Tuesday, May 10, 2022

So, You Think That You Are Entitled to Claim Itemized Deducitons?

William Delaney, EA
Westwood, MA

Just want you need to see walking into your office right after a tough tax season. A taxpayer who is a few years behind in filing his income tax returns, and he is here because he has been caught by the IRS. Consider the plight of Shawn Stephen Salter, who had not filed for tax year 2013 and, of course, ignored IRS notices/correspondence from a time (pre-COVID) when the IRS was still able to function properly.

Eventually, the IRS prepared a substitute return and they had a lot of gross income information available (W-2 wages; unemployment compensation; dividends; taxable state refund; capital gains; taxable retirement income. Did I leave anything out---oh, yes, there was also some “other” income). The IRS “generously” allowed a personal exemption and the standard deduction. The tax, interest, and various penalties were calculated and billed. That got the attention of the taxpayer, who decided to be a bit creative…

“After receiving the notice of deficiency, petitioner (taxpayer) informed the IRS of his belief that he had filed a return for 2013 using H&R Block software. But, IRS records showed that no return had been submitted, and the petitioner was unable to produce, from H&R Block or his own files, a copy of a return or evidence of it filing.” Shawn Stephen Salter v. Comm., TC Memo 2022-29 (4/5/2022). Oh, did I forget to mention that this purported to be a refund return, yet the IRS had no record of a refund nor could the taxpayer show that he had received and deposited same.

When that didn’t work, the taxpayer then prepared a form 1040 and reported all of the income shown on the substitute return. He also claimed itemized deductions. Your Editor, and I assume this to be true of others, has been successful in convincing the IRS to accept an original 1040 in place of a substitute return and assess accordingly, but this isn’t always the case…

The IRS received the return and decided to audit the itemized deductions. They could match state and local taxes, home mortgage interest, and mortgage insurance premiums. So far, so good. However, “Petitioner supplied no documentation, during IRS examination or at trial, to substantiate the other deductions he claimed, and he admitted that he had estimated these amounts.” Ibid., page 3.

As a result of the failed audit, the IRS refused to accept the form 1040 for filing. And, they may do just that, since §6020(a) allows them to prepare “a return required by this title” and (b)((2) states that such a return “…shall be prima facie good and sufficient for all legal purposes.” So, they already had a legally filed return and were not obliged to accept the taxpayer’s much later and very flawed submission. Now, for the really fun part. It turns out that the IRS didn’t need an audit; they could have denied all of the itemized deductions because the taxpayer had not made a timely election to itemize.

Your Editor had always assumed that itemized deductions is an available option when filing an original (not an amended) income tax return. Well, according to the Tax Court, this isn’t so…

“Section 63(e)(1) provides that ‘…unless an individual makes an election under this subsection for the taxable year, no itemized deduction shall be allowed for the taxable year’.” But, didn’t the taxpayer file a return (although it was late) and elect itemized deductions? The Tax Court cited (among several authorities) George v. Comm., TC Memo 2019-128 – “Thus, if an individual fails to file a return, he has made no election to itemize his deductions.” If no return is filed and “…as a result, the Commissioner prepares a substitute return, then the individual has made no election and may not claim itemized deductions.”

What is our taxpayer to do? He decided to continue to do it himself and filed a pro se petition with the Tax Court. This means, he decided to represent himself without the need for counsel. He then proceeded to prove the validity of the adage (slightly amended by your Editor) – a taxpayer who represents himself has a fool for a client (attributed to Abraham Lincoln).

The Court (not surprisingly) determined (page 5) “…petitioner did not file a return for 2013, that he made no election to itemize deductions as required by section 63(e), and that he accordingly is not allowed any itemized deductions. He remains entitled to the standard deduction as calculated on the notice of deficiency.”

A one-page summary of this case in TheTaxBook News states that the taxpayer “filed an amended return claiming itemized deductions.” This appears to be an incorrect reading of the fact pattern; the rejected 1040 was an original filing, and the decision of the Court centers on an attempt by the taxpayer to override a substitute return by filing an original return (which probably would have been accepted had it not failed the audit examination).

It turns out that Abraham Lincoln was spot on!

