by Taxing Subjects | Jun 8, 2023 | Tax Tips and News
A new wave of advertising is churning up interest in a tax credit intended to help businesses and non-profits that tried to retain their employees during the COVID-19 pandemic. However, the ads on TV and radio, online, and even direct mail leave out a critical fact: most of the promoters’ clients won’t qualify for the credit.
That’s where you come in.
As a trusted tax professional, you are often the source of truth for your clients. You may be getting questions about ads touting big payoffs for claiming the Employee Retention Credit (ERC). If these stories sound too good to be true, that’s because they are.
We want you to have all the facts, so your clients can make the right decisions.
Be wary of unrealistic claims for the ERC
To hear one of these ads, you’d think virtually anyone can claim the ERC: businesses, non-profits and individuals alike. In addition, they say “you have nothing to lose!” Both these statements are false.
True, the ERC is a refundable credit, but it is intended for businesses that continued to pay workers even while they were shut down during the pandemic. The credit also applies to businesses that had significant declines in gross receipts during the specified eligibility periods. And no matter what the ads say, individuals are not eligible for the ERC.
As far as filers having “nothing to lose,” consider that anyone who improperly claims the ERC has to pay it back—many times along with penalties and interest. The IRS cautions businesses and tax-exempt organizations that they could find themselves in a much worse cash position if they have to pay back the credit than if they never claimed it in the first place.
What are the requirements for claiming the ERC?
Companies can claim the credit on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021.
To be eligible, employers must have:
- Carried out a full or partial shutdown of operations as ordered by an appropriate governmental authority because of Covid-19 during 2020 or the first three quarters of 2021;
- Experienced a significant decline in gross receipts during 2020 or during the first three quarters of 2021, or;
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
How can clients know if an offer could be a scam?
First, the offer comes through an advertisement or an unsolicited phone call. Either may promote an “easy application process.”
Second, promoters will often claim they can determine the filer’s ERC eligibility within minutes, but charge a large up-front fee just to claim the credit. Many times, promoters will claim a business qualifies for the credit without any discussion of the client’s tax situation.
Finally, promoters’ fees tend to be based on the amount of ERC being claimed.
You are the best defense against ERC scams
The IRS says you, the trusted tax professional, have the skills needed to correctly determine eligibility for the Employee Retention Credit and to calculate the correct credit amount. These third-party promoters have only profit as their motive and cannot be trusted to act in taxpayers’ best interests.
To report abuse of the Employee Retention Credit, submit a Form 14242, Report Suspected Abusive Tax Promotions or Preparers, mailing or faxing the completed form along with any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations at:
Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, California 92677-3405
Fax: 877-477-9135
Source: IR-2023-105
– Article provided by Taxing Subjects.
by Taxing Subjects | May 25, 2023 | Tax Tips and News
The Internal Revenue Service is moving ahead with a program that will offer taxpayers a new option for filing their 2023 returns next year. Dubbed “Direct File,” a scaled-down version of the full program will allow taxpayers to file online for free, using an IRS-run website.
The move to online filing through the IRS is rooted in the Inflation Reduction Act (IRA). The IRA mandated that the Treasury Department and the IRS look into whether free online filing is possible through the IRS and what the agency needs to make it happen.
The IRS broke its fact-finding effort into three pieces.
1. Do taxpayers want it?
A number of sources were united to acquire and analyze public opinion about the project. The IRS used its Taxpayer Experience Survey (TES) to poll thousands of taxpayers on the issue. Next, results from an independent MITRE Corporation survey were pulled in. Then, independent analysis by New America and Professor Ariel Jurow Kleiman on the concept was added to the mix.
An IRS report to Congress on the Direct File initiative determined taxpayer interest in the project is sufficient to move forward.
2. Are there costs to implementing Direct File?
While the IRS report doesn’t give hard figures, it does caution Congress that building and executing an effective Direct File online filing site would require a sustained investment by lawmakers. Given the difficulty the agency has faced in receiving requested funding, this could prove to be a roadblock for the future of the program.
3. Is a free online filing portal even possible for the IRS?
The congressional report says creating a successful online filing portal is feasible despite presenting technical challenges for operation and administration. According to the report, the agency is ready and able to meet these challenges.
The IRS is embracing a proven method of testing for its new project: start small and work your way up. To that end, the agency intends to field its Direct File pilot program in 2024 with a limited scope so technicians can more easily track its operation. This approach will also allow system administrators to see if the pilot project adequately meets the customer support and technology needs of taxpayers before the system is scaled up.
