IRS Archives - Pearson & Co., PC

04 Sep 2024

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THERE ARE RULES … AND EXCEPTIONS TO RULES

Some May Apply to Your Retirement Plan

Tax Advantaged Retirement Plans

Congress enacted regulations that provide significant tax advantages to American taxpayers that participate in one or more qualified retirement plans. The term qualified retirement plans refers to the following:

Qualified employer sponsored plans such as a 401(k)
Qualified employee 403(a) annuity
Tax-sheltered 403 (b) for employees of public schools or tax-exempt entities
Individual Retirement Accounts (IRA)

You may currently participate in a tax advantaged retirement plan or consider doing so. Your payoff is added financial incentive to enhance your retirement nest-egg through immediate tax savings and long-term tax-deferred investment income such as capital gains and dividends.

At retirement, qualified plan distributions are subject to income tax … perhaps at a time when you are in a lower tax bracket. That said, there are tax penalties for “early” or “premature” distributions … generally defined as qualified plan withdrawals prior to age 59½.

The legislative intent of qualified plans is to encourage taxpayers to set aside and invest money for the long-term, namely to provide a financial cushion at retirement. To discourage the use of qualified plan funds for purposes other than normal retirement, the law imposes a tax penalty on early distributions. Result … early withdrawals must be reported as gross income, plus a 10% penalty tax of that amount is due and payable.

Now Back to Rules … and Exceptions to Rules

The SECURE 2.0 Act, passed as part of an omnibus spending bill in December 2022, added new exceptions to the 10% federal income tax penalty for early withdrawals from tax-advantaged retirement accounts. Withdrawals covered by these exceptions can be repaid within three years to an eligible retirement plan. If repayment is made after the year of the distribution, an amended return must be filed to obtain a refund of any taxes paid.

Please see the following chart that outlines the exceptions and identifies which qualified plans are eligible.

EXCEPTIONS TO THE 10% ADDITIONAL TAX

Source: IRS

The foregoing is meant as an overview only. Give us a call and we’ll help you
determine next steps regarding any problems you face with the IRS.

26 Jul 2024

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IRS SERVICE TO TAXPAYERS ON THE MEND …

On the Mend… But Still a Long Way to Go!

The National Taxpayer Advocate and professional tax advisors weigh in on progress.

The National Taxpayer Advocate Reports to Congress

The National Taxpayer Advocate Service (TAS) is an independent organization within the IRS. TAS helps taxpayers resolve problems with the IRS, makes administrative and legislative recommendations to prevent or correct the problems, and protects taxpayer rights.

TAS is required to provide an Annual Report to Congress in January of each year and a follow-up Objective Report in June. Here’s a summary update on the conclusions of both as presented to Congress by Erin M. Collins, National Taxpayer Advocate.

Annual Report to Congress – 2023

The Annual Report to Congress summarizes the ten most serious problems encountered by taxpayers each year. For 2023, the National Taxpayer Advocate has identified, analyzed, and offered recommendations to assist the IRS and Congress in resolving ten such problems. Here’s a snapshot of those findings.

Most Serious Problems Encountered by Taxpayers

Processing: Ongoing delays burden and frustrate taxpayers awaiting refunds and other account actions.
IRS Hiring, Recruitment & Training: Shortcomings in personnel issues adversely affect the quality of taxpayer service and undermines effective tax administration.
IRS Transparency: The agency does not provide sufficient clear and timely information to taxpayers resulting in confusion and frustration for the public and complicated internal agency oversight.
Telephone & In-person Service: Taxpayers continue to experience difficulties and frustration in obtaining telephone and face-to-face assistance to resolve tax issues and questions.
Return Preparer Oversight: Taxpayers are harmed by the absence of minimum competency standards for tax return preparers.
Identity Theft: Victims of identity theft face lengthy resolution delays and inadequate notices of whose returns the IRS flagged for possible identity theft.
Online Account Access: Digital services remain inadequate impeding efficient case resolution and forcing millions of taxpayers and tax professionals to call or send written correspondence to the IRS.
International: The IRS’s approach to international information return penalties Is draconian and inefficient.
Compliance Challenges for Taxpayers Abroad: Taxpayers abroad continue to be underserved and face significant challenges in meeting their U.S. tax obligations.
Appeals: Despite some improvements, many taxpayers and tax professionals continue to perceive the IRS Independent Office of Appeals as insufficiently independent.