Friday, February 18, 2022

MA Paid Family & Medical Leave Taxation Issues


Now that a few months have passed and this new tax has been deducted and/or

employer only paid, have we handled it correctly? What’s to handle, you might ask?

I haven’t seen anyone draw down on this fund (with good reason---it’s too soon for

benefits to kick-in). Yes, but is it taxable when it does suddenly appear in a subsequent

year – or currently for a RI resident (more on this later).


What about the employee payroll deductions? If you are like me, at least half of the

W-2 forms which should have shown something in box #14 did not have an entry. If

there is an entry, did you do anything with it? It qualifies as a SALT (state and local

[income] tax) so it should be posted to Schedule A---subject to the $10,000 annual

limitation. For authority, see CCA 200630017 (7/28/2006).

Is it taxable income when received. YES, according to the Chief Counsel’s Advice cited

above. If you received an itemized deduction for the employee payment, the entire

benefit is taxable when received. If you were unable to itemize, the amount of the

payroll deduction becomes your tax basis and it is excluded from taxable benefit

income.


While this is the federal rule for the Massachusetts and Rhode Island State plans, other

state plans may be treated differently.


And, if you have not forgotten, the RI “tax” qualifies as a state tax when computing the

maximum amount of credit on the MA resident return for taxes paid to another state.

See MA Revised Directive 12-1 (3/15/12). Does RI reciprocate? Not at this time. The

regulation in effect since 1/1/1998 is PIT 98-12 and it specifies (see part IV) that the

allowable state income tax must be similar to what is allowed on the RI personal income

tax return. The RI personal return only allows (Schedule W) a credit for withholding tax

shown on form W-2, box #17). RI does not follow the MA “rule.”

Saturday, February 12, 2022

Earned Income Credit for Seniors?

 

William Delaney, EA
Westwood, MA
SENIOR CITIZENS (OVER AGE 64) ARE NOT ELIGIBLE FOR THE EARNED INCOME CREDIT (at least they were not for 2020).  HAS ANYTHING HAPPENED TO CHANGE THAT? 

 

Is my software going crazy---it is allowing an EIC (when the income qualifies) for my 69 year old taxpayer who works part-time at the supermarket, bagging groceries!  This can’t be right—he didn’t get it last year!  So, your Editor looked it up in The Tax Book and, sure enough, there it is on page 11-10:

 

NEW FOR 2021 – Individuals over age 65.  For 2021, this age limit is eliminated.

 

That’s close, but not quite right.  The American Rescue Plan Act of 2021 removed the  age 64 limitation, but only for tax year 2021.  See Subtitle F, Part 3, §9621(a)(n)(2) of the Act.  Don’t look a gift horse in the mouth---go for it!

Friday, February 11, 2022

Backup Withholding Required When No TIN

Mary Mellem, EA

We find two issues in this case:  1) backup withholding, and 2) the statute of limitations.

 

James Quezada works as a stone mason and owns Quezada Masonry.  Mr. Quezada hired subcontractors to perform much of the work, and timely filed his Forms 1099.  For 2005, Mr. Quezada filed 39 Forms 1099, of which 30 lacked Taxpayer Identification Numbers (TINs).  Forms filed for 2006, 2007, and 2008 were similar.

 

BACKUP WITHHOLDING – IRC Section 3405(a) addresses the backup withholding requirements by stating a taxpayer must withhold at the 4th individual tax rate (currently 24%) in any of four events.  The first event listed (Section 3405(a)(1)(A)) is “the payee fails to furnish his TIN to the payer in the manner required.”

 

Most of the Forms 1099 filed with IRS failed to show TINs.  Therefore, Mr. Quezada was required to do backup withholding.  He did not file Form 945 to show the backup withholding, nor did he turn over any monies to IRS.  The Court of Appeals agreed Mr. Quezada was responsible to backup withhold.

 

This should be a warning to taxpayers who do not have the recipient’s TIN at the time payment is to be made, that the taxpayers should backup withhold and subsequently file Form 945 to turn the funds over to IRS.