In the short term, the IRS plans to meet with stakeholders in the tax industry over the coming months to hear concerns and offer some answers. According to the agency, more details on the Direct File program will soon be available.
Source: IRS submits Direct File report to Congress; Treasury Department directs pilot to evaluate key issues
– Article provided by Taxing Subjects.
by Taxing Subjects | May 6, 2023 | Tax Tips and News
The Internal Revenue Service says it has almost $1.5 billion in leftover tax refunds for 2019 taxpayers who haven’t filed—but the time remaining to claim this money is slipping away.
According to the agency, as many as 1.5 million taxpayers could benefit from the unclaimed refunds, but they must file a tax year 2019 return to get it. The median refund is calculated to be $893.
Expanded three-year filing window is about to close
Taxpayers usually have three years in which to file and claim a refund. After that point, the money goes into the government’s pocket. Because of the COVID-19 pandemic, the usual deadline for filing 2019 returns for refund was pushed back to July 17, 2023. Notice 2023-21 has more details.
The IRS has broken down the list of refunds on a state-by-state basis, providing some insight into which parts of the US still need to file tax year 2019 returns:
- Texas leads the list in terms of total potential refunds. Lone Star State taxpayers could pick up more than $142 million if they file.
- California has the highest estimated number of taxpayers who need to file to get it: 144,700.
- New Hampshire, with roughly 6,900 affected taxpayers, has the highest median refund in the group: $974.
- Vermont brings up the rear with just 3,100 estimated taxpayers who could benefit, with estimated refunds totaling just over $3 million.
Things to consider before filing
It’s worth noting that filing could have benefits beyond just the outstanding tax refund. A number of low- and moderate-income filers may be eligible for the Earned Income Tax Credit or EITC. In 2019, the EITC was worth as much as $6,557 to qualified taxpayers.
Despite four years passing, there are still options available for tracking down the various documents needed to file. Forms W-2, 1098, 1099, and 5498 may be available through the taxpayers’ employer, bank or other institution. The Get Transcript Online tool on IRS.gov can help taxpayer quickly track down forms that might be unavailable from other sources.
Taxpayers who need to file a paper Form 4506-T can request a “wage and income transcript” showing data from their W-2, 1099, 1098, and other financial forms. Keep in mind, though, this option is by far the slowest, taking weeks for the IRS to send the results.
As with all refunds, it’s worth remembering that the amount the taxpayer actually gets may be smaller than expected, depending on the circumstances. This decrease in expected refund is often due to 2019 tax refunds being held back to pay tax owed if a taxpayer hasn’t filed for 2020 and 2021. Additionally, a tax refund could be used to pay any tax debt owed to the IRS or state tax agency or offset unpaid child support and past-due student loan debt.
Source: IR-2023-79
– Article provided by Taxing Subjects.
by Taxing Subjects | Apr 24, 2023 | Tax Tips and News
Every year, CPA Practice Advisor asks readers to vote on the technology—both software and hardware—they trust the most. Just one day before the individual filing deadline, the publication announced the results of its nineteenth annual Readers’ Choice Awards, which included more than 5,000 respondents.
Just like years past, thousands of customers recognized Drake Software as a reliable partner during filing season. In addition to claiming the same five categories as last year, our solutions also took first place for website-builder, CPE-provider, and hosting-solution services.
Which categories did Drake Software win?
Federal/State Income Tax Preparation: Drake Tax®
Tax professionals need a reliable professional tax preparation solution—especially when navigating unprecedented challenges like a once-a-century pandemic. Since CPA Practice Advisor began hosting the Readers’ Choice Awards, Drake Tax has proven to be a dependable partner for paid tax return preparers: winning the Federal/State Income Tax Preparation category 18 times. Learn more about Drake Tax.
Tax Planning Systems: Drake Tax Planner™
Being able to quickly compare clients’ current tax situation with other possible scenarios—from having a child to changing jobs—helps you easily provide tax planning services. Just like last year, the Drake Tax Planner won the Tax Planning Systems category. Learn more about the Drake Tax Planner.
1099/W-2 Compliance: Drake Accounting®
Tax professionals who have small business clients commonly provide payroll services. Drake Accounting is our fully integrated bookkeeping solution, and it includes a number of essential payroll features, including live and after-the-fact payroll, multi-location payroll, and e-filing for Forms 94x, W-2, W-2G, W-3, and 1099. Learn more about Drake Accounting.
