financial institutions must provide comprehensive reporting of all transactions (e.g. deposits, withdrawals, checks written, etc.).


This provision would pertain to all businesses and individuals.It would include all bank, loan, and

investment accounts above a $600 threshold. Aside from the massive burden on

financial institutions, it is believed by banks that this will cause the decrease of the use of various financial accounts.


Enhancing the accuracy of tax information by allowing the IRS to require e-filing of information returns and expanding the quality of those returns.Expand broker information reporting

regarding crypto assets.


Extending the statute of limitations on listed transactions. Expanding the liability provisions of unpaid

corporate income taxes by imposing the requirement that such taxes be paid by the shareholders.


Increasing the oversight of return preparers by providing the IRS with the explicit authority to regulate paid preparers of federal tax returns including the imposition of minimum competency standards (we will discuss later the introduction of separate legislation regarding this issue).

American Jobs Plan

American Jobs Plan – Corporate Provisions

Raising the corporate tax rate to 28% from 21%.Extensive revisions of tax law affecting

global transactions including the disallowing of deductions attributable to exempt income, limiting inversions, etc. Imposing a 15% minimum tax on book

earnings of large corporations.

American Jobs Plan – Corporate Provisions - Continued

Allowing a 10% tax credit as an incentive for locating jobs and business activity in the United States.Disallowing tax deductions for expenses

incurred in connection with moving jobs overseas.

American Jobs Plan – Housing and Infrastructure Provisions

1. Expanding the low income housing credit.

2. Establishing a new neighborhood homes investment tax credit.

3. Making permanent the new markets tax credit.

4. Providing federally subsidized state and local bonds for infrastructure.

American Jobs Plan – Energy Provisions

1. Elimination of the intangible drilling costs deduction.

This provision is somewhat radical as the oil and gas industry has stated that if this is done we will easily see oil prices at $100+ per barrel.

2. Elimination of a variety of other, favorable fossil fuel tax provisions .

American Jobs Plan – Energy ProvisionsContinued

3. Expansion of various alternative energy and renewable tax incentives.

4. Establishment of a tax credit for electrical transmission investments.

5. Providing a partial credit for electricity generated from existing nuclear power facilities.

American Jobs Plan – Energy Provisions Continued

6. Establishment of various tax credits for qualifying advanced energy manufacturing.

7. Establishing various tax credits for heavy and medium size zero emissions vehicles.

8. Establishment of various tax incentives for sustainable aviation fuel.


9. Establishing a tax credit for low carbon hydrogen.

10.Establishing new and extending various energy efficiency and electrification incentives.

11.Establishing a disaster mitigation tax credit.


12. Enhancement and expansion of the carbon oxide sequestration credit.

13. Expanding and extending the electric vehicle charging station credit.

14. Reinstating the expired superfund excise taxes.


15. Modify and redefine the oil spill trust fund financing.

In summary, these two proposed tax bills are just that. They are proposed and what they will look like in their final form is anyone’s guess.

American Families Plan and American Jobs Plan – Effective Date and Retroactivity

One of the alarming provisions in the introduction of this proposed legislation is to the initial appearance that the provisions were retroactive to April 28, 2021.This retroactive date is now limited to only

the proposed capital gains tax rate provisions at this time.

American Families Plan and American Jobs Plan – Effective Date and Retroactivity

Any corporate rate increases for fiscal year entities would be prorated to increase the portion after January 1, 2022. However, the administration’s proposed

budget indicates that the effective date will be on or after January 1, 2022, for all other provisions.Still…….

It Has Been Suggested…..Bonus Depreciation

An advisor to President Biden (former Rep. John Delaney) has suggested that another revenue raising method would be the elimination of bonus depreciation. Note: Bonus depreciation starts to phase-

out January 1, 2023 and is completely eliminated on January 1, 2028.Could bonus depreciation be allowed to

expire altogether?

Taxpayer Protection and Preparer Proficiency Act

Taxpayer Protection and Preparer Proficiency Act

This bill was introduced in a bipartisan manner to formalize the discussion in the American Families Plan to regulate tax preparers.

Such sentiments have bipartisan support and the support of numerous external stakeholder groups.

Taxpayer Protection and Preparer Proficiency Act - Continued

The bill would give the IRS the power to regulate preparers in accordance with the court decision that stated that the IRS needs Congressional authority.

The legislation is focused on preparers who are currently unregulated.


Provisions of the Bill Are:1. Authorize the IRS to reinstate their 2011

Registered Tax Return Program. Those of you who had became registered

under the program should now realize that the registration was not wasted (it never was).