 

STATUTE OF LIMITATIONS – In 2014 IRS assessed about $1.2 million for amounts Mr. Quezada failed to backup withhold from 2005-2008, plus penalties and interest.  Mr. Quezada argued the statute of limitations had expired on these years, starting when his Form 1040 and Forms 1099 were filed since IRS could determine his liability for backup withholding.  IRS contended the statute had not started yet, since IRS’ regulations prescribe Form 945 as the “return” to be filed to show backup withholding and this form was not filed for any of these years.

 

Court of Appeals, 5th Circuit, sided with the taxpayer.  The net result of these two issues is IRS’ assessment was past the statute of limitations, even though Mr. Quezada was responsible to backup withhold.

 

Also of note – the time frame between the years involved (2005-2008) and the IRS initial assessment in 2014.

 

IRS has stated it will not acquiesce to this position.  In other words, IRS will not follow the 5th Circuit’s position outside of the 5th Circuit.  (The 5th Circuit Court of Appeals includes Texas, Louisiana, and Mississippi.)

 

 

James Quezada & Simona Quezada, CA-5, No 19-51000, December 11, 2020

 

 

This text has been shared courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065, fax 920-496-9111, ataxprof.com.

Wednesday, February 9, 2022

Last Week's Partnership Question - What is The Answer?

In general, when a partner receives property in a complete liquidation of his partnership interest, it is not a taxable event; his basis in the property is his outside basis (adjusted basis) in the partnership.  However, as has been said so many times and in so many situations, the devil is in the details!

 

In our example from last week, Jeff received $5,000 in cash.  §732(b) provides that any money distributed (i.e. cash) is applied to reduce the partner’s adjusted basis in the property.  So, now we reduce $185,000 (adjusted basis before distributions) to $180,000 (adjusted basis after money distributions). 

 

But, we are asked for Jeff’s basis in the building only, not his adjusted basis in all of the property distributed, so we need to do an allocation and split up the $180,000.  §732(c) to the rescue, but easy it is not…

 

(c)(1)(A)(i)(ii) do not apply so we move on to (c)(1)(B)(i) and assign basis to the building and the land in accordance with inside basis (partnership’s basis).   $100,000 + $50,000 = $150,000, which is short of $180,000 by $30,000.  When we have unallocated basis (i.e. $30,000) we then look to (c)(1)(B)(ii) which tells us to defer to either (c)(2) or (c)(3), “whichever is appropriate.”  To avoid making matters more complicated than needed to throw you all off (including, alas, your Editor), it turns out that (c)(2)(A) applies (since both properties have appreciated in value) and we never get to (c)(2)(B) (thank God for little favors).

 

(c)(2)(A) requires us to allocate the $30,000 proportionate to FMV ($100,000 + $50,000 = $150,000) FMV…

 

Building $100,000/$150,000 x $30,000 = $20,000

Land $50,000/$150,000 x $30,000 = $10,000

 

To the answer:

 

Building - $100,000 + $20,000 = $120,000 (answer 4 to last week’s question)

Tuesday, February 8, 2022

Elective Pass-through Entity Excise – Important Information from MASS DOR

 


Elective Pass-through Entity Excise – Important Information

On September 30, 2021, the Massachusetts Legislature enacted an elective pass-through entity excise in response to the $10,000 cap on the federal state and local tax deduction added in the 2017 federal Tax Cuts and Jobs Act.

IMPORTANT INFORMATION: Eligible pass-through entities must register for the 63D-ELT tax type before making a payment. Do not make a 63D-ELT payment on other pre-existing tax types. A pass-through entity must file its annual return and make the election before filing the 2021 Form 63D-ELT.
A pass-through entity can elect to pay the excise when filing Form 3, Form 355S – Schedule S, or Form 2 and will confirm the election by submitting the new Form 63D-ELT. Detailed information is provided on the Frequently Asked Questions page linked below.

INFORMATION AVAILABLE: Extensive information is available about the new elective pass-through entity excise including:
  1. Frequently Asked Questions webpage where you will find information on who’s eligible to make the election and how to make the election.
  2. Working Draft Technical Information Release which explains the elective excise on pass-through entities as enacted in the Fiscal Year 2022 Budget.
If you have a question that’s not covered on the FAQ page, please send that along to us. You can also log in to your MassTaxConnect account and send a secure email specifically related to your account.  

