Want to get your tax return sooner and protect yourself from tax identity theft? File your tax return early.

The IRS announced it is opening the 2021 individual income tax return filing season on January 24. (Business returns are already being accepted.) Even if you typically don’t file until much closer to the April deadline (or you file for an extension until October), consider filing earlier this year. Why? You can potentially protect yourself from tax identity theft — and there may be other benefits, too.

How tax identity theft occurs

In a tax identity theft scheme, a thief uses another individual’s personal information to file a bogus tax return early in the filing season and claim a fraudulent refund.

The actual taxpayer discovers the fraud when he or she files a return and is told by the IRS that it is being rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Note: You can still get your individual tax return prepared by us before January 24 if you have all the required documents. But processing of the return will begin after IRS systems open on that date.

Your W-2s and 1099s

To file your tax return, you need all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2021 W-2 forms to employees and, generally, for businesses to issue Form 1099s to recipients for any 2021 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

Other benefits of filing early

In addition to protecting yourself from tax identity theft, another advantage of early filing is that, if you’re getting a refund, you’ll get it sooner. The IRS expects most refunds to be issued within 21 days. However, the IRS has been experiencing delays during the pandemic in processing some returns. Keep in mind that the time to receive a refund is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.

Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.

If you were eligible for an Economic Impact Payment (EIP) or advance Child Tax Credit (CTC) payments, and you didn’t receive them or you didn’t receive the full amount due, filing early will help you to receive the money sooner. In 2021, the third round of EIPs were paid by the federal government to eligible individuals to help mitigate the financial effects of COVID-19. Advance CTC payments were made monthly in 2021 to eligible families from July through December. EIP and CTC payments due that weren’t made to eligible taxpayers can be claimed on your 2021 return.

We can help

Contact us If you have questions or would like an appointment to prepare your tax return. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

In the year ahead, businesses will need to continue transforming in response to public health and economic developments. Change management can help your company handle the challenge.

Businesses have had to grapple with unprecedented changes over the last couple years. Think of all the steps you’ve had to take to safeguard your employees from COVID-19, comply with government mandates and adjust to the economic impact of the pandemic. Now look ahead to the future — what further changes lie in store in 2022 and beyond?

One hopes the transformations your company undergoes in the months ahead are positive and proactive, rather than reactive. Regardless, the process probably won’t be easy. This is where change management comes in. It involves creating a customized plan for ensuring that you communicate effectively and provide employees with the leadership, training and coaching needed to change successfully.

Prepare for resistance

Employees resist change in the workplace for many reasons. Some may see it as a disruption that will lead to loss of job security or status (whether real or perceived). Other staff members, particularly long-tenured ones, can have a hard time breaking out of the mindset that “the old way is better.”

Still others, in perhaps the most dangerous of perspectives, distrust their employer’s motives for change. They may be listening to — or spreading — gossip or misinformation about the state or strategic direction of the company.

It doesn’t help the situation when certain initial changes appear to make employees’ jobs more difficult. For example, moving to a new location might enhance the image of the business or provide more productive facilities. But a move also may increase some employees’ commuting times or put them in a drastically different working environment. When their daily lives are affected in such ways, employees tend to question the decision and experience high levels of anxiety.

Make your case

Often, when employees resist change, a company’s leadership can’t understand how ideas they’ve spent weeks, months or years carefully deliberating could be so quickly rejected. They overlook the fact that employees haven’t had this time to contemplate and get used to the new concepts and processes. Instead of helping to ease employee fears, leadership may double down on the change, more strictly enforcing new rules and showing little patience for disagreements or concerns.

It’s here that the implementation effort can break down and start costing the business real dollars and cents. Employees resist change in many counterproductive ways, from intentionally lengthening learning curves to calling in sick when they aren’t to filing formal complaints or lawsuits. Some might even quit — an increasingly common occurrence as of late.

By engaging in change management, you may be able to lessen the negative impact on productivity, morale and employee retention.

Craft your future

The content of a change-management plan will, of course, depend on the nature of the change in question as well as the size and mission of your company. For major changes, you may want to invest in a business consultant who can help you craft and execute the plan. Getting the details right matters — the future of your business may depend on it.

If you’re selling your principal residence, some or all of the profit may be tax free. It depends on your home sale profit and your income. Here are the basic rules.

Many homeowners across the country have seen their home values increase recently. According to the National Association of Realtors, the median price of homes sold in July of 2021 rose 17.8% over July of 2020. The median home price was $411,200 in the Northeast, $275,300 in the Midwest, $305,200 in the South and $508,300 in the West.

Be aware of the tax implications if you’re selling your home or you sold one in 2021. You may owe capital gains tax and net investment income tax (NIIT).

Gain exclusion

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.

To qualify for the exclusion, you must meet these tests:

• You must have owned the property for at least two years during the five-year period ending on the sale date.
• You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Gain above the exclusion amount 

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss.

The NIIT

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.

However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

1. Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use.
2. You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.

As you can see, depending on your home sale profit and your income, some or all of the gain may be tax free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales.

If you have a parent entering a nursing home, you may not be thinking about taxes. But there are a number of possible tax implications. Here are five.

1. Long-term medical care

The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income (AGI).

Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual that is provided under care administered by a licensed healthcare practitioner.

To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify an individual as unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity or severe cognitive impairment.

2. Long-term care insurance

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limitations explained below) to the extent they, along with other medical expenses, exceed the percentage-of-AGI threshold. A qualified long-term care insurance contract covers only qualified long-term care services, doesn’t pay costs covered by Medicare, is guaranteed renewable and doesn’t have a cash surrender value.

Qualified long-term care premiums are includible as medical expenses up to certain amounts. For individuals over 60 but not over 70 years old, the 2021 limit on deductible long-term care insurance premiums is $4,520, and for those over 70, the 2021 limit is $5,640.

3. Nursing home payments

Amounts paid to a nursing home are deductible as a medical expense if a person is staying at the facility principally for medical, rather than custodial care. If a person isn’t in the nursing home principally to receive medical care, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. But if the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.

If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction.

4. Head-of-household filing status 

If you aren’t married and you meet certain dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you.

5. The sale of your parent’s home. 

If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. In order to qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years out of the five years before the sale, and used the home as a principal residence for at least two years out of the five years before the sale. However, there’s an exception to the two-out-of-five-year use test if the seller becomes physically or mentally unable to care for him or herself during the five-year period.

These are only some of the tax issues you may deal with when your parent moves into a nursing home. Contact us if you need more information or assistance.

Business owners: Have you paused to consider how well your company initially responded to the COVID-19 pandemic? Update your disaster plan before the details fade.

It’s been a year like no other. The sudden impact of the COVID-19 pandemic in March forced every business owner — ready or not — to execute his or her disaster response plan.

So, how did yours do? Although it may still be a little early to do a complete assessment of what went right and wrong during the crisis, you can take a quick look back right now while the experience is still fresh in your mind.

Get specific

When devising a disaster response plan, brainstorm as many scenarios as possible that could affect your company. What weather-related, environmental and socio-political threats do you face? Obviously, you can now add “pandemic” to the list.

The operative word, however, is “your.” Every company faces distinctive threats related to its industry, size, location(s), and products or services. Identify these as specifically as possible, based on what you’ve learned.