The summary conclusion presented to Congress.

Objectives Report to Congress – Fiscal Year 2025

In her statutorily mandated mid-year report to Congress, National Taxpayer Advocate Erin M. Collins essentially confirmed the ten most serious problems encountered by taxpayers in her Annual Report to Congress earlier this year. She was encouraged in her remarks:

“For most taxpayers, the filing season is the only time they interact with the IRS,” Collins wrote. “After several years of abysmal taxpayer service during the COVID-19 pandemic, the IRS has now delivered two filing seasons that demonstrate the agency has restored service to pre-pandemic levels and has improved in most, but not all, areas of service. This is excellent news for most taxpayers.”

That said, the report indicates the tax-return filing season generally ran smoothly this year, but it identifies delays in issuing refunds to identity theft victims, misleading telephone measures that lead to poor resource allocation decisions, and delays in processing Employee Retention Credit claims as key taxpayer challenges. The report also emphasizes the importance of technology upgrades as the IRS seeks to modernize its operations in the coming years.

Tax Professionals Perspective

A recent article in the Journal of Accountancy summarizes the results of its annual American Institute of Certified Public Accountants (AICPA) survey about IRS customer service. The overall impressions from the survey were that satisfaction with IRS services is improving, but inconsistencies and concerns remain, including:

The IRS answered calls quickly, but many calls experienced extended waiting times when they were transferred.
The quality of service varied from agent to agent, and issues often remained unresolved.
The IRS lacks accountability for its mistakes, causing frustration.
Employees of TAS have a backlog of cases, indicating systemic delays in addressing taxpayer concerns.

Top concerns for the 2025 tax season include the effect of late legislative changes (29% of respondents); IRS processing delays (27%); political distractions affecting IRS funding and administration (22%); and lack of clarity/guidance from the IRS in technical areas (17%).

Takeaways

Clearly, there is consensus by both TAS and tax professionals that things are getting better, but there’s plenty of altitude yet to climb to remedy IRS shortcomings. To contrast and compare IRS progress, click here for our last article on the deficiencies and “fixes”.

The foregoing is meant as an overview only. Give us a call and we’ll help you
determine next steps regarding any problems you face with the IRS.

15 Apr 2024

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FEDERAL JUDGE DECLARES CORPORATE TRANSPARENCY ACT UNCONSTITUTIONAL!

Important Update for Small Businesses

Background – Corporate Transparency Act (CTA)

This year’s January issue of the Pearson Perspective alerted small business owners to be sure to find out if your business is one of millions affected by the Corporate Transparency Act (CTA). Congress enacted the CTA in 2021 to combat sources of financial criminal activity and abuse of anonymous companies. The law became effective January 1 of this year.

The Problem: Congress identified a widespread tactic by individuals with malicious intent to affect national security and economic integrity. Specifically, the scheme is to conceal or profit from the ownership of U.S. companies to facilitate illegal operations.

The Solution: The intent of the CTA is to curb unlawful financial activity including tax fraud, money laundering, and terrorism financing. Compliance requires a majority of privately held corporations, limited liability companies, and similar entities … domestic and foreign … doing business in the United States to report to the Financial Crimes Enforcement Network information about the individuals who own or control them.

The measure is targeted squarely at small businesses with fewer than 20 employees or $5 million or less in gross receipts. Companies larger than this are exempt … as are many lines of financial services businesses that are far more able to be abusive than approximately 11 million small businesses that are expected to incur annual compliance costs exceeding $1 billion.

Small Businesses Push Back!

In 2020, two plaintiffs filed suit in the U.S. District Court for the Northern District of Alabama against the Treasury Department. Together, the National Small Business Association (NSBA) and NSBA member Isaac Winkles challenged the constitutionality of the CTA’s reporting requirements on the basis that the Act is:

unduly burdensome for small businesses;
a violation of privacy and free speech protections; and
an infringement on a state’s power to govern business.

Unexpectedly, Federal Judge Liles C. Burke ruled on March 1 that the CTA is unconstitutional “because it cannot be justified as an exercise of Congress’ enumerated powers.” Clearly, small businesses have reason to cheer this decision.

