IRS: Taxpayers impacted by Hurricane Lee in Maine and Massachusetts qualify for tax relief; various deadlines postponed to Feb. 15

WASHINGTON — The Internal Revenue Service today announced tax relief for individuals and businesses affected by Hurricane Lee anywhere in Maine and Massachusetts. These taxpayers now have until Feb. 15, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). All 16 counties in Maine and all 14 counties in Massachusetts qualify. Individuals and households that reside or have a business in these counties qualify for tax relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

Filing and Payment Relief

The tax relief postpones various tax filing and payment deadlines that occurred from Sept. 15, 2023, through Feb. 15, 2024 (postponement period). As a result, affected individuals and businesses will have until Feb. 15, 2024, to file returns and pay any taxes that were originally due during this period.

This means, for example, that the Feb. 15, 2024, deadline will now apply to:

• Individuals who had a valid extension to file their 2022 return due to run out on Oct. 16, 2023. The IRS noted, however, that because tax payments related to these 2022 returns were due on April 18, 2023, those payments are not eligible for this relief. So, this is more time to file not to pay.
• Quarterly estimated income tax payments normally due on Sept. 15, 2023, and Jan. 16, 2024.
• Quarterly payroll and excise tax returns normally due on Oct. 31, 2023, and Jan. 31, 2024.
• Calendar-year partnerships and S corporations whose 2022 extensions run out on Sept. 15, 2023.
• Calendar-year corporations whose 2022 extensions run out on Oct. 16, 2023.
• Calendar-year tax-exempt organizations whose extensions run out on Nov. 15, 2023.

In addition, penalties for the failure to make payroll and excise tax deposits due on or after Sept. 15, 2023, and before Oct. 2, 2023, will be abated as long as the deposits are made by Oct. 2, 2023.

The IRS disaster assistance and emergency relief for individuals and businesses page has details on other returns, payments and tax-related actions qualifying for relief during the postponement period.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. These taxpayers do not need to contact the agency to get this relief.

It is possible an affected taxpayer may not have an IRS address of record located in the disaster area, for example, because they moved to the disaster area after filing their return. In these kinds of unique circumstances, the affected taxpayer could receive a late filing or late payment penalty notice from the IRS for the postponement period. The taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Additional Tax Relief

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2023 return normally filed next year), or the return for the prior year (2022). Taxpayers have extra time – up to six months after the due date of the taxpayer's federal income tax return for the disaster year (without regard to any extension of time to file) – to make the election. Be sure to write the FEMA declaration number – 3598-EM for Maine or 3599-EM for Massachusetts − on any return claiming a loss. See Publication 547, Casualties, Disasters, and Thefts, for details.

Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents. See Publication 525, Taxable and Nontaxable Income, for details.

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow.

The IRS may provide additional disaster relief in the future.

The tax relief is part of a coordinated federal response to the damage caused by this storm and is based on local damage assessments by FEMA. For information on disaster recovery, visit DisasterAssistance.gov

Employee Retention Credit Moratorium

The Employee Retention Credit (ERC) is a hot topic.  Even though it only existed for parts of 2020 and 2021, the opportunity to amend the Forms 941 to claim this credit is still here.  IRS feels it has received many claims that are not valid because the taxpayer did not meet either of the qualifying conditions.

Now, in News Release IR-2023-169, IRS has announced a moratorium on processing new ERC claims at least through the end of the year.  This moratorium is effective for claims received September 14, 2023 or after.

IRS will continue to work existing claims, although the processing will be slower, with a standard processing goal of 180 days, instead of the former 90 days. IRS may request additional documentation from a taxpayer to ensure it is a legitimate claim.

On July 26, IRS announced it was increasingly shifting its focus to review claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims.  Hundreds of criminal cases are being worked, and thousands of ERC claims have been referred for audit.  As of July 31, 2023, IRS-Criminal Investigation (CI) has initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims.  An improper ERC can cause taxpayers to be in much worse financial position than not filing a claim.  If the claim is denied, the taxpayer will have to repay the ERC, plus interest and possible penalties.  And in many cases the taxpayer has paid a company 10-30% in contingency fee when the claim was prepared.

IRS encourages taxpayers who haven’t filed a claim to talk to a trusted tax professional, not a tax promoters or marketing firm.  For those who have already filed a claim, which IRS has not yet fully processed, and now feel the claim may be improper, IRS plans to release procedures for these taxpayers to withdraw their ERC claim.

This text has been shared courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065, fax 920-496-9111, ataxprof.com.  We ask that no reproduction of this article take place without the express written consent of Ashwaubenon Tax Professionals, 2140 Holmgren Way, Suite 1040, Green Bay, WI  54304.

2023 Annual Meting & Seminar

Massachusetts / Rhode Island NATP Chapter Annual Meeting & Educational Seminar October 11th 2023

Join the Massachusetts / Rhode Island NATP Chapter on Wednesday, October 11th 2023 for our Annual Meeting & Educational Seminar. This all day event will be held at the Southbridge Hotel & Conference Center. Registration details are below, and is handled online by National. Take a look at the details on our speaker and topics provided in this great Continuing Education  opportunity including continental breakfast, snacks, lunch and great networking opportunities (In-Person). This seminar is limited to the First 100 Registrants!

• For online registration FOR IN PERSON MEETING, click here.