There are some constants for nearly every plan. Seek out alternative suppliers who could fill in for your current ones if necessary. Fortify your IT assets and functionality with enhanced recovery and security capabilities.

Communicate optimally

Another critical factor during and after a crisis is communication, both internal and external. Review whether and how your business was able to communicate in the initial months of the pandemic.

You and most of your management team probably needed to concentrate on maintaining or restoring operations. Who communicated with employees and other stakeholders to keep them abreast of your response and recovery progress? Typically, these parties include:

• Staff members and their families,
• Customers,
• Suppliers,
• Banks and other financial stakeholders, and
• Local authorities, first responders and community leaders (as appropriate).

Look into the communication channels that were used — such as voicemail, text messaging, email, website postings and social media. Which were most and least effective? Would some type of new technology enable your business to communicate better?

Revisit and update

If the events of this past spring illustrate anything, it’s that companies can’t create a disaster response plan and toss it on a shelf. Revisit the plan at least annually, looking for adjustments and new risk factors.

You’ll also want to keep the plan clear in the minds of your employees. Be sure that everyone — including new hires — knows exactly what to do by spelling out the communication channels, contacts and procedures you’ll use in the event of a disaster. Everyone should sign a written confirmation that they’ve read the plan’s details, either when hired or when the plan is substantially updated.

In addition, go over disaster response measures during company meetings once or twice a year. You might even want to hold live drills to give staff members a chance to practice their roles and responsibilities.

Heed the lessons

For years, advisors urged business owners to prepare for disasters or else. This year we got the “or else.” Despite the hardships and continuing challenges, however, the lessons being learned are invaluable. Please contact us to discuss ways to manage costs and maintain profitability during these difficult times.

If you invest in mutual funds, be aware of some potential pitfalls involved in buying and selling shares.

Surprise sales 

You may already have made taxable “sales” of part of your mutual fund investment without knowing it.

One way this can happen is if your mutual fund allows you to write checks against your fund investment. Every time you write a check against your mutual fund account, you’ve made a partial sale of your interest in the fund. Thus, except for funds such as money market funds, for which share value remains constant, you may have taxable gain (or a deductible loss) when you write a check. And each such sale is a separate transaction that must be reported on your tax return.

Here’s another way you may unexpectedly make a taxable sale. If your mutual fund sponsor allows you to make changes in the way your money is invested — for instance, lets you switch from one fund to another fund — making that switch is treated as a taxable sale of your shares in the first fund.

Recordkeeping 

Carefully save all the statements that the fund sends you — not only official tax statements, such as Forms 1099-DIV, but the confirmations the fund sends you when you buy or sell shares or when dividends are reinvested in new shares. Unless you keep these records, it may be difficult to prove how much you paid for the shares, and thus, you won’t be able to establish the amount of gain that’s subject to tax (or the amount of loss you can deduct) when you sell.

You also need to keep these records to prove how long you’ve held your shares if you want to take advantage of favorable long-term capital gain tax rates. (If you get a year-end statement that lists all your transactions for the year, you can just keep that and discard quarterly or other interim statements. But save anything that specifically says it contains tax information.)

Recordkeeping is simplified by rules that require funds to report the customer’s basis in shares sold and whether any gain or loss is short-term or long-term. This is mandatory for mutual fund shares acquired after 2011, and some funds will provide this to shareholders for shares they acquired earlier, if the fund has the information.

Timing purchases and sales

If you’re planning to invest in a mutual fund, there are some important tax consequences to take into account in timing the investment. For instance, an investment shortly before payment of a dividend is something you should generally try to avoid. Your receipt of the dividend (even if reinvested in additional shares) will be treated as income and increase your tax liability. If you’re planning a sale of any of your mutual fund shares near year-end, you should weigh the tax and the non-tax consequences in the current year versus a sale in the next year.

Identify shares you sell 

If you sell fewer than all of the shares that you hold in the same mutual fund, there are complicated rules for identifying which shares you’ve sold. The proper application of these rules can reduce the amount of your taxable gain or qualify the gain for favorable long-term capital gain treatment.

Contact us if you’d like to find out more about tax planning for buying and selling mutual fund shares.

A new law signed by President Trump on March 27 provides a variety of tax and financial relief measures to help Americans during the coronavirus (COVID-19) pandemic. This article explains some of the tax relief for individuals in the Coronavirus Aid, Relief, and Economic Security (CARES) Act

Individual cash payments

Under the new law, an eligible individual will receive a cash payment equal to the sum of: $1,200 ($2,400 for eligible married couples filing jointly) plus $500 for each qualifying child. Eligibility is based on adjusted gross income (AGI).

Individuals who have no income, as well as those whose income comes entirely from Social Security benefits, are also eligible for the payment.

The AGI thresholds will be based on 2019 tax returns, or 2018 returns if you haven’t yet filed your 2019 returns. For those who don’t qualify on their most recently filed tax returns, there may be another option to receive some money. An individual who isn’t an eligible individual for 2019 may be eligible for 2020. The IRS won’t send cash payments to him or her. Instead, the individual will be able to claim the credit when filing a 2020 return.

The income thresholds

The amount of the payment is reduced by 5% of AGI in excess of:

• $150,000 for a joint return,
• $112,500 for a head of household, and
• $75,000 for all other taxpayers.

But there is a ceiling that leaves some taxpayers ineligible for a payment. Under the rules, the payment is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the payment is completely phased out when AGI exceeds $146,500.

Most eligible individuals won’t have to take any action to receive a cash payment from the IRS. The payment may be made into a bank account if a taxpayer filed electronically and provided bank account information. Otherwise, the IRS will mail the payment to the last known address.

Other tax provisions

There are several other tax-related provisions in the CARES Act. For example, a distribution from a qualified retirement plan won’t be subject to the 10% additional tax if you’re under age 59 ½ — as long as the distribution is related to COVID-19. And the new law allows charitable deductions, beginning in 2020, for up $300 even if a taxpayer doesn’t itemize deductions.

Stay tuned

These are only a few of the tax breaks in the CARES Act. We’ll cover additional topics in coming weeks. In the meantime, please contact us if you have any questions about your situation.

In the last issue of the Funeral Business Advisor, we talked about stuff. Specifically, we acknowledged that as the owner of a funeral home, you’re constantly buying stuff for various reasons and among your considerations in choosing what stuff to buy are the tax implications. Will buying this stuff lower my taxes? The answer was (surprise!) “It depends”. In our previous article, we dealt with the small stuff; i.e. inventory, supplies, furniture, equipment and vehicles. In this issue, we’re going to focus on the big stuff: real estate.

Buying real estate will be one of the largest investments you’ll make as a business owner. Even with bank financing, you’ll likely need to make a substantial down payment to acquire a desired property. You would think that, having drained your bank account to make that big investment, there has to be some large tax write-off that goes with it, right? “WRONG!” Despite the big investment required to buy real estate, the annual write-off you get from real estate under the tax code is small in comparison. It all has to do with depreciation. Let me explain.