Notably, there are similar pending cases in other states that have challenged the requirements of the CTA.

Cautious Cause for Celebration

The ruling is certainly good news for small businesses and for everyone concerned about financial privacy in the United States. That said, it is only the first step in what shapes up to be a long legal process. The Financial Crimes Enforcement Network (FinCen) promptly reacted by releasing a statement that addresses the court ruling, its intention to respond further and continued enforcement of the CTA i.e. “reporting companies are still required to comply with the CTA and file beneficial ownership reports as provided in FinCEN’s regulations.”

In a further move, the Justice Department filed an appeal of the verdict on behalf of FinCen which will be heard in the U.S. Court of Appeals for the 11th Circuit. The appeal effectively ignores the holding of the Alabama District Court.

Key Takeaways

FinCEN, advises that “reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations”.
FinCEN indicated it would not attempt to enforce the CTA against the two named plaintiffs or others specified in the Alabama court’s injunction while litigation is continuing.
FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities that may be subject to reporting requirements under the CTA. The fraudulent correspondence may be titled "Important Compliance Notice" and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests. Please do not respond to these fraudulent messages or click on any links or scan any QR codes within them.
Pearson & Co will keep you in the loop as the legal issues develop.

The foregoing is meant as an overview only. There is more to consider.
Give us a call and we’ll help you determine your company’s status
under the CTA plus help with reporting if necessary.

27 Feb 2024

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2023 TAXPAYER ADVOCATE ANNUAL REPORT

If you weren’t frustrated and inconvenienced by inefficiency in responses by the IRS, certainly you know one or more taxpayers who have … or heard of the considerable backlog in unprocessed returns and unissued refunds for the past three tax years.

Erin Collins is our National Taxpayer Advocate. In her 2023 Annual Report to Congress she presented an assessment of progress in reducing known bottlenecks as well as identifying agency improvements that may take more time. Collins introduced her report with, “The year 2023 was one of extraordinary transition for the IRS and therefore for taxpayers. Despair has turned to cautious optimism. Because of the COVID-19 pandemic, the three preceding years had been the most challenging years the agency and most taxpayers had ever experienced.”

Progress Resolving Taxpayer Frustrations

As evidence of progress, Collins reported that the backlog of processing paper Forms 1040 “has been virtually eliminated” from a peak of 17 million returns at the end of 2021. Similar success remains to be realized with amended individual tax returns, business amended tax returns, or correspondence, the backlogs of which “remain at double their pre-pandemic levels.”

Wait times and answer rates of customer phone calls have been continuing frustrations for taxpayers. While more needs to be done, notably:

During fiscal year 2021, roughly 11% of phone calls were answered.
In contrast, 29% answered in fiscal 2023.
Collins commended the IRS for reducing the average wait time from 29 minutes in fiscal 2022 to 13 minutes in fiscal 2023.

Collins emphasized that tackling the phone call issues had a ripple effect resulting in continued interruptions processing amended returns, taxpayer communications and delays in issuing refunds.

As stated in the report, “The IRS cannot easily shuffle employees back and forth between answering phones and processing correspondence, so unproductive employee time was the price it had to pay to improve telephone service levels”. Going forward, the IRS needs to find a way to move employees between those two functions more nimbly. For present purposes, however, we need to keep in mind that backlogs in processing tax returns and taxpayer correspondence drive much of the phone volume.”

Tax-related identify theft remains a major outstanding IRS service issue. Self-reported cases during fiscal 2023 averaged 19 months to resolve and taxpayers to receive amounts owed. At the end of that year, about 484,000 were unresolved and remain in inventory for processing.

So, two workforce issues were highlighted as requiring remedial attention.

Collins urged the agency to address how open jobs are posted, expedite the pace of the hiring process, and make positions more competitive pay-wise.
Shuffling staff between customer support work and inventory processing is that new hires tend to lack sufficient training to succeed, especially when speaking directly with taxpayers.
“The IRS has always had challenges with training, and those challenges are greater when the agency is staffing up”, she reported.