Welcome Desk 7:00 am to 8:00 am (Continental Breakfast Included)
Education 8:00 am to 5:00 pm
Annual Meeting Prior to Lunch (Lunch Included)

CE Credits -
6 Federal Tax Law Topic

2 Federal Tax Law Update


Speaker - John Sheeley, EA

Topics:

• The Corporate Tranparency Act
• The IRS and Taxation of Social Media Influencers
• Hiring The Kids
• S-Corps and Reasonable Compensation
• Tax Court Cases of 2023 Which You Missed (and why they are important to your practice)

Chester, New York based John Sheeley, EA began his career in the tax industry in 1987, passing the IRS special enrollment exam in 1995. His career includes 13 years as a multi-unit franchisee of a national tax firm and 5 years as a tax manager at a regional CPA firm in New York. A National Tax Practice Institute fellow, John completed his undergraduate education at the State University of New York at Oswego.

John formed his current tax services firm in 2008, with a focus on the tax and representation needs of U.S. citizens living abroad, and non‐resident alien entrepreneurs and entertainers living and working in the United States. The Firm prepares the occasional cannabis industry and crypto currency tax return.

John is also the founder of Tax Practice Pro, Inc, a national continuing education provider. His current teaching focus centers on taxation of legal marijuana businesses, problems of S corps, and taxation of non-resident aliens and those living abroad. He can be reached at john@taxpracticepro.com

Blind Ignorance and Unjustifiable Reliance Fail The Reasonable Cause Exception to the Negligence Penalty

William Delaney, EA
Westwood, MA

Ashenafi G. Mulu engaged Dave, the Tax Doctor (aka David Clerie) to prepare his personal income tax return for 2018, as he had for several years prior. Since Clerie did not have a PTIN, the e-filed returns were submitted as being self-prepared. Apparently, the taxpayer thought that this was business as usual (blind ignorance).

The year before (2017), Mulu purchased a rental house which he renovated, but it did not generate any rental income until the following year (2018). There was a net rental loss (passive loss) which was claimed for that year. In addition, a Schedule C was filed (business described as “driver”). The occupation shown on form 1040 was “laborer” although Mt. Mulu was employed (W-2) as a pharmacist.

Before the return was fully prepared and filed, Cleric (the tax preparer) died and his brother took over the tax practice and completed/filed the tax return. The brother’s tax preparation background, and the presence or absence of credentials, apparently were never a subject of conversation between Clerie (brother) and Mulu (customer/client).

It is sufficient to say that the IRS was not much impressed with the quality of the return preparation because they issued a notice of deficiency. In addition, an accuracy-related penalty [§6662(a)] of $1,212.20 was imposed. Mr. Mulu sought to abate the penalty in full, which it is often possible to do with a well-written reasonable cause explanation.

Mr. Mulu claimed reasonable cause and good faith because he relied on the tax preparer (unjustifiable reliance) and had no understanding of taxation, depreciation, and accounting for expenses (some of which were disallowed in-part or in-full). He also claimed that he was the victim of an unscrupulous return preparer.

This argument fell on its head. One problem, of course, is that the tax preparers (Dave, the Tax Doctor and his brother) were unlicensed and ineligible to e-file an income tax return (you need a PTIN to do that), so the taxpayer filed the tax return as being self-prepared*. Another difficult problem for the taxpayer to overcome was his apparent indifference to what “he” was reporting to the IRS. (He failed to exercise diligence and/or prudence). Mulu actually admitted that he did not review the tax return before it was filed (a “where do I sign” client).

If your thought is, well I can get “them” to waive the penalty, don’t take on a client like Ashenafi Mulu. Mulu v. Comm., TC Summary Opinion 2023-2 (1/25/2023).

*Your editor once acquired a client whose return was self-prepared. She knew that the preparer (a college professor) was preparing tax returns as a sideline and did not want to leave his fingerprints anywhere, because he wasn’t reporting the income. This didn’t bother her. I discovered, among other things, that he continued to deduct depreciation beyond the asset’s useful life (because he did not maintain cumulative records). She, also, did not have a clue but, at least, she didn’t pretend to be ignorant.

A Few Things About Massachusetts Taxation Which Are New For Tax Year 2022

The MA taxation of individuals is now based on the Internal Revenue Code as of January 1, 2022 – MGL Ch. 62, §(1)(c). This means that quite a few current federal code provisions which we could NOT use on our state return (because MA previously followed the Code as of 2005) are now available. Here are some which will be widely seen and used…

Alimony and separate maintenance. Income is no longer reported; the deduction may no longer be claimed. Conforms with IRC §62(a)(8) and (a)(10). The deduction is still shown on Schedule Y, line 3 (for pre-2018 agreements). Likewise, the income is still shown as reportable on Form 1, line 9 as taken from Schedule X (line 7). Again, for pre-2018 agreements.

Educators expense deduction (new for MA). Eligible educators may deduct a maximum of $300 per person; if both taxpayer and spouse are eligible educators the maximum is $600 ($300 + 300). IRC §62(a)(2)(D).

Where to deduct? You will need to drill down to the instructions to find this---Schedule Y, line 9a (certain qualified deductions from US Form 1040).

Income from discharged qualified principal residence indebtedness, i.e. mortgage loan forgiveness income. MA now recognizes this exclusion from income if claimed on the federal return. IRC §108(a)(1)(E).

Like-kind exchanges. Until this tax year (2022) MA allowed the more broadly based deferral of income and did not confine it to real estate. However, MA now conforms to the federal rule---real estate only. IRC §1031.

Review MA TIR 23-1 for a more complete list of the applicable provisions.