Generally under the tax code, property that you use over a number of years is not expensed immediately when it is purchased. Rather, you deduct the property’s cost over its depreciable life. The property’s depreciable life is determined under the tax code, and the annual deduction is called depreciation expense. For example, if you purchase a hearse (which has a depreciable life of 5 years) for $60,000, the annual deductible depreciation expense is $12,000 ($60,000 ÷ 5 years). As explained in our previous article, there are provisions in the tax code that allow you to immediately expense personal property rather than having to depreciate it over several years, but those exceptions rarely apply to real estate. As you’ve probably guessed by now, your depreciation deduction depends heavily on the depreciable life of the asset and therein lies the problem. Under the tax code, the depreciable life of a funeral home building is 39 years! Furthermore, if you make substantial capital improvements to your property, those improvements also need to be depreciated over 39 years. Considering you probably have a 15 or 20 year mortgage, you can see that your building will be paid off long before you will have completely written it off for your taxes. So what can you do to accelerate the deductible cost of your property? Here are some options.

Consider a Cost Segregation Study
One of the key strategies in maximizing and accelerating the depreciation deduction for your property is in the allocation of its cost. The cost of a property must first be allocated between land and building. Allocation here is important because land cannot be depreciated, so you will receive no tax benefit from the land cost until later when the property is sold. So it’s important to be aggressively reasonable when allocating a portion of your purchase price to land.

Once you’ve carved out the cost of the land, what remains is the building which, as previously mentioned, must be depreciated over 39 years. However, the tax regulations allow you to break out your property into various components which can be depreciated over shorter lives, thereby increasing and accelerating your depreciation deduction. To do this, you need to have a cost segregation study (CSS) performed on your property. The CSS is performed by engineers who will examine your property and provide you with a report which breaks out the cost of your property into several “asset classes” of varying depreciable lives. The result is that rather than having to depreciate the cost of your entire building over 39 years, portions of it will be depreciated over 5, 7 or 15 years thereby increasing and accelerating your depreciation deductions in the earlier years of ownership. By way of example, a client of mine purchased a property for $2.5M. By having a CSS performed on the property, my client was able to claim additional depreciation expense of approximately $330,000 over the first five years the property was owned thereby significantly reducing his tax liability during that time.

Although performing a CSS on your property sounds like a great idea, there are a few considerations to keep in mind. First, a properly done CSS will set you back $5,000 to $7,000 depending on the property. As such, it doesn’t make economic sense to do a CSS if the cost allocated to your building is less than $800,000. Second, a CSS only allows you to depreciate portions of your building faster. Once your building has reached the end of its depreciable life, the total depreciation you will have taken on that property will be no different regardless of how it was written off. If you paid $750,000 for your building, that’s all you’ll get to depreciate. The CSS just allows you to write off that $750,000 at a faster rate, and because a deduction today is worth more than a deduction five years from now, the CSS could be worth doing. Third, work closely with your tax advisor to ensure the accelerated depreciation will provide you the intended tax benefits. There are various other provisions within our complicated tax code that can lessen the tax benefits coming out of a CSS, so best to know those before you spend the money on a CSS.

Repairs vs Capital Improvements
So you are now the proud owner of a beautiful funeral home. For obvious reasons, funeral home owners are well known for meticulously maintaining their stuff, especially their properties. But that gets expensive. Whether all those costs are tax deductible depends on what you’re doing to the property and as you would expect, the IRS doesn’t make that easy. There are hundreds of pages of regulations which deal with this (known as “the repair regs”), but we’ll stick to the basics.

First, a repair is deductible immediately while a capital improvement needs to be depreciated. That makes a repair more tax advantageous than a capital improvement. So what’s the difference between a repair and a capital improvement? It really depends on nature of the “improvement” and here’s how it works.

The tax regulations require you to look at your building as a structure with a collection of “systems.” Examples of these systems are HVAC, electrical, plumbing, elevator, etc. If you restore or improve a substantial portion of the building structure or any of these systems, that will be a capital improvement which will need to be depreciated. If it’s not a substantial improvement, then it’s a repair that can be expensed immediately. I know what you’re asking; what does “substantial” mean? The IRS provides no clear definition of what substantial means, but the rule of thumb appears to be 30% of the repaired property. For example, your funeral home has thirty windows. You replace four windows. Since four windows comprise less than 30% of all your windows, you would treat the window replacement as a repair. But suppose you replace 20 windows. You’ve now replaced 66% of your windows, so the replacement cost would be a capital improvement which would need to be depreciated over 39 years.

What do we learn from this? For one thing, proper planning and timing of your building repairs can significantly affect your ability to expense the repair, so plan ahead. Spread projects out over time so you fall below the 30% repair threshold. Secondly, talk to your tax advisor when contemplating large repair or improvement projects. They can work with you to maximize possible write-offs associated with such projects. Finally, ensure your contractor will provide you detailed billing statements for your repair project so as to maximize possible write-offs.

Partial Asset Dispositions
So you’ve concluded that your project is indeed a capital improvement and you are now stuck depreciating it over the next 39 years. However, all hope may not be lost. There is another opportunity to possibly get a substantial write-off associated with a large improvement project. However, it applies only to a refurbishment or improvement of a currently existing property; it does not apply to a building addition or expansion. In tax jargon it’s called a “partial asset disposition” and it’s a relatively new option under the tax code. Here’s how it works.

Suppose you decide to renovate the inside of your funeral home to expand viewing rooms, add bathrooms, etc. You are not expanding your facility, you are simply renovating the current structure. Obviously, such a large project is a capital improvement that must be depreciated. However, what about the structures and systems that you have removed from the building? When you purchased the building, you paid for all those former walls, flooring, electrical systems and other portions of the building. Granted you were depreciating them along with the rest of your building, but they no longer exist. Seems unfair that you would be forced to continue depreciating something that no longer exists, doesn’t it? Furthermore, you should be able to write off the remaining undepreciated portion of the building that has been replaced by the renovation. That’s exactly what you can do through a partial asset disposition (PAD).

A PAD allows you to write off the undepreciated portion of property that has been replaced through a renovation or refurbishment. The amount of the write off will depend on the age and cost of your property. It is unlikely that the write-off will equal the cost of the renovation, but it could be substantial nonetheless and is certainly worth investigating. Finally, demolition costs can be expensed immediately, so be sure your contractor bills you separately for demolition.

Section 179 Election
In our previous article on the tax treatment of stuff (see July/August edition of Funeral Business Advisor) we talked about the Section 179 election. This provision of the tax code allows you to immediately expense the entire cost of property that would otherwise need to be depreciated. It normally doesn’t apply to real estate. However, the recent tax law changes expanded Sec 179 to allow the immediate write-off of certain real estate improvements such as roofs, HVAC property, security systems, etc. It’s important to remember that Sec 179 cannot be used for rental activities. So if you own your building in a separate entity and rent it to your funeral home business, you may not be able to claim an immediate write-off using Sec 179. It’s worth discussing this with your tax advisor.

Of all the stuff you will ever buy, it’s likely that real estate will be your biggest investment. How profitable it may be depends on many factors including the tax benefits or ramifications of owning real estate. As with all investment decisions, knowledge is power so be smart and always speak with your tax advisor before you invest in real estate. FBA

This article is meant to provide general information and should not be construed as legal or tax advice or opinion and is not a substitute advice of counsel, CPAs or other professionals.