Client Portals: Drake Portals™
While remote tax preparation initially gained traction during the pandemic, many have now embraced the convenience of using Internet-based platforms to facilitate tax preparation services. Drake Portals allows tax professionals to securely exchange client tax documents, gather signatures, collect payments, back up files, and send instant messages. Learn more about Drake Portals.
Document Management & Document Storage: Drake Documents
Serving as the Drake Tax- and Drake Portals-integrated document management solution for client records and returns, Drake Documents also produces PDF images, password protects files, and watermarks documents as final, review, or draft. Learn more about Drake Documents.
Website Builders & Services for Accounting Firms: Drake Software SiteDart Hosting
SiteDart Hosting specializes in building websites for tax and accounting professionals, so you don’t need any experience with HTML to have a site with features like a financial calculator, tax-rate information, tax-return checklists, and federal and state refund searches. Learn more about SiteDart Hosting.
Favorite CPE Provider: DrakeCPE®
In addition to keeping tax pros informed about the latest tax and industry updates, continuing professional education is required to maintain myriad professional designations. For some, finding a reputable CPE provider that satisfies their educational needs and fits their busy schedules can be challenging. DrakeCPE offers more than 50 courses in a variety of formats, including self-study, on-demand, and live webinars. Learn more about DrakeCPE.
ASP/Hosted Solution Providers: Drake Software Hosting Powered by Right Networks
Whether operating a multi-site firm or needing anytime, anywhere access to your tax preparation applications, hosting software on a platform like Right Networks provides the convenience of browser-based applications with the user experience of local installs. In addition to accessing Drake Tax and Drake Accounting from any location with high-speed Internet, your data is stored in Tier 4 data centers that run 90-day, nightly rolling backups. Learn more about Drake Software Hosting Powered by Right Networks.
How did our partners perform?
Other Workflow Tools: GruntWorx®
The frenetic pace of filing season has led many tax professionals to seek workflow solutions that can help save their practice time. GruntWorx products automate a number of tasks, from organizing client documents to entering data in returns, and they are integrated with Drake Tax. Learn more about GruntWorx.
Tax Document Automation: GruntWorx Populate
Populate saves time spent on data entry by extracting and inserting information from scanned client tax documents into many professional tax preparation applications. Integration with Drake Tax makes this process even easier, since scanning, printing, and file management can all be handled in Drake Documents.
Tax & Accounting Research Systems: TheTaxBook™
It’s essential that you have the tax information you need when you need it, especially during filing season. TheTaxBook WebLibrary Plus is a deep tax research database that is integrated within Drake Tax. Learn more about TheTaxBook.
Source: CPA Practice Advisor 2023 Readers’ Choice Awards
– Article provided by Taxing Subjects.
by Taxing Subjects | Apr 20, 2023 | Tax Tips and News
After severe thunderstorms and tornadoes raked parts of Tennessee on March 31, many of Volunteer State taxpayers could use a little good news. The Internal Revenue Service is doing its part, announcing tax relief for storm victims.
The agency announced that taxpayers and businesses in the 10 hardest-hit counties have been given until July 31, 2023, to meet a number of filing and payment deadlines, including the following:
- April 18: income tax return filing and payment deadline
- April 18: quarterly estimated tax payment deadline
- April 30: quarterly payroll and excise tax return deadline
- June 15: quarterly estimated tax payment deadline
Further, the IRS says penalties on payroll or excise tax deposits due March 31 – April 18 will be abated as long as tax deposits are made by April 18.
Information on other returns qualifying for relief, payments delayed, and other details can be found on the Disaster Assistance and Emergency Relief for Individuals and Businesses page on the IRS website.
Which Tennessee counties are receiving this tax relief?
The expanded deadlines are available to taxpayers and businesses in the 10 Tennessee counties named in the federal disaster declaration:
- Cannon
- Hardeman
- Hardin
- Haywood
- Lewis
- Macon
- McNairy
- Rutherford
- Tipton
- Wayne
If any other counties are added to the disaster declaration, the IRS will automatically add them to the list of qualifying counties.
There is one caveat for those who want more time beyond the expanded July 31 deadline: extension requests from disaster-area taxpayers after April 18 and before July 31 can only be filed on paper. (See the “Extension of Time To File Your Tax Return” page on IRS.gov for more details.)
Do taxpayers need to do anything to receive this tax relief?
Taxpayers within the disaster area do not have to do anything to receive the IRS relief measures; when they file, IRS electronic systems will apply relief measures according to the address on the return. However, any tax return that claims a loss within the disaster area due to these storms should contain the FEMA declaration number: 4701-DR.