Monday, February 7, 2022

Upcoming IRS Stakeholder Zoom Meetings

Stakeholder Liaison will be holding a series of filing season updates discussions. Join us and learn about:

 

  • Refundable credits you may be entitled to claim, even if you are not normally required to file a tax return, including:
    • Child Tax Credit
    • Recovery Rebate Credit
    • Earned Income Tax Credit
    • Child & Dependent Care Credit
  • What tax records to retain to make filing your tax return easy
  • The importance of filing electronically and direct depositing of refunds when possible
  • Free tax preparation services offered by the IRS Free File and the VITA (Volunteer Individual Tax Assistance) programs

 

Attached is a flyer with additional information and below are the upcoming dates for these events.  If you are not able to join us on any of these dates please let me know as there are other events in different states that you can also attend.

 

February 23, 2022, 1:00 p.m. – 2:00 p.m. ET

Join Zoom Meeting :

https://irs.zoomgov.com/j/1616913538?pwd=ZjNXbGpkdzJvZDhtby9nZUhmTHNidz09

Or join the audio portion only by dialing 646-828-7666 and entering Meeting ID: 161 691 3538

February 24, 2022 – Spanish, 1:00 p.m. – 2:00 p.m. ET

Join Zoom he meeting:

https://irs.zoomgov.com/j/1611642678?pwd=bGNmY05pMGdpVUlZMWpBWW5XeWpnZz09

Or join the audio portion only by dialing 646-828-7666 and entering Meeting ID: 161 164 2678

March 9, 202210:00 a.m. – 11:00 a.m. ET

Join Zoom meeting:

https://irs.zoomgov.com/j/1602190810?pwd=R1Z5bDVrMUx6SncxakdlUU5IM0luQT09

Or join the audio portion only by dialing 646-828-7666 and entering Meeting ID: 160 219 0810

  

Thank you and we look forward to you joining us! 

 

Sincerely,

Jill A. Maniacci

IRS Stakeholder Liaison

Attachments area

Friday, February 4, 2022

Do You Know The Answer?

Taken from a recent EA examination…

 

Jeff’s outside basis in ABC partnership is $185,000.  He receives this complete liquidation of his interest in the partnership:

                                                                                  Fair       

                                                            Inside           Market  

                                                            Basis*           Value

 

Cash                                                      5,000            5,000

Building                                                50,000        100,000 

Land                                                     40,000          50,000

 

Q.  What is Jeff’s basis in the building?

 

1.   $50,000

2.   $100,000

3.   $116,667

4.   $120,000

 

*Inside basis (i.e. partnership basis) should not be confused with outside basis (Jeff’s basis in the partnership).  They are usually not the same.

 

The applicable rules are found in IRC §732(b) and (c).  Good luck.  Answer and technical explanation to be published next week.   

Thursday, February 3, 2022

Important Massachusetts Income Tax Changes

William Delaney, EA
Westwood, MA
Debt Forgiveness Income – PPP Loans: For sole proprietors, federal PPP loan debt forgiveness was not taxable in MA for tax year 2020. However, due to careless drafting of state statute, this benefit did not extend beyond that one tax year. The MA legislature has now made it clear in recently enacted HB4269 under Section 78 that

“…for any taxable year beginning on or after January 1, 2021, any amount received…..and any portion of a loan subsequently forgiven, shall be deducted from federal gross income for the purposes of determining Massachusetts gross income…” 

This means that the state issue regarding bringing back into MA income on an S corporation K-1 any federal debt forgiveness and taxing it to corporation shareholders is off the table; likewise, taxing this income to sole proprietors is retroactively cancelled. A win, win for MA taxpayers.

State Deduction for Charitable Contributions: A number of years ago, legislation was enacted which allowed a deduction for charitable contributions (whether or not itemized on federal Schedule A) when certain state budget surplus targets were achieved. Last year (tax year 2021) the Governor proposed that this deduction (which the legislature had deferred for tax 2020) be allowed for tax 2021, but his proposal was not enacted. The legislature then proposed to delay it once again in the current budget bill.