10 Most Serious Taxpayer Service Problems in 2023

The IRS requires the National Taxpayer Advocate to include a summary of the ten most serious problems encountered by taxpayers each year. Here is the list for 2023 based directly on an IRS survey about taxpayer attitudes and preferences. Click here to link with any for which you seek additional detail.

Processing Delays
Hiring, Recruitment & Training
IRS Transparency
Telephone & In-Person Service
Return Preparer Oversight
Identity Theft
Online Account Access for Taxpayers & Tax
International
Compliance Challenges for Taxpayers Abroad
Appeals

Summary

“After several difficult years for taxpayers, the IRS, and society in general, tax administration in 2023 mostly managed to leave its COVID-19 problems behind. The IRS eliminated most of its processing backlog, generally paid refunds timely, and answered taxpayer telephone calls at pre-pandemic levels. The good news is that, with limited exceptions, we are back to business as usual.”

“The bad news is that the baseline level of ‘business as usual’ was not good enough. Our nation’s taxpayers deserve a 21st century tax administration agency that is fair and equitable, provides timely and clear guidance, makes it possible for all taxpayers to electronically file their tax returns, answers its phones and resolves most issues at the first point of contact, and allows taxpayers to conduct business on any follow-up matters through online accounts in the same way they conduct business with their financial institutions.”

–ERIN M. COLLINS, NATIONAL TAXPAYER ADVOCATE

11 Dec 2023

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AMERICAN HOMEOWNERS … POTENTIAL TAX SAVINGS

You May Qualify for Residential Clean Energy Tax Credits

pearsondecember23photo

Energy improvements to your home may make you eligible to enjoy tax credits for a portion of qualifying expenses. To be eligible, it takes your investment in renewable energy for your home such as solar, wind, geothermal, fuel cells or battery storage technology.

If you expect to owe federal taxes this year, it’s worth investing a few minutes now to see how you may be able to lessen or eliminate that financial burden by taking advantage of one or more Residential Clean Energy Tax Credits.

What Are Tax Credits?

So, let’s start with a brief lesson on “What are tax credits?” The best way to describe tax credits is to contrast with what most taxpayers understand … tax deductions. Tax deductions reduce the amount of your income subject to tax.

Tax credits directly reduce your tax bill.

For example, assume you spend $2,000 that results in a tax deduction. That will reduce your taxable income by $2,000. In a 25% tax bracket, you would save $500 in taxes.

Now compare that with a $2,000 tax credit. That amount is subtracted from the amount of tax owed not as an offset to income … as is the case with a tax deduction. Result: Your tax bill is reduced by the full $2,000 tax credit!

Tax credits outshine tax deductions when it comes to saving tax dollars.

Why Is the Government Promoting Residential Clean Energy Tax Credits?

The purpose is to encourage environmental improvements as one element in the U.S. government’s stated goal to achieve net-zero emissions of carbon dioxide. Energy-efficient homes use less energy to heat and cool as well as run appliances and electronics.

Improvements in energy efficiency is one of the easiest and most cost-effective ways to combat climate change plus reduce energy costs for consumers. Residential Clean Energy Tax Credits encourage homeowners to invest in those efforts that will advance realization of those goals.

Who Can Claim the Credits? Available Credits? Dollar Value of Credits?

The credit amounts and types of qualifying expenses were expanded by the Inflation Reduction Act of 2022. In this article, we’ll help you compare the credits and determine whether any apply to expenses you’ve already incurred or may sustain in future improvements.

Who Qualifies to Claim the Credits

Homeowners who improve their primary residence are the most likely candidates to discover opportunities to claim a tax credit for qualifying expenses. Renters may also be able to claim credits, as well as owners of second homes used as residences.

Note: The credits are never available for improvements to homes that you don’t use as a residence.

Available Credits

Two “flavors” of tax credits are available … the Energy Efficient Home Improvement Credit; or the Residential Clean Property Credit. You may claim either of these credits for the year you make qualifying improvements.

Here are the details for each.

Energy Efficient Home Improvement Credit:

The following expenses may qualify if they meet requirements detailed on energy.gov.

Exterior doors, windows, skylights and insulation materials
Central air conditioners, water heaters, furnaces, boilers and heat pumps
Biomass stoves and boilers
Home energy audits (up to 30 percent for audits that cost up to $500 … maximum credit is $150)

Your credit is a percentage of your total improvement expenses in the year installed.

