Federal Tax News

How did the federal government do in sending out Economic Impact Payments (EIPs)? Two reports detail the results. EIPs were sent to eligible individuals to help mitigate the financial effects of the pandemic. Sending the payments to some people has been a tough task, according to a report by the Congressional Research Service (CRS). As of May 31, roughly 160.4 million had been issued, by check, direct deposit or prepaid debit cards. Still, “several glitches have marred delivery of EIPs” the report said.

For example, some checks were sent to deceased people and prepaid debit cards were mailed to taxpayers who didn’t expect them, so they discarded them in the plain white envelopes they were mailed in. Also, a reduced IRS workforce due to COVID-19 made it hard to deliver EIPs to eligible persons who haven’t provided the IRS with their bank information or current addresses. Here’s the CRS report: https://bit.ly/2EURtgn

Meanwhile, U.S. Treasury officials report that nearly 70% of $1.6 billion in EIPs that were sent to deceased people has now been recovered, according to the General Accountability Office (GAO). However, the GAO stated it “was unable to verify that amount” was actually returned. In a June report about the federal response and recovery efforts to COVID-19, the GAO stated that as of April 30, almost 1.1 million payments had gone to people who died. Since then, the IRS has issued instructions notifying ineligible recipients how to return payments.

Court allows taxpayer to deduct some expenses but not others. Self-employed taxpayers can generally deduct costs incurred in the course of doing business, if the costs are business-related and substantiated.

In one case, the U.S. Tax Court limited or disallowed deductions for a business consultant who did work for a physician who was also a long-term friend. Disallowed items included: rent for an apartment that was personal use; depreciation for unidentified property; office expenses that were mixed with personal expenses; costs for a car that belonged to the physician; unexplained travel and more. However, the taxpayer was able to deduct substantiated costs for dues, subscriptions, and some meal and entertainment expenses. (Alka Sham, TC Memo 2020-119)

Less paperwork is required when a business reports that it’s a victim of identity theft. The IRS has revised a form that must be filed by a business so that it no longer needs to be notarized and a police report no longer must be attached. This involves Form 14039-B, “Business Identity Theft Affidavit,” which is filed if a person suspects that his or her business entity, estate, trust or exempt organization has been a victim of identity theft.

The form must be signed by someone who has legal authority to act for the entity and to receive tax return information. It’s signed under penalty of perjury. Contact us for more information.

Have you been unemployed during the COVID-19 pandemic? If so, it’s a good idea to have tax withheld from your unemployment compensation now to avoid a tax-time surprise. Withholding is voluntary. By law, unemployment benefits are taxable and must be reported on your federal tax return for the tax year it was received. Taxable benefits include any of the special unemployment compensation authorized under the CARES Act.

Due to the pandemic, millions of Americans have received or are currently receiving unemployment compensation. Recipients can have 10% withheld from benefits to cover part or all their tax liability. To do this, complete Form W4-V and give it to the agency paying the benefits.

The IRS released guidance on deferring employee Social Security tax withholding (under President Trump’s executive action issued on Aug. 8). The guidance in Notice 2020-65 is brief and many employers still have questions and challenges about how, and whether, to implement the optional deferral. It applies to wages paid from Sept. 1 through Dec. 31, 2020 for employees paid less than $4,000 during a bi-weekly pay period. The deferral postpones (but doesn’t forgive) withholding and remittance of the employee share of Social Security tax until the period beginning on Jan. 1, 2021 and ending on April 30, 2021. Penalties, interest, and additions to tax will begin on May 1, 2021 for unpaid taxes.

There are concerns not covered by the guidance. For example: How does an employer collect taxes from a terminated employee? Can increased take-home pay be used for 401(k) loan repayments, garnishments, child support payments, etc.? And how will postponed amounts be reported on the 2020 Form W-2?

Although many private employers have announced they won’t be participating in the deferral of Social Security taxes, federal employees will have the taxes deferred. The National Finance Center, which provides payroll services to more than 600,000 federal employees, announced that it will be deferring the withholding and payment of the employees' share of Social Security taxes effective for the first pay period beginning after Sept. 1. And the Defense Finance and Accounting Service, which provides payroll services to the Department of Defense and other agencies, has stated that it will defer the withholding of military members’ and civilian employees’ portion of Social Security taxes. It added that military members and civilian employees can’t opt-out.

Prepare ahead for catastrophe. A disaster can strike at any time whether it strikes your home, your city or a much bigger area. That’s why the IRS is encouraging taxpayers to think ahead and prepare. This may include developing an evacuation plan, assembling a kit of essential supplies and putting financial safety measures in place.

Here are some tips for protecting your financial safety. Review your emergency plan annually for relevance. Keep important documents (such as insurance policies, tax returns, bank statements) in a safe place and create electronic copies if possible. Inventory your valuables, with photos or videotape, to make insurance claims easier. For more from the IRS: https://bit.ly/3h4hOqh

President Trump signs a payroll tax deferral. In an executive action, the President directed that Social Security and Medicare taxes be deferred from Sept. 1 through Dec. 31, 2020. There are still many questions that are unanswered about how this will work and there may be legal challenges.

At this point, the taxes are just deferred, meaning they will still have to be paid in the future. However, the Presidential Memorandum directs the U.S. Treasury Secretary “explore avenues, including legislation, to eliminate the obligation to pay the taxes,” as well as issue guidance for implementation. The deferral will be made available for “any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000.” Stay tuned for more details.

A recent court case provides a glimpse into how criminals commit tax fraud. The defendant and co-conspirators used stolen identities to fraudulently obtain tax refunds. Over the course of the scheme, he endorsed and deposited over 300 illegally obtained refund checks totaling more than $1.9 million into multiple bank accounts that he maintained.

Additionally, he moved money between the accounts and utilized front businesses to hide and launder the illicitly obtained funds. A federal appeals court affirmed the defendant's conviction for aggravated identity theft, conspiracy and theft of government funds incident to tax fraud. He was sentenced to 75 months in prison. (Bailey, CA2, 7/21/20)

Educators may qualify for a tax break. The pandemic may cause schools to be operated differently this year, but eligible educators can still take a 2020 deduction for certain expenses. That includes teachers, counselors, principals and aides in kindergarten through grade 12. They must work at least 900 hours during a school year in a school that provides education under state law.

The deduction is for up to $250 of unreimbursed expenses (receipts required). Married taxpayers who file jointly and are both eligible educators may claim up to a $500 deduction. Qualifying expenses include professional development course fees; books; supplies; computer equipment, software and certain other items. Here’s more: https://bit.ly/2EiIDIw

Business wins court case. Companies that improperly treat workers as independent contractors may draw scrutiny from the IRS. If the IRS reclassifies workers as employees, the company may be charged penalties. One key factor is the level of control over the work. In one case, the IRS found that a company that arranged for workers to clean apartments had misclassified workers as independent contractors.

But in U.S. Tax Court, a review showed that the control exercised over the workers was minimal. The court found that the owner was similar to a dispatcher and an intermediary between the workers and apartment complexes. Therefore, the court ruled she properly treated the workers as contractors. (Santos, TC Memo 2020-88)

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