According to the IRS, those living outside the disaster area may still be able to qualify for this tax relief if “records necessary to meet a deadline occurring during the postponement period are located in the affected area,” or they are “workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.” Unlike residents who automatically receive relief, these taxpayers need to call the IRS: 866-562-5227.
Source: IR-2023-75
– Article provided by Taxing Subjects.
by Taxing Subjects | Apr 11, 2023 | Tax Tips and News
The Internal Revenue Service has released its annual Dirty Dozen list of the top scams and schemes posing threats to taxpayers and tax pros, and this year sees some new schemes among the known scams from previous lists.
While not ranked by importance or enforcement priority, the list shows the lengths scammers, hackers, and other thieves will go to crack the cyber defenses of tax preparers and their clients.
The Dirty Dozen list is issued every year by the IRS and Security Summit, a group of IRS officials, state tax agency, and national tax industry partners. The Summit is aimed at identifying security threats and devising defense strategies against them.
Let’s get started.
Bogus Employee Retention Credit Claims
The Employee Retention Credit was created to help a specific type of business that continued to pay employees while the firm was shut down during the COVID-19 pandemic. The credit is not available to individuals.
Scammers, however, hawk the credit on TV, radio and the internet as a way for anyone—whether a business or an individual—to file and get a big payday from the government. In truth, many of these claims are built on bogus eligibility statements and payout estimates rooted more in wishful thinking than in reality.
The real danger, the Security Summit cautions, is these third-party filers charge fees for their “service,” leaving taxpayers in the lurch when they’re turned down for a credit they cannot get. Individuals should remember the IRS holds the taxpayer responsible if their return isn’t accurate.
Using Text or Email to Trick Tax Pros and Taxpayers
This is a perennial offender in the Dirty Dozen lists.
The format is simple: Scammers send emails or texts to tax professionals that appear to be from potential clients, or they may target taxpayers by posing as the IRS or some other official agency.
The point of these bogus communications is to get the target tax pro or taxpayer to divulge vital personal information such as a Social Security number, account login information or other details that could help the scammer steal the taxpayer’s identity.
These attacks come in two basic forms: phishing and smishing. Phishing is an email sent by scammers posing as some sort of official agency or business. The email may threaten the recipient if they don’t click a certain link or pay a bogus fee, or offer a non-existent tax refund.
Smishing uses a text or smartphone SMS message in lieu of an email, with the same purpose. Smishers sometimes send messages warning that your account has been locked, accompanied by a link to “solutions” that will allegedly fix the problem. Like phishing attempts, these will take the victim to a fake website where their information can be stolen or otherwise compromised.
Risks from either method are great for both tax professionals and taxpayers. Never click on any link in an email or text message that arrives unsolicited.
Bogus Offers of “Help” to Set Up Online Accounts
It sounds so innocent: an offer to help taxpayers set up their Online Account on the IRS website. But this comes from a No-Good Samaritan. It’s the work of an identity thief.
Setting up an Online Account with the IRS is a straightforward process, requiring no outside help to establish. The scammers frequently market themselves to the elderly and to taxpayers with a limited command of English.
The scammer’s “helpful” service hides the true goal of what appears to be a good deed: to steal a taxpayer’s personal information so the scammer can do his damage.
Once the cyberthief gets the taxpayer’s address, Social Security number or Individual Taxpayer Identification Number (ITIN), and photo identification, he can file fraudulent tax returns (all claiming huge refunds), obtain loans and open new credit accounts.
Making Fraudulent Fuel Tax Credit Claims
This one is a variation on a theme: Scammers convincing taxpayers to claim a credit they’re not qualified to receive.
In this case, it’s the Fuel Tax Credit, designed to refund fuel tax paid by farmers and other off-highway users. Scammers and promoters pitch a claim for the Fuel Tax Credit to regular taxpayers, when in reality, it’s simply not available to most taxpayers.
The scammer can make off with an inflated fee for suggesting the Fuel Tax Credit and possibly taxpayer information to help file a fraudulent tax return.
Using Fake Charities to Dupe Taxpayers
The world has experienced tragedy of epic proportions over the past few years. When there’s a disaster of any kind, whether earthquake, hurricane, or famine, thankfully some charity steps up to help the recovery effort.
But scammers have learned this and they invent fake charities to pose as legitimate humanitarian organizations so they can rake in public donations that simply go into the scammers’ pockets. Disaster victims, meanwhile are left to fend for themselves.
On top of the diverted donations, fake charities offer scammers the opportunity to pull in donors’ personal financial information, leaving donors vulnerable to identity theft for their good deed.