2022: 30% (up to a lifetime maximum of $500)
2023 through 2032: 30%, (up to a maximum of $1,200 … biomass stoves and boilers have a separate annual credit limit of $2,000 … no lifetime limit)

For detailed info click on this link … Energy Efficient Home Improvement Credit.

Residential Clean Energy Credit:

The following expenses may qualify if they meet requirements detailed on energy.gov.

Solar, wind and geothermal power generation
Solar water heaters
Fuel cells
Battery storage (beginning in 2023)

Your credit is a percentage of your total improvement expenses in the year installed.

2022 to 2032: (30%, no annual maximum or lifetime limit)
2033: (26%, no annual maximum or lifetime limit)
2034: (22%, no annual maximum or lifetime limit)

For detailed info click on this link … Residential Clean Energy Credit

Consider this example of a significant tax credit.
A homeowner who installs solar panels at a cost of $30,000 is eligible for a $9,000 credit!
That translates to the maximum 30% discount on the expense for this qualifying home improvement.

Caution! The qualifications, limitations and taxpayer requirements are complex.
The foregoing is meant as an overview only. If you have a thirst for research, see the links below.

Better yet, give us a call and we’ll help you determine
if you qualify and for how much.

Research Resources

09 Nov 2023

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VIRGINIA EMPLOYERS … RetirePath Deadline: February 15, 2024

Employer Mandates … Employee Options

What is RetirePath?

In 2020, a report by Virginia’s Legislative Information System to the General Assembly alerted lawmakers to a major employee financial shortcoming … about 45% of private-sector workers in Virginia lack access to a retirement plan through their job.

That fact prompted legislative action to propose and pass a solution, HB 2174 … a remedy referred to as RetirePath. The law went into effect July 1, 2021, and employer registration opened in 2023. Eligible employers received the first registration notification prior to July 1, 2023.

The stated goal of the bill is, “To promote greater voluntary retirement savings for private-sector workers in a convenient and portable manner.” Portability means employees may retain their plan’s value when they move to another employer.

The intent is to offer a plan to help close the retirement savings gap and improve the financial security of more Virginians. The program is designed to provide eligible employers a simple way to help their employees save for the future with a minimum of administrative burden.

RetirePath is a state sponsored, mandatory retirement plan that must be adopted by businesses that meet the eligibility criteria. The plan is administered by Virginia529, an independent agency of the Commonwealth of Virginia. Eligible employers must log on to the RetirePath Virginia website to register or seek an exemption no later than February 15, 2024.

In June of this year, RetirePath notified 8,700 Virginia businesses that may be required to participate. These emails and letters include a unique access code, registration deadline and instructions. Virginia law requires eligible employers to either register for the RetirePath plan or offer their own qualified retirement plan.

Note: The RetirePath’s site clearly states that the program “is not meant to replace or compete with employer-sponsored plans.” As an employer you may choose to establish an alternative qualified plan if that is more appropriate for your business and still remain in compliance.

In this article, we’ll detail the employer eligibility criteria. As a shortcut, you may want to click here to take the Employer Eligibility Quiz.

Employer Mandates

Employers that are eligible in 2023 are those that meet the following criteria and must register by February 15, 2024. Employers …

With 25+ eligible employees who are at least 18 years of age who work a minimum of 30 hours a week.
That has been in business 2+ years.
Without a qualified plan (such as a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b)).

Next Steps: You will need your Access Code delivered to you via email or postal service plus your employer identification number (EIN) to register or seek exemption from the program. If any of the above three requirements don’t apply to your business, you may click on “Certify My Exemption”.

If your company is eligible to participate, you will need to follow the instructions to register for RetirePath. Employer requirements are minimal. If your company is subject to the mandate, you only need to present proof of an alternative qualified plan or register by the deadline of February 15, 2024.

Then set up a payroll deduction for each eligible employee, submit payroll records each pay period and hold an annual open enrollment period.

Note: Employers that are not in compliance will incur a fine of $200 per employee per year.