2. Give the IRS full authority to regulate preparers.


3. Grant the IRS the authority to revoke an incompetent or fraudulent preparer’s preparer tax identification number (PTIN).

4. Clarify that certain non-signing preparers who are individuals employed by and prepare returns under the supervision of an attorney, CPA, or enrolled agent are not required to obtain a PTIN.


5. Require a U.S. Government Accountability Office study on the sharing of information between the IRS and state authorities regarding PTINs issued to paid return preparers and preparer minimum standards.

Tax Deadline Simplification Act

Tax Deadline and Simplification Act (H.R. 4214)

This bipartisan bill was cosponsored and introduced in the House of Representatives.

The intent of the legislation is to simplify the quarterly estimated tax installments.

The legislation would change the due dates for individuals for the second and third quarters so that all payments are due after the end of a quarter.

Small Business Tax Fairness Act

This bill would establish one threshold of $400,000 for the determination of whether a taxpayer obtains the deduction.

The legislation would phase out the deduction for individuals who have an income in excess of $400,000.

Small Business Tax Fairness Act -Continued

The phase out would result in the complete elimination of the deduction at $500,000.

This eliminated deduction would be in effect for four years.

Small Business Tax Fairness Act -Continued

It would also establish a single definition of qualified business income which would apply to all taxpayers.

The effect of this particular provision would be to expand the deduction to middle income service businesses.

Tax Extenders

Extension and Changed Provisions by Year

New Provisions1. Meals from restaurants for amounts paid

after 12-31-20 and before 1-01-23.2. Flexible savings accounts (health) or

dependent flexible savings accounts are allowed to carryover unspent amounts from 2020 or 2021 to the next year.

Extension and Changed Provisions by Year - Continued

Extended Through 20211. Mortgage insurance premiums as

qualified residence interest.2. Credit for health insurance costs for

qualified individuals.3. Nonbusiness energy property credit.4. Alternative fuel refueling property credit.


5. Two wheel plug-in electric vehicle credit.6. Classification of certain race horses as

three year property for depreciation purposes.


Extended Through 12-31-20231. Residential energy efficient property

credit such as solar credits of 22% and 26%.

2. Energy credits under Section 48.


Extended Through 12-31-20251. New markets tax credit.2. Employer credit for paid family and

medical leave.3. Exclusion from income of qualified

employer payments of student loans.


4. Work opportunity credit. 5. Exclusion from gross income of discharge

of qualified principal residence indebtedness but a new lower amount of $750,000.


Permanently Extended Provisions1. Medical expense deduction threshold of

7.5% of adjusted gross income.2. Repeal of the deduction for qualified

tuition and related expenses resulting, instead, an increased income limitation in computing the lifetime learning credit.


4. Exclusion from income of qualified tax benefits for volunteer firefighters and emergency medical responders.

My thoughts regarding the provisions extended through 2021 are…

Announced Areas of Enforcement And Related Issues –

Latest Developments

General “Hot” Compliance Targets of the IRS

The following areas reflect the IRS’s announced revamped audit strategy:

1. Off shore banking.2. Self-employment tax avoidance and issues.3. Cryptocurrencies. 4. Conservation easement syndications. 5. Increased audits of tax exempt entities.

Virtual Currencies

Participation in virtual currencies is a prime target of IRS enforcement.

The Commissioner of the Internal Revenue Service has asked Congress for the authority to collect information on crypto currency transfers valued at over $10,000.

Virtual Currencies - Continued

Thus, current discussions would expand reporting requirements to require that virtual currency exchanges report all transactions in excess of $10,000.

Practitioner’s Note: If you have a client who is engaged in virtual currency, have them sign a representation letter that they have disclosed all information to you.

Earned Income, Child Tax, and American Opportunity Tax Credits

The IRS has stated that in 2020 they made $16 billion in incorrect earned income credit refunds, $4.5 billion in incorrect child credit refunds ($7.2 in 2019), and $2.3 billion in incorrect American Opportunity credit refunds.

Earned Income, Child Tax, and American Opportunity Tax Credits - Continued

Because of the large incorrect refunds made in the past, exasperated by the large increases in the amount of earned income credits and child tax credits as well as eligibility expansion, these areas will be prime audit targets.

Earned Income Tax Credits

The IRS currently audits by correspondence approximately 300,000 returns claiming the earned income tax credit. 40% of the errors pertain to whether an

individual is a qualifying child.Again, due to the changes made to the

earned income credit, one can expect more audits.