According to a recent release from the Governor’s office announcing his signing of the budget bill… 

“Given the Commonwealth’s fiscal position, Governor Baker vetoed an outside section (of the state budget bill) which would have delayed the implementation of the charitable tax deduction. This deduction was approved by voters twenty years ago and slated to go into effect when the state finances allow, and the combination of strong state revenue and serious needs facing non-profits and charitable organizations necessitate this tax deduction going into place.

It appears, at least as of this writing, that the MA charitable deduction is in place for tax year 2022. Keep in mind that MA allowable deductions do not include non-cash donations (i.e. clothing, vehicles, goods in general).

Monday, January 10, 2022

2022 tax filing season begins Jan. 24; IRS outlines refund timing and what to expect in advance of April 18 tax deadline


WASHINGTON − The Internal Revenue Service announced that the nation's tax season will start on Monday, Jan. 24, 2022, when the tax agency will begin accepting and processing 2021 tax year returns.

The January 24 start date for individual tax return filers allows the IRS time to perform programming and testing that is critical to ensuring IRS systems run smoothly. Updated programming helps ensure that eligible people can claim the proper amount of the Child Tax Credit after comparing their 2021 advance credits and claim any remaining stimulus money as a Recovery Rebate Credit when they file their 2021 tax return. 
 
"Planning for the nation's filing season process is a massive undertaking, and IRS teams have been working non-stop these past several months to prepare," said IRS Commissioner Chuck Rettig. "The pandemic continues to create challenges, but the IRS reminds people there are important steps they can take to help ensure their tax return and refund don’t face processing delays. Filing electronically with direct deposit and avoiding a paper tax return is more important than ever this year. And we urge extra attention to those who received an Economic Impact Payment or an advance Child Tax Credit last year. People should make sure they report the correct amount on their tax return to avoid delays.”
 
The IRS encourages everyone to have all the information they need in hand to make sure they file a complete and accurate return. Having an accurate tax return can avoid processing delays, refund delays and later IRS notices. This is especially important for people who received advance Child Tax Credit payments or Economic Impact Payments (American Rescue Plan stimulus payments) in 2021; they will need the amounts of these payments when preparing their tax return. The IRS is mailing special letters to recipients, and they can also check amounts received on IRS.gov.
 
Like last year, there will be individuals filing tax returns who, even though they are not required to file, need to file a 2021 return to claim a Recovery Rebate Credit to receive the tax credit from the 2021 stimulus payments or reconcile advance payments of the Child Tax Credit. People who don’t normally file also could receive other credits.

April 18 tax filing deadline for most
The filing deadline to submit 2021 tax returns or an extension to file and pay tax owed is Monday, April 18, 2022, for most taxpayers. By law, Washington, D.C., holidays impact tax deadlines for everyone in the same way federal holidays do. The due date is April 18, instead of April 15, because of the Emancipation Day holiday in the District of Columbia for everyone except taxpayers who live in Maine or Massachusetts. Taxpayers in Maine or Massachusetts have until April 19, 2022, to file their returns due to the Patriots’ Day holiday in those states. Taxpayers requesting an extension will have until Monday, Oct. 17, 2022, to file.
 
Awaiting processing of previous tax returns? People can still file 2021 returns
Rettig noted that IRS employees continue to work hard on critical areas affected by the pandemic, including processing of tax returns from last year and record levels of phone calls coming in.
 
“In many areas, we are unable to deliver the amount of service and enforcement that our taxpayers and tax system deserves and needs. This is frustrating for taxpayers, for IRS employees and for me,” Rettig said. “IRS employees want to do more, and we will continue in 2022 to do everything possible with the resources available to us. And we will continue to look for ways to improve. We want to deliver as much as possible while also protecting the health and safety of our employees and taxpayers. Additional resources are essential to helping our employees do more in 2022 – and beyond.”
 
The IRS continues to reduce the inventory of prior-year individual tax returns that have not been fully processed. As of Dec. 3, 2021, the IRS has processed nearly 169 million tax returns.  All paper and electronic individual 2020 refund returns received prior to April 2021 have been processed if the return had no errors or did not require further review.