A company’s strategic plan can look good on paper but never really work out in real life. Here’s how to ensure your business accomplishes its goals.

In the broadest sense, strategic planning comprises two primary tasks: establishing goals and achieving them. Many business owners would probably say the first part, coming up with objectives, is relatively easy. It’s that second part — accomplishing those goals — that can really challenge a company. The key to turning your strategic objectives into a reality is a solid implementation plan.

Start with people

After clearly identifying short- and long-range goals under a viable strategic planning process, you need to establish a formal plan for carrying it out. The most important aspect of this plan is getting the right people involved.

First, appoint an implementation leader and give him or her the authority, responsibility and accountability to communicate and champion your stated objectives. (If yours is a smaller business, you could oversee implementation yourself.)

Next, establish teams of carefully selected employees with specific duties and timelines under which to complete goal-related projects. Choose employees with the experience, will and energy to implement the plan. These teams should deliver regular progress reports to you and the implementation leader.

Watch out for roadblocks

On the surface, these steps may seem logical and foolproof. But let’s delve into what could go wrong with such a clearly defined process.

One typical problem arises when an implementation team is composed of employees wholly or largely from one department. Often, they’ll (inadvertently or intentionally) execute an objective in such a way that mostly benefits their department but ultimately hinders the company from meeting the intended goal.

To avoid this, create teams with a diversity of employees from across various departments. For example, an objective related to expanding your company’s customer base will naturally need to include members of the sales and marketing departments. But also invite administrative, production and IT staff to ensure the team’s actions are operationally practical and sustainable.

Another common roadblock is running into money problems. Ensure your implementation plan is feasible based on your company’s budget, revenue projections, and local and national economic forecasts. Ask teams to include expense reports and financial projections in their regular reports. If you determine that you can’t (or shouldn’t) implement the plan as written, don’t hesitate to revise or eliminate some goals.

Succeed at the important part

Strategic planning may seem to be “all about the ideas,” but implementing the specific goals related to your strategic plan is really the most important part of the process. Of course, it’s also the most difficult and most affected by outside forces. We can help you assess the financial feasibility of your objectives and design an implementation plan with the highest odds of success.

Did you make large gifts to your heirs in 2018? If so, it’s important to determine whether you’re required to file a gift tax return by April 15 (Oct. 15 if you file for an extension). Generally, you’ll need to file one if you made 2018 gifts that exceeded the $15,000-per-recipient gift tax annual exclusion (unless to your U.S. citizen spouse) and in certain other situations. But sometimes it’s desirable to file a gift tax return even if you aren’t required to. If you’re not sure whether you must (or should) file a 2018 gift tax return, contact us.

Did you make large gifts to your children, grandchildren or other heirs last year? If so, it’s important to determine whether you’re required to file a 2018 gift tax return — or whether filing one would be beneficial even if it isn’t required.

Filing requirements

Generally, you must file a gift tax return for 2018 if, during the tax year, you made gifts:

• That exceeded the $15,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
• That you wish to split with your spouse to take advantage of your combined $30,000 annual exclusion,
• That exceeded the $152,000 annual exclusion for gifts to a noncitizen spouse,
• To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2018,
• Of future interests — such as remainder interests in a trust — regardless of the amount, or
• Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($11.18 million for 2018). As you can see, some transfers require a return even if you don’t owe tax.

No return required

No gift tax return is required if your gifts for the year consist solely of gifts that are tax-free because they qualify as:

• Annual exclusion gifts,
• Present interest gifts to a U.S. citizen spouse,
• Educational or medical expenses paid directly to a school or health care provider, or
• Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Be ready for April 15

The gift tax return deadline is the same as the income tax filing deadline. For 2018 returns, it’s April 15, 2019 — or October 15, 2019, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2018 gift tax return, contact us.

As we approach the end of 2018, it’s a good idea to review the mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid surprise capital gains

Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer beware

Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution. So you’ll owe taxes on the gain without actually making a profit.

Seller beware

If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2019 — unless you expect to be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods, thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think beyond just taxes

Investment decisions shouldn’t be driven by tax considerations alone. For example, you need to keep in mind your overall financial goals and your risk tolerance.

But taxes are still an important factor to consider. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.

With the April 17 individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.

With the April 17 individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.

Many variables

A tremendous number of variables affect your overall tax liability for the year. Looking at these variables early in the year can give you more opportunities to reduce your 2018 tax bill.

For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

In other words, tax planning shouldn’t be just a year-end activity.

Certainty vs. uncertainty

Last year, planning early was a challenge because it was uncertain whether tax reform legislation would be signed into law, when it would go into effect and what it would include. This year, the TCJA tax reform legislation is in place, with most of the provisions affecting individuals in effect for 2018–2025. And additional major tax law changes aren’t expected in 2018. So there’s no need to hold off on tax planning.

But while there’s more certainty about the tax law that will be in effect this year and next, there’s still much uncertainty on exactly what the impact of the TCJA changes will be on each taxpayer. The new law generally reduces individual tax rates, and it expands some tax breaks. However, it reduces or eliminates many other breaks.

The total impact of these changes is what will ultimately determine which tax strategies will make sense for you this year, such as the best way to time income and expenses. You may need to deviate from strategies that worked for you in previous years and implement some new strategies.

Getting started sooner will help ensure you don’t take actions that you think will save taxes but that actually will be costly under the new tax regime. It will also allow you to take full advantage of new tax-saving opportunities.

Now and throughout the year

To get started on your 2018 tax planning, contact us. We can help you determine how the TCJA affects you and what strategies you should implement now and throughout the year to minimize your tax liability.

While April 15 (April 17 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that you also need to be aware of. To help you make sure you don’t miss any important 2018 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

While April 15 (April 17 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that you also need to be aware of. To help you make sure you don’t miss any important 2018 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.

June 15

• File a 2017 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
• Pay the second installment of 2018 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

September 17

• Pay the third installment of 2018 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

October 1

• If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2017 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.

October 15

• File a 2017 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
• Make contributions for 2017 to certain retirement plans or establish a SEP for 2017, if an automatic six-month extension was filed.
• File a 2017 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed.

December 31

• Make 2018 contributions to certain employer-sponsored retirement plans.
• Make 2018 annual exclusion gifts (up to $15,000 per recipient).
• Incur various expenses that potentially can be claimed as itemized deductions on your 2018 tax return. Examples include charitable donations, medical expenses and property tax payments.

But remember that some types of expenses that were deductible on 2017 returns won’t be deductible on 2018 returns under the Tax Cuts and Jobs Act, such as unreimbursed work-related expenses, certain professional fees, and investment expenses. In addition, some deductions will be subject to new limits. Finally, with the nearly doubled standard deduction, you may no longer benefit from itemizing deductions.

The IRS released the optional standard mileage rates for 2022. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,

• medical, and

• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

The IRS released the optional standard mileage rates for 2022. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,

• medical, and

• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

2022 Standard Mileage Rates

The standard mileage rates for 2022 are:

• 58.5 cents per mile for business uses;

• 18 cents per mile for medical uses; and

• 14 cents per mile for charitable uses.

Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.

FAVR Allowance for 2022

For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2021 is:

• $56,100 for passenger automobiles, and

• $56,100 for trucks and vans.

Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.