Form 1099-K

The IRS is currently using data generated by the form 1099-K to identify taxpayers that should be audited.As discussed earlier, the form 1099-K is a

“darling” of the IRS and the massive expansion of the number of recipients will guarantee that it will continue to be a focus of their audits.

Self-Employment Taxes – Part I

The IRS is currently continuing to match tax returns with self-employment income to a lack of self-employment tax being reported on that return.

The majority of these matchings result in a letter sent to the taxpayer inquiring as to the lack of self-employment tax and seeking the payment of it.

Self-Employment Taxes – Part I -Continued

These inquiries include individuals that are exempt from social security and have filed form 4029 (Application for Exemption From Social Security and Medicare Taxes).

Practitioner’s Note: Obtain from any taxpayer who claims exemption their filed and approved form 4029 and keep it in their permanent file.

Self-Employment Taxes – Part I -Continued

There has been a rise in instances where employees of sole proprietorships and partnerships have had their claim to be exempt from social security challenged.

Note: Corporations and S corporations are required to have social security withheld and matched on exempt employees.

Self-Employment Taxes – Part II

The IRS’s Large Business and International Division has a continued audit “campaign” identifying and auditing limited partners and members in LLC professional service firms claiming exemption from self-employment tax.

This was a result of a 2017 court case that brought the issue to light.

Large Partnerships

The IRS is using a specialized group of agents and specialists in partnership issues to expand their audit of large partnerships.

The returns selected for audit are being identified by the use of data analytics.

Small Retail Businesses

The IRS has updated the audit guide involving small retail businesses as to what issues the examiner should be concerned about.

This audit guide is now directing the examiners to new “gig” type businesses such as food trucks.

Small Retail Businesses - Continued

The two major issues that the audit guide is alerting the examiner to is the determination of whether unreported income exists and whether the cost of goods sold are correct.

Other potential issues are discussed.

Amended Returns – Domestic Production Deductions

The IRS has received a large number of amended returns for pre-2018 years claiming the now eliminated domestic production deduction resulting in claimed refunds totaling several billion dollars.

These amended returns claiming this deduction are a focus of current audits.

Passports and Delinquent Taxes

The IRS is enforcing the legal requirement that when a taxpayer owes $54,000 or more in delinquent taxes they can be denied a passport or have their current one revoked.

They are accomplishing this by notifying the State Department of who these individuals are and advising them by letter that their name was submitted to the State Department regarding the enforcement of this provision.

Passports and Delinquent Taxes -Continued

This provision does not apply to individuals who have installment agreements, live in a federally declared disaster area, are in bankruptcy, or were determined by the IRS that the debt cannot be collected due to hardship.

Audits and Valuation Methods Used

In prior audits we have discussed the absolute need to obtain professional and (desirably) certified valuations of property that is inherited, part of a basket purchase, etc.

The IRS is now using county auditor/assessor’s valuation to challenge the lack of these formal valuations.

Audits and Valuation Methods Used -Continued

The problem is that these valuations are designed for property tax reasons and, in many cases, lack any formal connection to the underlying economics.

My thoughts are….

High Income Delinquent Filers

As we had discussed last year, a shocking report was issued that stated that the IRS was not pursuing high income taxpayers who were not filing their tax returns.

The IRS is currently pursuing such individuals to obtain their delinquent tax returns.

My thoughts are…...

Delinquent Filers – Tax Preparers -Continued

As the pandemic restrictions are lifted, these individuals will have on-site visits from revenue officers.

My thoughts are…..

Noncompliance – BackupWithholding

The Office of the Treasury Inspector General for Tax Administration (TIGTA) has cited the IRS for failure to vigorously enforce the backup withholding rules.

In their report, they cited that failure to do so was costing billions in lost revenue.

Noncompliance – BackupWithholding - Continued

In their sample of 440,000 form 1099 filings with a missing or incorrect identification number, they found that the failed backup withholding on this sample cost the Treasury $13.3 billion in lost revenue.

This noncompliance was primarily with forms 1099 reporting nonemployee compensation.

Noncompliance – BackupWithholding - Continued

Therefore, with such a negative finding and based upon IRS’s historic strong reaction to negative findings by TIGTA, one can be certain that there will be a strong program to enforce and collect backup withholding.

My thoughts are…..

Individual Retirement Accounts

The IRS is stepping up audits of traditional IRA and Roth IRA accounts that hold non-traditional assets such as real estate.