RichPath Plan Structure:

Eligible employees will be automatically enrolled in the plan.
Automatic payroll deductions will contribute 5% of an employee’s after-tax pay.
Participating employees’ after-tax contributions will go directly to a Roth IRA.
Automatic deduction will increase by 1% each year until it reaches the cap of 10% of after-tax pay.
Employees may change the percentage of their contribution or opt out of the program altogether.
Employees may customize their investment or choose the plan’s default investment.
Individuals who are self-employed or don’t work for an employer registered with RetirePath can open an account today

Employer Costs: Most administration costs are handled by the Virginia College Savings board. Employers have no fees to set up their RichPath and incur no fiduciary responsibilities. Additionally, the IRS prohibits employers from making contributions to the plan.

That said, there is sure to be some internal costs of administration … adding employees, removing employees, educating employees, and uploading payroll contributions as these functions will all require administrative time.

The above presentation is meant as an overview only.
Give us a call and we’ll be happy to help you with questions.

09 Oct 2023

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THE ERC COMES FULL-CIRCLE WITH IRS MORATORIUM

Mountain of Relief for Small Businesses – Now an Avalanche of Fraud

Over a year ago, we reported on the Employee Retention Credit (ERC) included in the CARES Act providing $80 billion dollars to encourage employers to retain employees at the height of the COVID-19 pandemic in early 2020. The driving principle for Congressional adoption of the incentive was to help pandemic-impaired businesses and tax-exempts to retain jobs and trigger job creation.

Many employers were and are confused as to qualification requirements and application procedures. Consequently, many of those employers who may qualify ignored participation in the program … one of considerable financial significance. The 2020 credit can be as much as $5,000 per employee … the 2021 credit up to $21,000 per employee.

Notably, for employers that have not yet applied, the ERC can be claimed for three years after the filing date of the original payroll returns.

The lack of understanding by employers regarding application procedures and administrative burdens coupled with the sheer dollar amount of potential tax credits triggered an open invitation for fraudsters … a caution we shared earlier this year.

As we reported, the IRS chimed in on abuses by third-party “advisors” for blasting ads on radio and the internet hyping ERC refunds. The agency’s concern was underscored by including ERC fraudsters in its annual Dirty Dozen summary.

Fueled by aggressive third-party marketing to ineligible applicants, the IRS was deluged with new ERC claims … a substantial share of which are unqualified.

In mid-September, the IRS issued the following notice regarding processing ERC claims.

To protect taxpayers from scams, IRS orders immediate stop to new Employee Retention Credit processing amid surge of questionable claims; concerns from tax pros, aggressive marketing to ineligible applicants highlights unacceptable risk to businesses and the tax system.

Moratorium on processing of new claims through year’s end will allow IRS to add more safeguards to prevent future abuse, protect businesses from predatory tactics; IRS working with Justice Department to pursue fraud fueled by aggressive marketing.

IRS Commissioner Danny Werfel ordered the immediate moratorium, following growing concerns inside the tax agency, from tax professionals as well as media reports that a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.

The IRS continues to work previously filed ERC claims received prior to the moratorium but emphasizes that payouts for these claims will be at a slower pace due to the detailed compliance reviews

IRS Commissioner Danny Werfel said, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in. For those people being pressured by promoters to apply for the Employee Retention Credit, I urge them to immediately pause and review their situation while we look to add new protections and safeguards to stop bad claims from ever coming in.”

He continued, “In the meantime, businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee. Businesses that receive ERC payments improperly face the daunting prospect of paying those back, so we urge the utmost caution. The moratorium will help protect taxpayers by adding a new safety net onto this program to focus on fraudulent claims and scammers taking advantage of honest taxpayers.”

The above presentation is meant as an overview only.
Give us a call and we’ll quickly help you with questions.

20 Sep 2023

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VIRGINIA TAXPAYERS … BETTER LATE THAN NEVER! 

Learn About $1 Billion in Tax Relief
2023 Tax Rebate Plus, Increased Standard Deduction 

If You Receive a Check from the Commonwealth of Virginia … 
Here’s the Reason Why!

Virginia 2023 State Budget Approved

Six months overdue, the Virginia budget was finally approved by lawmakers on Wednesday, September 6,
2023. The compromise budget legislation is the result of lawmakers, urged by Governor Youngkin, returning to
the negotiation table after months of deadlock. The politically divided Virginia General Assembly approved the
long-delayed budget … voting in an unusually fast-paced special session.