2022 Mileage Rate for Moving Expenses

The standard mileage rate for the moving expense deduction is 18 cents per mile. To claim this deduction, the taxpayer must be:

• a member of the Armed Forces of the United States,

• on active military duty, and

• moving under a military order and incident to a permanent change of station

The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.

Unreimbursed Employee Travel Expenses

For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:

• members of a reserve component of the U.S. Armed Forces,

• state or local government officials paid on a fee basis, and

• performing artists with relatively low incomes.

Notice 2021-2, I.R.B. 2021-2, 478, is superseded.

The IRS has encouraged taxpayers to take important actions this month to help them file their tax returns in 2022, including special steps related to Economic Impact Payments and advance Child Tax Credit payments. As a part of a series of reminders to help taxpayers get ready for the upcoming tax filing season, the IRS highlighted a special page the outlines the steps taxpayers can take to make the tax filing season easier.

The IRS has encouraged taxpayers to take important actions this month to help them file their tax returns in 2022, including special steps related to Economic Impact Payments and advance Child Tax Credit payments. As a part of a series of reminders to help taxpayers get ready for the upcoming tax filing season, the IRS highlighted a special page the outlines the steps taxpayers can take to make the tax filing season easier.

Advance Child Tax Credit Payments

The IRS advised families who received advance payments to compare the advance Child Tax Credit payments that they received in 2021 with the amount of the Child Tax Credit that they can properly claim on their 2021 tax return. Taxpayers who received less than the amount for which they're eligible can claim a credit for the remaining amount of Child Tax Credit on their 2021 tax return. Similarly, taxpayers who received more than the amount for which they're eligible may need to repay some or all of the excess payment when they file. Additionally, eligible families who did not get monthly advance payments in 2021 can still get a lump-sum payment by claiming the Child Tax Credit when they file a 2021 federal income tax return next year. This includes families who don’t normally need to file a return.

The IRS announced that it would send Letter 6419 in January 2022 with the total amount of advance Child Tax Credit payments taxpayers received in 2021. Taxpayers should keep this and any other IRS letters about advance Child Tax Credit payments with their tax records.

Economic Impact Payments and Recovery Rebate Credit

Individuals who failed to qualify for the third Economic Impact Payment (EIP) or did not receive the full amount may be eligible for the Recovery Rebate Credit based on their 2021 tax information. Accordingly, these individuals will need to file a 2021 tax return, even if they do not usually file, to claim the credit. Further, individuals will also need the amount of their third EIP and any Plus-Up Payments received to calculate their correct 2021 Recovery Rebate Credit amount when they file their tax return.

Charitable Deduction Changes

Finally, taxpayers who do not itemize deductions may qualify to take a charitable deduction of up to $600 for married taxpayers filing joint returns and up to $300 for all other filers for cash contributions made in 2021 to qualifying organizations.

The IRS has extended the availability of electronic signatures on certain audit and non-audit forms. Through October 31, 2023, taxpayers and their authorized representatives may electronically sign documents and email documents to the IRS. This is an exception to normal policy. Previously, the IRS had allowed e-signatures through the end of 2021.

The IRS has extended the availability of electronic signatures on certain audit and non-audit forms. Through October 31, 2023, taxpayers and their authorized representatives may electronically sign documents and email documents to the IRS. This is an exception to normal policy. Previously, the IRS had allowed e-signatures through the end of 2021.

Audit or Collection

The Service will accept e-signatures during audit or collection for:

• extensions of statute of limitations on an assessment or collection;

• waivers of statutory notice of deficiency and consents to an assessment;

• closing agreements; and

• other statements or forms collected outside standard filing procedures.

The IRS accepts two types of electronic signatures during an audit or collection interaction (1) digital signatures, and (2) imaged signatures. Regarding imaging signatures, taxpayers that do not have a digital certificate may hand sign a document, and then scan or photograph the document and save it in a standard picture format such as JPEG, TIFF or PDF.

Other Forms That Can Be Electronically Signed

Electronic signatures are also allowed through October 31, 2023 for the following forms and purposes:

• Form 11-C, Occupational Tax and Registration Return for Wagering;

• Form 637, Application for Registration (For Certain Excise Tax Activities);

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 706-A, U.S. Additional Estate Tax Return;

• Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions;

• Form 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust;

• Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations;

• Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts;

• Form 706 Schedule R-1, Generation Skipping Transfer Tax;

• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;

• Form 730, Monthly Tax Return for Wagers;

• Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons;

• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;

• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;

• Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation;

• Form 1120-H, U.S. Income Tax Return for Homeowners Associations;

• Form 1120-IC DISC, Interest Charge Domestic International Sales – Corporation Return;

• Form 1120-L, U.S. Life Insurance Company Income Tax Return;

• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;

• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;

• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;

• Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;

• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);

• Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;

• Form 1128, Application to Adopt, Change or Retain a Tax Year;

• Form 2678, Employer/Payer Appointment of Agent;

• Form 3115, Application for Change in Accounting Method;

• Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts;

• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner;

• Form 4421, Declaration – Executor’s Commissions and Attorney’s Fees;

• Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;

• Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues;

• Form 8038-G, Information Return for Tax-Exempt Governmental Bonds;

• Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales;

• Form 8283, Noncash Charitable Contributions;

• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms;

• Form 8802, Application for U.S. Residency Certification;

• Form 8832, Entity Classification Election;

• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent;

• Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement; and

• Elections made pursuant to Code Sec. 83(b).

The IRS has issued guidance for employers on the retroactive termination of the COVID-19 employee retention credit against the employer's share of Medicare tax. The Infrastructure Investment and Jobs Act (P.L. 117-58) amended Code Sec. 3134 so that for most employers the credit applies only to wages paid before October 1, 2021. If the employer is a recovery startup business, the credit continues to apply to wages paid before January 1, 2022.

The IRS has issued guidance for employers on the retroactive termination of the COVID-19 employee retention credit against the employer's share of Medicare tax. The Infrastructure Investment and Jobs Act (P.L. 117-58) amended Code Sec. 3134 so that for most employers the credit applies only to wages paid before October 1, 2021. If the employer is a recovery startup business, the credit continues to apply to wages paid before January 1, 2022.

The guidance applies to employers that:

• paid wages after September 30, 2021,

• either received an advance payment of the credit for those wages, or reduced employment tax deposits in anticipation of the credit for the fourth quarter of 2021, but

• are ineligible for the credit due to the change in the law.

Advance Payments

Employers that are not recovery startup businesses but received advance payments of the employee retention credit for fourth quarter wages of 2021 can avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns. Failure to repay the advance payment by the due date may result in the IRS imposing failure to pay penalties.

Reduced Employment Tax Deposits

Employers that reduced deposits on or before December 20, 2021, for wages paid during the fourth calendar quarter of 2021 in anticipation of the employee retention credit but are not recovery startup businesses will not be subject to a failure to deposit penalty for the retained deposits if they:

• reduced deposits in anticipation of the credit, consistent with the rules in Notice 2021-24;

• deposit the amounts initially retained in anticipation of the credit on or before the relevant due date for wages paid on December 31, 2021, regardless of whether the employer actually pays wages on that date; and

• report the tax liability resulting from the termination of the credit on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021.