For example the rules on holding real estate in an IRA are very strict and easy to run afoul of the prohibited transaction rules resulting in the revocation of the account.

IRAs, SEP-IRA, Roth, Simple Roth –Prohibitive Transactions & Activities

The increased IRS audit focus on prohibitive transactions is due the large increase in taxpayers ignoring such transactions.

Examples of Prohibitive Transactions:1. Real estate owned by the plan where the

plan owner does repairs, etc.

IRAs, SEP-IRA, Roth, Simple Roth – Prohibitive Transactions & Activities - Continued

2. The plan owner renting to or from the plan.

3. Selling property to or purchasing it from the plan.

4. Co-signing or guaranteeing a loan that involves the plan.


5. Purchasing a business in an IRA in which the plan owner has a personal interest.

6. Drawing any compensation from a business in which the IRA has invested.

7. Lending money to or borrowing from the plan by the IRA owner.


8. Paying any type of promotion fee out of an IRA.

9. Using related parties to engage in any of the prior eight examples.

There are many more examples which focus on self-dealing.

Individual Retirement Accounts -Continued

One can be assured that the leak of certain IRS documents that were published showing alleged abuses with IRAs by wealthy individuals (Peter Thiel) has further invigorated the IRS to examine whether both the traditional and Roth accounts are meeting all requirements.


The IRS continues to assess account owners for taxes plus penalties from the investment and holding of master limited partnerships in an IRA.

Such investments generate unrelated business income and the resulting taxes.


Additionally, the IRS is strictly enforcing that when a taxpayer does not file form 8606 reporting nondeductible contributions to an IRA, these contributions are treated as having been deducted and not included in the nontaxable basis of the account.


Unreported IRA distributions are a major enforcement focus.

In particular, taxable distributions paid to LLCs, partnerships, S corporations, and trusts.

The IRS is examining these distributions from the viewpoint as to the avoidance of the eventual tax effect.

SEP Retirement Plans

The IRS continues to examine self-employed individuals with SEP deductions.

The major and obvious issue is that the taxpayer must have earnings from self-employment to make a contribution to the SEP.

Self-Employed Individual and Other Retirement Plans

The IRS is currently auditing sole proprietorships with a schedule C who file form 5500.

The issues are whether the self-employment deduction was taken on schedule 1 of form 1040 rather than adjusted to schedule C, thus, computing the amount of earned income correctly.

Retirement Plan Audits

The IRS is currently auditing retirement plans for:

1. The correct filing of form 5500 resulting in severe penalties for failure to file, violations of reporting, and disclosure rules, etc..

2. Plan loans that exceed the smaller of $50,000 or 50% of account balances.

Retirement Plan Audits - Continued

3. Whether loans for nonresidential property are paid back within five years.

4. Loan defaults and how they are treated by the plan.

The IRS has been hiring employees in the audit function for its Employee Plans division.

Mileage Audits

The IRS is in the process of identifying and auditing returns that have claimed large deductions based on the optional mileage rate.

In doing so, the IRS is taking a strict approach to the examination of the mileage log.

The log must be contemporaneous and must include odometer readings.

Mileage Audits - Continued

The Internal Revenue Manual instructs examiners to verify actual mileage based upon odometer readings.

At the very least, the client should provide contemporaneous, independent verification of the odometer readings for the beginning and ending of the year using receipts.

Mileage Audits - Continued

The IRS will use repair receipts in verification of their examination of entries in the mileage log.

The IRS has won several court cases that support this stricter examination of the computation of mileage.

Large Cash Transactions

The IRS has stepped up its audits involving taxpayers who engage in transaction in excess of $10,000 or more.

These reports are required to be filed by banks when accepting deposits or cashing third party checks in these amounts as well as retail operations when the taxpayer pays in cash in excess of $10,000.

Large Cash Transactions - Continued

Note: the issuance of these FinCEN Form 112 reports by financial institutions does not necessarily mean one deposit in excess of $10,000.

Each institution has an internal control mechanism that computes the total cash deposits within a certain time frame to issue the report.

Large Cash Transactions - Continued

The emphasis on these cash transaction audits results from the TIGTA determination that thousands of taxpayers with several billion in cash reported by financial institutions did not file tax returns.

IRS examiners have access to a data base on their laptops that detail if a given taxpayer has been the subject of one of these reports.

Fuel Tax Credits

We have discussed this in prior seminars.The IRS is focusing on the issue of

taxpayers who claim the fuel tax credit for fuel utilized in off-road, business purposes.