Taxpayers generally will not need to wait for their 2020 return to be fully processed to file their 2021 tax returns and can file when they are ready.
 
Key information to help taxpayers
The IRS encourages people to use online resources before calling. Last filing season, as a result of COVID-era tax changes and broader pandemic challenges, the IRS phone systems received more than 145 million calls from January 1 – May 17, more than four times more calls than in an average year. In addition to IRS.gov, the IRS has a variety of other free options available to help taxpayers, ranging from free assistance at Volunteer Income Tax Assistance and Tax Counseling for the Elderly locations across the country to the availability of the IRS Free File program.
 
“Our phone volumes continue to remain at record-setting levels,” Rettig said. “We urge people to check IRS.gov and establish an online account to help them access information more quickly. We have invested in developing new online capacities to make this a quick and easy way for taxpayers to get the information they need.”
 
Last year's average tax refund was more than $2,800. More than 160 million individual tax returns for the 2021 tax year are expected to be filed, with the vast majority of those coming before the traditional April tax deadline.
 
Overall, the IRS anticipates most taxpayers will receive their refund within 21 days of when they file electronically if they choose direct deposit and there are no issues with their tax return. The IRS urges taxpayers and tax professionals to file electronically. To avoid delays in processing, people should avoid filing paper returns wherever possible.

By law, the IRS cannot issue a refund involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February, though eligible people may file their returns beginning on January 24. The law provides this additional time to help the IRS stop fraudulent refunds from being issued.
 
Some returns, filed electronically or on paper, may need manual review, which delays the processing, if our systems detect a possible error or missing information, or there is suspected identity theft or fraud. Some of these situations require us to correspond with taxpayers, but some do not. This work does require special handling by an IRS employee so, in these instances, it may take the IRS more than the normal 21 days to issue any related refund. In those cases where IRS is able to correct the return without corresponding, the IRS will send an explanation to the taxpayer.

File electronically and choose direct deposit
To speed refunds, the IRS urges taxpayers to file electronically with direct deposit information as soon as they have everything they need to file an accurate return. If the return includes errors or is incomplete, it may require further review that may slow the tax refund. Having all information available when preparing the 2021 tax return can reduce errors and avoid delays in processing.
 
Most individual taxpayers file IRS Form 1040 or Form 1040-SR once they receive Forms W-2 and other earnings information from their employers, issuers like state agencies and payers. The IRS has incorporated recent changes to the tax laws into the forms and instructions and shared the updates with its partners who develop the software used by individuals and tax professionals to prepare and file their returns. Forms 1040 and 1040-SR and the associated instructions are available now on IRS.gov. For the latest IRS forms and instructions, visit the IRS website at IRS.gov/forms.

Free File available January 14
IRS Free File will open January 14 when participating providers will accept completed returns and hold them until they can be filed electronically with the IRS. Many commercial tax preparation software companies and tax professionals will also be accepting and preparing tax returns before January 24 to submit the returns when the IRS systems open.

The IRS strongly encourages people to file their tax returns electronically to minimize errors and for faster refunds – as well having all the information they need to file an accurate return to avoid delays. The IRS’s Free File program allows taxpayers who made $73,000 or less in 2021 to file their taxes electronically for free using software provided by commercial tax filing companies. More information will be available on Free File later this week.
 
In addition to IRS Free File, the IRS's Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs free basic tax return preparation to qualified individuals. See this page on IRS.gov for more information.
 
Watch for IRS letters about advance Child Tax Credit payments and third Economic Impact Payments
The IRS started sending Letter 6419, 2021 advance Child Tax Credit, in late December 2021 and continues to do so into January. The letter contains important information that can help ensure the return is accurate. People who received the advance CTC payments can also check the amount of the payments they received by using the CTC Update Portal available on IRS.gov.

Eligible taxpayers who received advanced Child Tax Credit payments should file a 2021 tax return to receive the second half of the credit. Eligible taxpayers who did not receive advanced Child Tax Credit payments can claim the full credit by filing a tax return.