Failure to Deposit Penalty Waiver

Due to the termination of the employee retention credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses, the IRS will not waive failure to deposit penalties for employers that reduce deposits in anticipation of the employee retention credit after December 20, 2021.

Reasonable Cause Relief

Employers that do not qualify for relief under this guidance can reply to an IRS penalty notice with an explanation. The IRS will consider reasonable cause relief.

Effect on Other Documents

This guidance modifies Notice 2021-49, IRB 2021-34, 316, and Notice 2021-24, IRB 2021-18, 1122.

The IRS has reminded tax professionals and taxpayers that they can use digital signatures on a variety of common IRS forms and access a secure online platform to view and make changes to their account. The IRS has balanced the e-signature option with critical security and protection needed against identity theft and fraud.

The IRS has reminded tax professionals and taxpayers that they can use digital signatures on a variety of common IRS forms and access a secure online platform to view and make changes to their account. The IRS has balanced the e-signature option with critical security and protection needed against identity theft and fraud. The Service has informed taxpayers that acceptable electronic signature methods include:

• a typed name on a signature block;

• a scanned or digitized image of a handwritten signature that's attached to an electronic record;

• a handwritten signature input onto an electronic signature pad;

• a handwritten signature, mark or command input on a display screen with a stylus device; or

• a signature created by a third-party software.

The IRS will accept images of signatures (scanned or photographed) including common file types supported by Microsoft 365 such as .tiff, .jpg, .jpeg, .pdf, Microsoft Office suite, or Zip. Further, the IRS allows taxpayers and representatives to use electronic or digital signatures on certain paper forms which they cannot file using IRS e-file. The forms are available on the IRS website and through tax professional's software products.

The IRS has also added a new feature this year, which gives taxpayers digital control over who can represent them or view their tax records. The new feature, one of many recent enhancements to the Online Account for individuals, will allow individual taxpayers to authorize their tax practitioner to represent them before the IRS with a Power of Attorney (POA) and to view their tax accounts with a Tax Information Authorization (TIA). Tax professionals may go to the new Tax Pro Account on IRS.gov to digitally initiate POAs and TIAs. These digital authorization requests are simpler versions of Forms 2848 and 8821.

This new digital authorization option will allow the IRS to reduce its current CAF inventory and to focus on authorization requests received through fax, mail or the Submit Forms 2848 and 8821 Online – all of which require IRS personnel to handle. The Security Summit partners remind all tax professionals to review their security measures. IRS Publication 4557, Safeguarding Taxpayer Data (.pdf), provides tax pros with a starting point for basic steps to protect clients. IRS Publication 5293, Data Security Resource Guide for Tax Professionals (.pdf), provides a compilation of data theft information available on IRS.gov, including the reporting processes.

The IRS has reminded taxpayers that they can get extra protection starting in January by joining the Service's Identity Protection Personal Identification Number (IP PIN) program. The IRS has made recent changes to the program to make it easier for more taxpayers to join. The fastest and easiest way to receive an IP Pin is by using the Get an IP PIN tool.

The IRS has reminded taxpayers that they can get extra protection starting in January by joining the Service's Identity Protection Personal Identification Number (IP PIN) program. The IRS has made recent changes to the program to make it easier for more taxpayers to join. The fastest and easiest way to receive an IP Pin is by using the Get an IP PIN tool.

The IRS has urged any IP PIN applicant previously rejected during the identity authentication process to try applying again in 2022. The authentication process has been refined and improved, now enabling many taxpayers screened out in the past to have a better chance of passing the authentication process. Taxpayers are requested to keep in mind these key points about the IP PIN program:

• For 2022, the Get an IP PIN tool is scheduled to launch on January 10. It’s the fastest and easiest way to get an IP PIN. It is also the only option that immediately reveals the IP PIN to the taxpayer. For that reason, the IRS urges everyone to try the Get an IP PIN tool first, before pursuing other options.

• No identity theft affidavit is required for taxpayers opting in.

• The IP PIN is valid for one year.

• Taxpayers should enter the IP PIN on any return, whether it is filed electronically or on paper.

• Anyone with either a Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) who can verify their identity is eligible for the IP PIN opt-in program.

• Any eligible family member can get an IP PIN.

• Taxpayers should never reveal an IP PIN to anyone. The only exception is a taxpayer who uses a trusted tax professional to file their return.

There are two options have been made available for people who cannot pass the IRS online identity authentication process. One involves filing Form 15227 and the other requires a visit to an IRS Taxpayer Assistance Center (TAC). Further, for processing year 2022, individuals with an adjusted gross income of $73,000 or less and those married filing jointly with an AGI of $146,000 or less with access to a telephone can complete Form 15227 (.pdf) and either mail or fax it to the IRS. Any taxpayer who is ineligible to file a Form 15227 may make an appointment to visit an IRS Taxpayer Assistance Center (TAC). Anyone using this option must bring two forms of picture identification. Because this is an in- person identity verification, an IP PIN will be mailed to the taxpayer after their visit. To find the nearest TAC, taxpayers can use the IRS Local Office Locator online tool or call 844-545-5640.

The Internal Revenue Service is now allowing taxpayers who have had an offer in compromise accepted by the agency to keep their tax refunds instead of the previous policy of having those refunds applied to their outstanding tax debt.

An offer in compromise (OIC) happens when the IRS and the taxpayer settle past due taxes for an amount that is less than the full amount owed. This typically happens when the agency agrees with the taxpayer that the payment in full will create a financial burden.

"For taxpayers facing an economic hardship, the anticipation of a refund may be the safety pin holding together a family’s ability to meet basic living expenses, especially for taxpayers relying on the Earned Income Tax Credit or the Additional Child Tax Credit that Congress intended for subsistence of low-income taxpayers," National Taxpayer Advocate Erin Collins said in a recent blog post discussing the changes, which went into effect in November. She added that it will also help those who are struggling financially because of the COVID-19 pandemic.

The blog notes that the filing of an amended return could cause the refund to be applied to an existing debt rather than being sent to the taxpayer.

Additionally, the agency announced that certain taxpayers will be able to seek an offset bypass refund while OIC decisions are pending, although taxpayers need to be proactive in contacting the IRS if they want an offset bypass refund, as there is no formal form to request it.

A. Mcnulty, 157 TC —, No. 10, Dec. 61,950

Delivery of coins to the owner of a self-directed "Check Book IRA" was taxable income even though she took the coins as manager of the IRA’s LLC. While an IRA owner may act as a conduit or agent of the IRA custodian, she may do so only as long as she is not in constructive or actual receipt of the IRA assets. The fact that the Check Book IRA website said this would not be treated as a taxable distribution did not constitute reasonable cause for escaping understatement penalties.

A. Mcnulty, 157 TC —, No. 10, Dec. 61,950

Delivery of coins to the owner of a self-directed "Check Book IRA" was taxable income even though she took the coins as manager of the IRA’s LLC. While an IRA owner may act as a conduit or agent of the IRA custodian, she may do so only as long as she is not in constructive or actual receipt of the IRA assets. The fact that the Check Book IRA website said this would not be treated as a taxable distribution did not constitute reasonable cause for escaping understatement penalties.