The issue has been brought to the fore front by the filing of amended returns seeking large refunds based on this credit.

Fuel Tax Credits - Continued

The IRS became aware that this was an “automatic” credit for some preparers as well as having been criticized in the past by TIGTA for allowing large refunds on amended returns claiming the credit.

This is now a major audit issue as well as the fact that the IRS has built in certain “filters” in their software to electronically identify suspicious credits.

Related Party TransactionsThe IRS through a series of audit issue

advisories and memorandums to their examiners has instructed them to focus on related party transactions as a component of their audits.

Examples of issues to be examined are:1. Related party sales and purchases as to

basis, sales price, and prohibited subsequent tax treatments on such transactions.

Related Party Transactions - Continued

2. Installment sales.3. Imputed interest on transactions. 4. Loans and advances to related entities as

to whether they are evidenced by loan agreements, stated interest, payments made, debt vs. equity treatments, etc.

5. My thoughts are…

Large Losses on Schedule CThe Office of the Treasury Inspector

General for Tax Administration has cited the IRS for not conducting enough audits on returns containing schedule Cs that have large losses and no gross receipts.

According to the TIGTA report, returns containing such schedule Cs contain large adjustments and have a compliance risk.

My thoughts are…….

Large Business & International Enforcement Objectives

In addition to S corporations and partnerships, the Large Business & International Division of the IRS announced in June that they have started what is termed a “Tax Cuts and Jobs Act” compliance campaign.

Additionally, they are going to focus on the examination of syndicated conservation easements and captive insurance companies.

Large Business & International Enforcement Objectives

Both are highly “radioactive” issues.

S Corporation Shareholders

The IRS is examining S corporation shareholder’s returns that contain large losses as to whether they have sufficient basis to claim such losses.

One issue in particular as to whether the shareholder is a co-borrower or guarantor of a loan which does not qualify to increase their basis.

Form 706 – Estate Returns – Portability Elections

The IRS is examining forms 706 filed to claim the portability exclusion election of $11,580,000 ( 2020) for completeness and accuracy.

The IRS is also denying the portability election carryover in estates that claim the exclusion where the form 706 was not filed.

Form 706 – Estate Returns – Portability Elections - Continued

The portability exclusion is not automatic and a complete form 706 must be filed to elect to claim the carry over of the unused exclusion amount.

There is a procedure under Revenue Ruling 2017-34 to elect the portability (carryover of unused exemption).

Form 706 – Estate Returns – Portability Elections - Continued

This revenue procedure allows an estate return to be filed no later than the second anniversary of the decedent’s death.

The revenue procedure is available only for those estates that were not required to originally file a form 706.

Tax Exempt Entities

The IRS is focusing its audit program on tax exempt entities for the following issues:

1. Determination of unrelated business income and compliance with anti-netting rules of the 2017 Tax Cut Jobs Act.

2. Nonmember income of social clubs. 3. Evidence of self-dealing and inurement.

Tax Exempt Entities - Continued

4. Charities that have private benefit issues. 5. Improper use of donor advised funds. 6. Misclassification of workers.7. Abusive charitable remainder trusts.8. Promoters who use tax exempt entities to

promote various tax plans and shelters.

Tax Practice

Identity Protection Personal Identification Numbers

The IRS has opened up its program to obtain a identity protection personal identification number (IP PIN) to anyone who wishes to have one.

Taxpayers may opt in the program by either mailing or faxing form 15227 (Application for an Identity Protection Personal Identification Number).

Identity Protection Personal Identification Numbers - Continued

To File the Form 15227 the Taxpayer Will Need:

1. A valid SSN or individual taxpayer identification number.

2. Adjusted gross income of $72,000 or less.3. Access to a telephone.

Identity Protection Personal Identification Numbers - Continued

Upon processing the form, the IRS will call the applicant and validate their identity.If this identity is validated, the taxpayer

will receive a IP PIN for the next filing season.Large downside to this number: Losing it or

having it appropriated by someone else!

Tax Pro Account

The IRS has announced the establishment of a new digital authorization method that will allow for the submission of powers of attorneys and taxpayer information authorizations.

This new feature is entitled Tax Pro Account.

Tax Pro Account - Continued

The Tax Pro Account will allow a tax professional to submit an authorization request to an individual taxpayer’s IRS online account with these features:

1. Request is submitted in 15 minutes or less.2. Taxpayer electronically signs.3. Real-time processing.


The tax professional will go to the Tax Pro Account and initiate a simpler version of the power of attorney and tax information authorization.