The IRS will begin issuing Letter 6475, Your Third Economic Impact Payment, to individuals who received a third payment in 2021 in late January. While most eligible people already received their stimulus payments, this letter will help individuals determine if they are eligible to claim the Recovery Rebate Credit for missing stimulus payments. If so, they must file a 2021 tax return to claim their remaining stimulus amount. People can also use IRS online account to view their Economic Impact Payment amounts.
 
Both letters include important information that can help people file an accurate 2021 tax return. If the return includes errors or is incomplete, it may require further review while the IRS corrects the error, which may slow the tax refund. Using this information when preparing a tax return electronically can reduce errors and avoid delays in processing.
 
The fastest way for eligible individuals to get their 2021 tax refund that will include their allowable Child Tax Credit and Recovery Rebate Credit is by filing electronically and choosing direct deposit

Tips to make filing easier
To avoid processing delays and speed refunds, the IRS urges people to follow these steps:
Organize and gather 2021 tax records including Social Security numbers, Individual Taxpayer Identification Numbers, Adoption Taxpayer Identification Numbers, and this year’s Identity Protection Personal Identification Numbers valid for calendar year 2022.

Check IRS.gov for the latest tax information, including the latest on reconciling advance payments of the Child Tax Credit or claiming a Recovery Rebate Credit for missing stimulus payments. There is no need to call.

Set up or log in securely at IRS.gov/account to access personal tax account information including balance, payments, and tax records including adjusted gross income.

Make final estimated tax payments for 2021 by Tuesday, Jan.18, 2022, to help avoid a tax-time bill and possible penalties.

Individuals can use a bank account, prepaid debit card or mobile app to use direct deposit and will need to provide routing and account numbers. Learn how to open an account  at an FDIC-Insured bank or through the National Credit Union Locator Tool.

File a complete and accurate return electronically when ready and choose direct deposit for the quickest refund.

Key filing season dates
There are several important dates taxpayers should keep in mind for this year's filing season:

January 14: IRS Free File opens. Taxpayers can begin filing returns through IRS Free File partners; tax returns will be transmitted to the IRS starting January 24. Tax software companies also are accepting tax filings in advance.
January 18: Due date for tax year 2021 fourth quarter estimated tax payment. 
January 24: IRS begins 2022 tax season. Individual 2021 tax returns begin being accepted and processing begins
January 28: Earned Income Tax Credit Awareness Day to raise awareness of valuable tax credits available to many people – including the option to use prior-year income to qualify.
April 18: Due date to file 2021 tax return or request extension and pay tax owed due to Emancipation Day holiday in Washington, D.C., even for those who live outside the area.
April 19: Due date to file 2021 tax return or request extension and pay tax owed for those who live in MA or ME due to Patriots’ Day holiday
October 17: Due date to file for those requesting an extension on their 2021 tax returns

Planning ahead
It’s never too early to get ready for the tax-filing season ahead. For more tips and resources, check out the Get Ready page on IRS.gov.

Thursday, January 6, 2022

January Update Seminar (Updated with Link)

COVID Can't Keep Us Down...at least not all of us. Today, we held our Annual State Update Seminar in Southbridge, MA. Although we had last minute cancellations by speakers from Massachusetts DOR and Connecticut DOR, we still delivered updates from Rhode Island and New York in addition to our Federal update by Kathryn Keane. She led us in a jam packed session updating us on the latest issues relating to the Corporate Transparency Act, changes in the Earned Income Credit, PPP Forgiveness and in depth conversations on the Advanced Child Tax Credit and Recover Rebate Credit reconciliations (and much more!!)

Instructor Kathryn Keane Back in Person

With the last minute speaker cancellations, our Education Chair, Sharon Cummings, led a roundtable discussion on COVID-19 Office Procudres for the upcoming tax season. There was great discussion on topics revolving around the virtual office using video conferring and document uploading to secure online portals. Many attendees will not be visiting with clients in person and will either be video chatting with clients or requiring documents to be mailed in or dropped off in secure lock boxes.

All of the handouts for this seminar can be found online here.

Thank you to all who attended and PLEASE STAY SAFE this filing season!!