Background

A husband and wife each established a self-directed IRA and directed assets held in the IRA to invest in a single-member limited liability company (LLC). The wife was the manager of the LLC that her IRA invested in. She directed the LLC to purchase American Eagle coins and took physical possession of the coins. The IRS treated this as a taxable distribution in the year she received physical custody of the coins. The husband directed his IRA to invest in these kinds of coins and a condominium through an LLC. He conceded that he received taxable distributions from these transactions but contested understatement penalties for the failure to report the distributions.

Custody

According to the court, IRA owners cannot have unfettered command over the IRA assets without tax consequences. A qualified custodian or trustee is required to be responsible for the management and disposition of property held in a self-directed IRA. When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds.

Penalties

Understatement penalties were imposed even though the Check Book IRA website said that taking possession of the property as manager of the LLC would not be treated as a taxable distribution. The court was skeptical about treating viewing the Check Book’s website as seeking professional advice upon which a reasonable person could rely. The taxpayers did not seek or receive any advice from their C.P.A., who prepared their returns, regarding their self-directed IRAs. They failed to disclose the relevant information to their C.P.A. They were both professionals. They liquidated nearly $750,000 from their existing qualified retirement accounts to invest in a questionable internet scheme without disclosing the transactions to their C.P.A.

The Internal Revenue Service is keeping the pressure on high income taxpayers who do not file their taxes as well as other high wealth taxpayers who may otherwise be hiding their earnings to avoid paying taxes.

And while agents are actively pursuing these people, Darren Guillot, Commissioner of the IRS Small Business/Self-Employed – Collection division said the goal is to avoid as much as possible escalating a case to enforcement proceedings.

His message on November 15 to attendees of the AICPA & CIMA National and Sophisticated Tax Planning Conferences in Washington, D.C., was a simple one: "Just tell the truth. We want to get you in compliance. We want you to file on time and pay what you owe. Every case is not criminal. We don’t want any case to be criminal, or enforcement or a seizure."

The Internal Revenue Service is keeping the pressure on high income taxpayers who do not file their taxes as well as other high wealth taxpayers who may otherwise be hiding their earnings to avoid paying taxes.

And while agents are actively pursuing these people, Darren Guillot, Commissioner of the IRS Small Business/Self-Employed – Collection division said the goal is to avoid as much as possible escalating a case to enforcement proceedings.

His message on November 15 to attendees of the AICPA & CIMA National and Sophisticated Tax Planning Conferences in Washington, D.C., was a simple one: "Just tell the truth. We want to get you in compliance. We want you to file on time and pay what you owe. Every case is not criminal. We don’t want any case to be criminal, or enforcement or a seizure."

HiDeF Sweeps

To that end, he highlighted some of the activities the agency is engaged in that target high income non-filers, which he defined as earning at least $100,000 in income from a third-party source. The agency is employing data analytics to identify these individuals and are engaging these taxpayers through what is called High Income Delinquent Filer (HiDeF) Sweeps, which began in December 2018.

The analytics identified those who meet the income threshold and had at least three years of unfiled returns. The agency then proceeded with unannounced field visits, though those were moved to a virtual environment because of the COVID-19 pandemic.

Guillot said these personal interactions with agents have been key in collection activities. "It sends a message," he said. "We just want to hear from you. And you certainly are going to hear from us."

He noted that in 2019, there were 9.5 million non-filers and of them, more than 843,000 were high income non-filers. He said the program HiDeF program would be continuing for years to come. For those instances that involve egregious noncompliance and/or potential fraud, the IRS has what is called Operation Surround Sound, a collaboration beween the Office of Fraud Enforcement, Collection and Examination Operations.

These types of cases could involve significantly higher amounts of earned income, as well as foreign holdings and cryptocurrency. And again, Guillot reiterated the advice of "just tell the truth" about what is going on and get back into compliance before it has a chance to become an enforcement action that could entail measures such as levies, asset collections, repatriation of foreign assets and revocation or denial of passports.

Busting Ghost Employers

Guillot also highlighted another target the agency recently began focusing on: ghost employers. These involve employers who provide a W-2 to their employees but do not file the proper forms or pay the money owed to the IRS or the Social Security Administration.

Again, he pointed to the agency’s use of data analytics, which uncovered this scheme, and in a relatively short amount of time, revenue officers were able to help launch a number of criminal investigations. He said the work in this area is going to continue.

Other areas the IRS is focused on include employers who fraudulently applied for COVID assistance to help keep their employees, which he noted that work in this area has stopped hundreds of millions of dollars in payments; tracking transactions of more than $10,000 in cash where no tax returns are filed; and efforts that are focusing on high income earners and under-reporting of income in gig economy segments.

Internal Revenue Service Commissioner Charles Rettig praised the work of agency employees throughout the COVID-19 pandemic but stated that there simply are not enough of them as the agency is slowly working through the backlog the pandemic caused.

Rettig used that as the foundation to call for not only more funding for the agency, but to encourage people to apply for open positions within the agency, especially as it is facing significant employee shortages in the coming years.

Internal Revenue Service Commissioner Charles Rettig praised the work of agency employees throughout the COVID-19 pandemic but stated that there simply are not enough of them as the agency is slowly working through the backlog the pandemic caused.

Rettig used that as the foundation to call for not only more funding for the agency, but to encourage people to apply for open positions within the agency, especially as it is facing significant employee shortages in the coming years.

"I appreciate your patience and understanding and working with us," he said November 16 at the AICPA & CIMA National and Sophisticated Tax Planning Conferences in Washington, D.C., acknowledging how challenging it has been for them to be working with the IRS throughout the pandemic.

One issue has been the backlog in mail, which by July 2020, there were more than 20 million pieces of mail stockpiled Rettig said.

An Extreme Spike In Calls Received

He also noted that during the pandemic, the agency has been receiving a significantly higher number of phone calls. By August 2021, the agency received 246 million calls being handled by less than 15,000 customer service representatives. He said that on March 15, the calls were coming in at a rate of 1,500 calls per second. By comparison, the IRS received 42 million calls in 2019 and 44 million calls in 2020.

The average call in 2021 was also four minutes longer than in previous years, he said.

With that in mind, Retting stated that taxpayers and the tax professionals who help them deserve the timely responses they may not be getting, whether by mail or over the phone, because of workplace protocols that make some of these processes challenging and cause delays and issues between departments within the agency.

However, Rettig noted the constraints of working for the government are keeping the agency from expanding as it would simply do if it was a private firm.

"Level of service is an appropriated item," meaning the IRS simply could not hire more people to man the phones or open the mail without getting more money from Congress to do so. "This should help frame up for you the importance of a properly funded Internal Revenue Service."

He also noted that in the next six years, the agency is going to lose 52,000 employees.

"Our rebuild is critical for you and for the country," he said. "If you ever thought about coming to work for the government, no better way to say it than now is the time. You can make a difference."

If You See Something, Say Something

The other clear message he wanted to pass along to attendees of the conference was to be vocal with the agency about what is going on in the field so the agency can continue to improve. Rettig noted his work as a professional CPA prior to taking on the commissioner’s role and how he remains in regular contact with his professional peers from his time in private practice.

"You should be a part of this," he said, emphasizing that he is easily reachable.

But he also mentioned that he has heard tax professionals that he knows complain in public forums about things without bringing it to his direct attention.