Beware “Ghost” Tax Preparers
This Dirty Dozen entry revolves around fly-by-night tax preparers who cut corners in order to get a higher fee from their clients. One of their tactics is to gauge their fees according to the size of the client’s claimed refund. Some of these preparers are called “ghosts,” because they refuse to sign the returns they prepare—or ask their clients to sign a blank return up front.
A ghost preparer may also ask for a cash-only payment but won’t give a receipt, create fake deductions to boost the size of the refund, or direct refunds into their bank account instead of the client’s bank account.
Taking Tax Advice Found on Social Media
Let’s face it: taxpayers are always looking for ways to increase the size of their tax refund. Unfortunately, many of these schemes can land folks in hot water with the IRS.
The agency says two scams have recently surfaced that got their attention. One involves common tax documents such as W-2s, while the other utilizes the more obscure Form 8944, which is usually used by a very limited group of tax filers. In both cases, the online proponents encouraged taxpayers to submit false information to get a refund.
As the old advice goes, if something sounds too good to be true—it probably is.
Tax Pros Are Vulnerable to Spearfishing Attacks
This scheme shows up in the tax professional’s email in-box all dressed up like a legitimate email from an official source—a state taxing agency, another tax firm, or even the IRS.
Problem is, it’s from a scammer.
The point of these ersatz emails is to trick the tax pro into divulging some of their clients’ personal financial information—or even their own, thinking they are communicating with a legitimate and trusted agency.
Spearfishing can be aimed at individual tax pros, or even whole payroll departments of businesses. The methods are the same no matter the scale.
Steer Clear of Offer in Compromise “Mills”
Some scammers advertise they can settle a taxpayer’s outstanding tax debt for pennies on the dollar, when in truth, taxpayers can do it themselves without anyone’s help.
These ads are a staple on radio and television, promoting how they got a taxpayer’s tax debt reduced to easy-to-pay monthly notes.
The scammers tout their success at negotiating with the IRS, but it’s actually all done through the agency’s Offer in Compromise, designed to help taxpayers who owe a large tax debt but don’t have the assets to pay.
No third party is required. Taxpayers can go online themselves to sign up for an OIC that sets a payment schedule for a significantly reduced tax debt amount.
Taxpayers promote their services aggressively, raking in up-front fees from taxpayers who don’t even meet the qualifications of the Offer in Compromise.
High-Income Filers Need to Think Twice
The IRS has a stern warning for wealthy taxpayers who are willing to go to any lengths to protect their bank accounts from the taxman: Resorting to illegal means to shield income can have serious consequences.
These complex schemes rely on tax shelters little-known to the average taxpayer. Whether a Charitable Remainder Annuity Trust (CRAT) or a Monetized Installment Sale, the promoter’s pitch is the same—a tax benefit that is greater than the law allows.
Taxpayers should remember that variants of these strategies have been named abusive tax avoidance schemes by the IRS.
Beware of Schemes That Abuse the Tax System
While the previous Dirty Dozen entry catered to the very wealthy, this set of pitfalls are more widely known. They are all familiar to the IRS as tax-avoidance schemes. All are promoted as ways to protect income from taxation, but when discovered, won’t protect the taxpayer from prosecution.
Two of these methods, micro-captive insurance arrangements and syndicated conservation easements, follow existing processes, but use deception in filing to inflate the benefits that protect income.
International Moves Enter Sketchy Territory
Some taxpayers rely on offshore accounts and digital assets to shield their funds from IRS scrutiny. If deception is involved, however, IRS agents take a closer look.
Another scheme has taxpayers depositing money into a so-called “pension fund” in Malta or some other foreign country. By claiming erroneous treaty provisions and improper exemptions from U.S. income tax, the scheme becomes abusive in the eyes of the IRS.
In both these examples and others known to auditors, willful deception and misstating income are seldom good strategies for filers.
Learn More About Protecting Taxpayer Data
The sheer number of scams threatening taxpayer data can seem daunting, but there are reliable educational resources available. “Keeping Taxpayer Data Secure” is a self-study course on DrakeCPE.com that covers the risks posed by cybercrime, data security best practices, and strategies for mitigating breaches.
Sources: IR-2023-49; IR-2023-51; IR-2023-54; IR-2023-55; IR-2023-57; IR-2023-59; IR-2023-61; IR-2023-62; IR-2023-63; IR-2023-65; IR-2023-67; IR-2023-71
– Article provided by Taxing Subjects.
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