New Rules For Third Party Settlement Organizations (TPSO)

William Delaney, EA
Westwood, MA

Think form 1099-K issued by credit card companies and banks, but only to report 

more than $20,000 and/or if there are more than 200 transactions. Now comes the 

American Rescue Plan Act of 2021 which throws this out the window as of 

January 1, 2022. As of 2022, we have a simple reporting requirement…receipts of 

more than $600 per year.

This matches the current reporting requirement for form 1099-NEC.

This closes the so-called PayPay loophole; TPSOs are now playing by the same 

rules as everyone else. Remember, also, that the definition of a TPSO includes not just

PayPal but also Uber, Lyft, eBay, Grubhub and Etsy, to name a few.

This time next year, expect to see forms 1099-K from clients who never thought that

their income source would be discovered and reported!

Finally, MA already has in place a more than $600 filing requirement for TPSOs, along

with AK, IL, MD, MI, MS, NJ and VT which have enacted various (i.e. lower than

$20,000) filing requirements.

Wednesday, January 5, 2022

Words Have Meaning and Specific Words Have Specific Meaning

William Delaney, EA
Westwood, MA

Now comes Mass. Gen. Laws Ch. 63D, Sec. 7 which directs that “The commissioner shall promulgate regulations or other guidance to carry out the purposes of this chapter.” 

 

“(ii) provide rules on the application of this chapter to eligible trusts and estates,…”

 

This has to do with the new MA Elective Pass-Through Entity Excise Tax -                (MGL Ch 63D).  The law, under §1, defines an eligible pass thru entity (PTE) as an S corporation, a partnership, or an LLC taxed as a C corporation or partnership.  There, the law has stopped.  Nothing “additional” has been included in the statutory definition of a PTE.  However, in §7, the legislature refers to eligible trusts and estates, and appears to have left it up to the MA Commissioner of Revenue to write rules and/or other guidance which would move certain trusts and estates (as defined by the commissioner) under the statutory umbrella wherein a PTE resides.  We didn’t place them there said the legislature when it wrote the statute---we told the commissioner that he could exercise his discretion and do so. 

 

Now we have (in proposed form) a TIR which does exactly that.  It makes certain trusts (as explained in the TIR) eligible to make the election.  And, the result is wonderful!  The trust pays the tax; there is a K-1 which passes credit for the tax payment to the trust beneficiary, and the beneficiary (on his/her Form 1) may claim credit of up to 90% of this amount against the income tax imposed on the pass-through income.  Again, wonderful!  The state has just increased your tax rate by 10% on the pass-through income!

 

Of course, there must be a benefit to this stuff and nonsense, so let’s look to the federal return.  On the federal 1041 there is allowed a deduction for taxes paid (which, one would presume, includes this excise tax), so the amount of pass-through income (DNI) is net after deductions.  Voila, there it is, the federal pass-through income has been reduced, so the additional state tax is more than offset by the federal 1040 tax saved*.  Ingenious!  Except, this doesn’t work, for reasons not addressed in either MGL or the TIR.

 

First, §1 defines Qualified Member as a shareholder of an S corporation, a partner in a partnership, or a member of an eligible LLC.  The TIR did not change or alter this MA statutory definition to include beneficiaries of a trust.  Therefore, while the trust may pay the excise tax, the beneficiary may not claim a credit for this payment, so he/she pays again.  A 100% jump in state tax for the ineligible beneficiary!

 

Second, IRS Notice 2020-75, which claims to be the precursor of federal regulations to be issued on this excise tax concept, limits eligible entities to S corporations and partnerships.  The IRS is telling us, in advance, that the regulations do not contemplate any such deduction by a trust or estate on the federal 1041.  If the trust, when filing its federal form 1041, cannot claim a tax deduction for this MA excise tax, the pass-through federal income will match the pass-through MA income, so there is no federal income tax savings which would at least offset the additional state tax paid!  Checkmate!

 

 

*If the federal distributive net income (pass-through income) is $10,000 and a MA 5% excise tax is imposed, the DNI is reduced to $9,500 for purposes of reporting on form 1040.  Since MA does NOT allow deductions for state tax paid, the MA income remains at $10,000.