"If I know it and I don’t do something, that’s on me," he said. "Continue to help us help others."

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.

Health expenses

Health FSAs are designed to reimburse participants for certain health care expenditures, typically expenses that qualify for the medical and dental expense deduction. Medical supplies, such as eye glasses and bandages, are usually treated as qualified expenses. However, nonprescription medicines (other than insulin) are not considered qualified medical expenses.

Health FSAs are often funded through voluntary salary reduction agreements with the participant's employer under a cafeteria plan. In that case, they are very taxpayer-friendly because no federal employment or federal income taxes are deducted from the employee's contribution. The employer may also contribute to a health FSA. However, there are special rules which govern employer contributions.

Typically, participants designate at the beginning of the year the amount they want to contribute to their health FSA and these amounts are deducted from their pay. For 2014, an employee's salary reduction contributions cannot exceed $2,500. The $2,500 cap is very important because cafeteria plans that do not limit health FSA contributions to $2,500 are not treated as cafeteria plans, and all benefits offered under the plan are included in the participants' gross income.

Use-or-lose rule

As mentioned, the use-or-lose rule is a drawback to health FSAs. Unused amounts remaining in the health FSA at year-end are forfeited. Employers are not allowed to refund any unused funds in a health FSA. Critics of the use-or-lose rule argue that it has discouraged participation in health FSAs because many employees do not want to risk forfeiting unused funds. Often, participants have to scramble at year-end to use their health FSA dollars

Grace period option

A few years ago, the IRS modified the use-or-lose rule. The IRS allowed cafeteria plans to adopt a grace period. Participants can use amounts remaining in a health FSA at year-end for up to an additional two months and 15 days. This grace period is optional. Employers are not required to offer the grace period, although many do.

Carryover option

At its option, an employer may now amend its cafeteria plan to provide for the carryover to the immediately following year of up to $500 of any amount remaining unused as of the end of the year in a health FSA. The carryover of up to $500 may be used to pay or reimburse qualified expenses under the health FSA incurred during the entire plan year to which it is carried over. Additionally, the carryover does not count against or otherwise affect the salary reduction limit ($2,500 for 2014) for health FSAs. However, the new rules do not allow participants to cash out unused health FSA amounts or convert them to other types of benefits.

The maximum carryover amount is $500. An employer can choose to offer a $0 carryover, a $500 carryover or any amount in between. As we discussed, the carryover is optional. Employers can choose not to offer any carryover.

Employers cannot offer both the grace period and the carryover. It is a choice of either the grace period or the carryover....or neither. The employer and not the participant decides. In regulations, the IRS described how employers can amend their cafeteria plans to provide for the carryover and how they can, if they choose, replace the grace period with the carryover.

Let's take a look at an example: Jacob participates in a health FSA under his employer's cafeteria plan. At year-end, Jacob has $255 remaining in his health FSA. Jacob's employer never offered a grace period but opted to allow participants to carry over up to $300 of unused health FSA dollars. Jacob can carry over all of his $255 in unused health FSA dollars.

If you have any questions about the new carryover option or health FSAs, please contact our office.

Notice 2013-71

The IRS has made several changes to its examination (aka, "audit") functions that are designed to expedite the process and relieve some burden on business taxpayers. These include the expansion of the Fast Track Settlement (FTS) program for small business, self-employed (SB/SE) taxpayers and a new process for issuing information document requests (IDRs) in large case audits.

The IRS has made several changes to its examination (aka, "audit") functions that are designed to expedite the process and relieve some burden on business taxpayers. These include the expansion of the Fast Track Settlement (FTS) program for small business, self-employed (SB/SE) taxpayers and a new process for issuing information document requests (IDRs) in large case audits.

Fast Track Settlement

The IRS launched the FTS program in 2005 to help small business taxpayers expedite case resolution. Small business FTS is modeled on a similar program for taxpayers in the IRS Large Business and International (LB&I) Division.

The goal of small business FTS is to complete cases within 60 days of their acceptance into the program. Under FTS, taxpayers under examination with issues in dispute work directly with IRS representatives from SB/SE's Examination Division and Appeals to resolve those issues. An Appeals Officer, trained in mediation, serves as a neutral party and employs dispute resolution techniques to facilitate settlement between the parties.

Application. To request to participate in small business FTS, the taxpayer and the SB/SE Group Manager submit Form 14017, Application for Fast Track Settlement. The taxpayer or the IRS examination representative may initiate Fast Track for eligible cases, usually before a 30-day letter is issued.

If the case is accepted and an agreement is reached, the IRS will use established issue or case closing procedures and applicable agreement forms, including preparation of a Form 906 specific matters closing agreement, if appropriate. If the case is not accepted the IRS explained that SB/SE or Appeals will inform the taxpayer of the basis for this decision and discuss other dispute resolution opportunities.

Qualifying issues. Small business FTS is generally available if:

• Issues are fully developed;
• The taxpayer has stated a position in writing or filed a small case request for cases in which the total amount for any tax period is less than $25,000; and
• There are a limited number of unagreed issues.

Small business FTS is unavailable for Collection Appeals Program, Collection Due Process, Offer-In-Compromise and Trust Fund Recovery cases, except as provided in any guidance issued by the IRS; correspondence examination cases worked solely in a Campus/Service Center site; and cases in which the taxpayer has failed to respond to IRS communications.

Information Document Requests

The IRS Large Business & International (LB&I) Division has issued a new directive (LB&I-04-1113-009) that expands on an earlier directive from in June (LB&I-04-0613-004) by itemizing the requirements for IRS agents preparing information document requests (IDRs). The new directive also outlines the mandatory three-part enforcement process for taxpayers that do not timely respond to an IDR. While IDRs are common for large business taxpayers, the IRS also uses them in auditing certain small business issues.

June directive. The original June 2013 directive set forth general principles and several mandatory actions that examiners must take while issuing IDRs. These principles are reiterated in the November directive.

The June directive also provided that IDRs issued after June 30, 2013 must comply with these principles. In particular, the IRS reported that the mandatory training emphasized that employees must focus their IDRs on specific issues relevant to the exam. IRS employees are required to discuss the IDRs and issues with the taxpayer, as well as what would be an appropriate deadline for the response to the request. The deadline must fall within a "reasonable timeframe" and be "mutually agreed upon." If the examiner does not receive a response by this date, and the IDR otherwise met the requirements listed under the directive, the case will proceed into the enforcement process outlined in the new directive from November 2013.

November directive. If a taxpayer does not respond to the IRS by the date indicated in the IDR, the case must proceed to the graduated, three-step enforcement process outlined in Attachment 2 of the November directive. This process, assuming the taxpayer could not respond to the IDRs by the dates specified at each step, would involve first a delinquency notice, then a pre-summons letter, and finally a summons.

The IRS has recently promoted the revised IDR enforcement process as a "win-win" for both the IRS and taxpayers. However, some practitioners have expressed concerns that the rigid deadlines in the new enforcement process will have the opposite effect and result in more summonses being issued. Practitioners recommend that taxpayers proactively involve themselves in the initial IDR process to ensure that the IDR, once issued, provides them with enough time to supply the requested information.

If you have questions relating to the IRS's new FTS or IDR programs, please contact our offices.