Once these forms are completed and submitted by the tax professional, they will appear in the taxpayer’s online account.


Since the taxpayer’s identities are already verified at the time of the login, they simply check a box as their signature and submit the authorization request to the IRS.

The completed form, if accurate, will go directly to the Centralized Authorization File (CAF).


As a result, the request will be immediately recorded and appear on the list of approved authorizations in the taxpayer’s online account.

To connect with their tax professionals, taxpayers either login to their online account using their IRS username and password or they create an account.


Taxpayers must first have created an account after passing an one-time identity validation process.

Tax professionals must use their IRS usernames and passwords to access the Tax Pro Account or create an account verifying their identities.


To use the Tax Pro Account authorization feature, you will need all of the standard information required to complete a tax information authorization or power of attorney.

The Tax Pro Account will be available from 6 AM ET to 9 PM ET Monday through Saturday and Sunday 10 AM to midnight.

Final Regulations – Misdirected Refunds

T.D. 9940The IRS has issued final regulations on how

to correct tax refunds that are direct deposited into the wrong bank account or otherwise misdirected. The regulations include how to report

misdirected refunds, how the institutions and the IRS will work to correct the issue, etc.

Final Regulations – Misdirected Refunds- Continued

The final regulations significantly state that errors in designating an account for direct deposit are not covered by this regulation.

Collection Notices

The IRS has redesigned their collection letters and notices.

This redesign allows a taxpayer to use their smartphones to scan a QR code and access pages on IRS.gov to create a log into their online account, apply for a payment plan through the Online Payment Agreement, or contact the Taxpayer Advocate.

Proposed Fees – Estate Closing Letters

Proposed Regulation 300.13Since June of 2015, the IRS has issued

estate closing letters only when requested.This was due to the increased demand

resulting from the requirement that an estate return had to be filed, even though not required, whenever it was desired to pass on a deceased spouse’s unused exclusion to the surviving spouse.

Proposed Fees – Estate Closing LettersContinued

The volume of requests for estate closing letters has increased even more dramatically in light of conversations regarding punitive estate changes and the IRS pronouncement that the carryover exclusion will be allowed regardless of what changes may be made.

Thus, the IRS wants to impose a fee of $67 for issuing such a letter.

Proposed Fees – Estate Closing LettersContinued

In reality, these letters are very valuable and worth the fee since they provide a firm, legal confidence in closing an existing estate and for future planning.

Virtual Currency and FABR

FinCEN Notice 2020-2Treasury’s Financial Crimes Enforcement

Network has stated that they intend to propose amendments to regulations to require foreign accounts holding virtual currency to report such accounts. My thoughts are……

E-Signatures

The IRS announced in April that it was extending to December 31, 2021 the authorization for taxpayers and representatives to electronically file a large selection of various forms. The forms can be filed only on paper and

otherwise require a handwritten signature.

Tax Cases and RulingsA Selection….

Nonfungible Tokens

Nonfungible tokens are non-interchangeable digital assets that represent items such as artwork, photos, videos, audio, and other similar digital files.

The tax treatment is awaiting IRS guidance.

My thoughts are…

Education Expenses

Revenue Procedure 2021-15In this ruling, the IRS has stated that

protective equipment and supplies incurred by educators after March 12, 2020 and unreimbursed are fully deductible as educator expenses.These expenses include gloves, tape,

purifiers, disinfectant, etc.

S Corporation – Second Class of Stock

Private Letter Ruling 2020-10001In prior seminars, we had discussed that

partnerships that elect S status could inadvertently trigger the termination of the S corporation if they do not closely examine or alter the prior partnership agreement to avoid a preferential treatment that triggers the second class of stock termination.

S Corporation – Second Class of Stock -Continued

In this case, the partnership elected S corporations status at the time it elected to become an LLC.The IRS examined the LLC operating

agreement, allocation of profits among members in proportion to their negative capital balances, etc.


The agreement specifically provided that all parties contribute capital to the entity in a pro rata amount in accordance with their percentage interest in the LLC and all allocations of income were made pro rata.

In addition, ordinary and liquidating distributions would be made in the same manner.


The private letter ruling is silent as the IRS’s reasoning but they ruled that in terms of such an agreement, this created a second class of stock.Practitioner’s Note: In accordance with this

surprising negative ruling, it would be wise to revoke any prior partnership agreements and place into effect a separate agreement for the new S corporation.


My thoughts are……

federal tax update – 2021 mid - year

Documents