Gov. Glenn Youngkin said “I appreciate the hard work of the General Assembly and our budget conferees to
send a budget to my desk,”. “While the process took longer than needed, more than $1 billion in tax relief is on
the way to Virginia veterans, working families and businesses.”

“I’m really pleased with the budget we have before us today. The negotiations have been very intense and very
extended. But the outcome is both fair and balanced towards the priorities of both the House and the Senate,”
said Democratic Sen. Janet Howell of Fairfax County, who co-chairs the Senate Finance and Appropriations
Committee.

House Appropriations Chairman Barry Knight, R-81st District, said it was a “bipartisan, bicameral compromise,”
Republican Sen. Steve Newman called it “as fiscally responsible a bill as I’ve ever seen.”

The budget was forwarded to Governor Youngkin’s desk for review pending his final signature. Consistent with
the shared consensus among lawmakers, he signed the budget on Thursday, September 14, 2023, without any
requests for revisions or amendments.

Two Significant “Wins” for Virginia Taxpayers 

Number 1 – Tax Rebates: 
Included in the budget is about $1.05 Billion in tax reductions for eligible Virginians in the form of one-time tax rebates. Qualifying individual taxpayers will receive $200 … joint filers, $400. Virginia issued similar rebates for the 2022 tax year, sometimes referred to as “stimulus checks” … returning massive budget surpluses to eligible residents.

Taxable or not? … That is an obvious next question. Most taxpayers receiving state tax refunds do not have to include the state tax refund in income for federal tax purposes. As a general rule, taxpayers who choose the standard deduction on their federal income tax returns do not owe federal income tax on state tax refunds for the 2023 tax year, according to the IRS.

That said, there could be some exceptions particularly in cases where taxpayers itemized deductions. As ever, be sure to consult a trusted tax professional before you file your 2023 federal income tax return.

Number 2 – Increased Standard Deduction: 
The Virginia standard deduction is increased for the 2024 and 2025 tax years. Single filers will enjoy a $500 bump in their standard deduction … from $8,000 to $8,500. Joint filers will benefit from a $1,000 increase … to $17,000 from current $16,000.

10,000 Feet View of Other Budget Provisions

Sales tax holiday reinstated; 
$645 million in aid for K-12 public education; 
Fund behavioral health initiatives including new crisis-receiving centers and stabilization units; 
$200 million in new resources for economic development-related site acquisitions; 
$62.5 million in additional funding for college financial aid; 
$12.3 million for the Virginia Employment Commission to help address the unemployment appeals backlog and support call centers; 
$250,000 to establish a Department of Corrections ombudsman within the state’s watchdog agency;  
State Corporation Commission to continue a widely supported reinsurance program that reduced premiums this year.

The above presentation is meant as an overview only.
Give us a call and we’ll quickly help you with questions.

17 Aug 2023

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NATIONAL TAXPAYER ADVOCATE MIDYEAR REPORT TO CONGRESS

“The difference between the 2022 and 2023 filing seasons … like night and day,”
– Erin M. Collins

You, or one or more people you know, suffered through the 2022 tax filing season … refund and return processing delays, correspondence processing holdups, and difficulty reaching the IRS by phone.

The Good News!

National Taxpayer Advocate Erin M. Collins released her statutorily mandated  2024 Objectives Report to Congress. She wrote in her introduction to the report, “In submitting this report, I’m finally able to deliver some good news: The taxpayer experience vastly improved during the 2023 filing season. The difference between the 2022 and 2023 filing seasons was like night and day.”

Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. Its mission is to be the “voice of taxpayers” to ensure that every taxpayer is treated fairly and understands their rights. TAS efforts are based on four priorities:

Help taxpayers with problems they can’t resolve with the IRS.
Understand your issues as a taxpayer and assure you that we’re here to help you.
Protect taxpayers’ rights.
Recommend changes to Congress to help prevent future problems.

“What a Difference a Year Makes” – Positive Progress

Here are two specific examples of enhanced taxpayer services rendered by the IRS in 2023 as presented in the TAS 2024 Objectives Report to Congress:

Processing of original tax returns.

For the week ending April 22, 2023, the IRS had 2.6 million unprocessed individual and business tax returns, compared to 13.3 million as of the same date in 2022, a reduction of 80%.

Telephone service.

In 2022, the IRS answered 10% of the 7.5 million calls it received, keeping each caller on hold for an average of 29 minutes. In 2023, the IRS answered 35% of the 32 million calls it received, keeping each caller on hold for an average of eight minutes.

Click Here for more details.

Fraud & Identity Theft – Effect on Processing Times

Business processing delays are largely attributed to Employee Retention Credit (ERC) claims. The ERC is a refundable tax credit authorized by Congress to encourage employers to retain employees during the C-19 pandemic. The IRS has received a significant number of fraudulent claims … serious enough to warrant inclusion of the offenses on its “Dirty Dozen” list of tax scams.

The result for processing times is impacted by submission of amended returns by businesses. At the end of May, the backlog of ERC claims was estimated at 800,000 with more forms arriving daily.

“The influx of fraudulent claims has put the IRS between a rock and a hard place,” Collins wrote. “If the IRS pays out claims quickly without taking the time to review them individually, it will be making some payments to individuals potentially engaged in fraud. If it takes the time to review claims individually, legitimate businesses who need the funds Congress authorized to help them stay afloat may not receive them in time.”

Click here for more info on fraudulent ERC advisors.

Victims of identity theft have suffered from particularly long and frustrating delays. The average cycle time for Identity Theft Victim Assistance cases closed in April 2023 was 436 days … nearly 15 months … about three months longer than the 362-day cycle time for cases closed in April 2022.

Conclusions & Recommendations

“Despite these areas of relative weakness,” the report says, “the big picture shows taxpayers had a much easier time reaching the IRS this filing season, reducing the need for repeat calls and lengthy wait times – a welcome relief for millions of taxpayers.”

Notwithstanding these improvements, the report confirms the IRS is still behind in processing amended tax returns and taxpayer correspondence. Typically, employees in the IRS’s Accounts Management function perform two roles – they answer telephone calls, and they process taxpayer correspondence, amended returns, and other cases.

The report says the IRS was much more effective in answering taxpayer calls this year, “but [that] could only be accomplished by prioritizing the phones over other IRS operations, and it resulted in greater delays in the processing of paper correspondence.”

Collins wrote … “to achieve and sustain transformational improvement over the longer term, the IRS must focus like a laser beam on IT”. In the report, Collins’ office urged the IRS to focus its efforts on modernizing outdated technology meant to improve the taxpayer experience. That is possible because of the additional $20 billion in funding that the IRS is budgeted to receive.

Collins’ IT to-do list includes:

Robust online accounts for taxpayers that are comparable to accounts provided by banks and other financial institutions;
Allowing all taxpayers to e-file tax returns;
Allowing taxpayers to receive and submit responses to information requests electronically in all interactions with the IRS; and
Replacing its 60 discrete case management systems that have limited ability to communicate with each other with an integrated, Service-wide system.

“But with adequate funding, leadership prioritization, and appropriate oversight from Congress, I believe the IRS will make considerable progress in the next three to five years in helping taxpayers comply with their tax obligations as painlessly as possible,” Collins wrote.

The above presentation is meant as an overview only.
Give us a call and we’ll quickly help you with questions.

24 Jul 2023

IRS, News, Retirement, Tax Credits, Tax Form Guidance, Tax Law Pearson & Co, PC 0 comment

EMPLOYEE RETENTION CREDIT

Pandemic-Era Tax Break … Now a Pandemic of Abuse!

At the height of the C-19 pandemic, the Employee Retention Credit (ERC) was introduced to help both business owners and workers maintain payrolls and income respectively. For those businesses that qualify, the ERC is a refundable tax credit intended for employers that continued paying employees … either while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods.

The sheer dollar amount of potential tax credits, plus the administrative burdens to expedite financial relief became an open invitation for fraudsters. In this year’s annual Dirty Dozen summary, the IRS posted the following:

Taxpayers should be aware of aggressive pitches from scammers who promote large refunds related to the Employee Retention Credit (ERC). The warning follows blatant attempts by promoters to con ineligible people to claim the credit.

The Service has published at least six warnings about ERC abuse since October 2022, including making it No. 1 on its annual “Dirty Dozen” list of the 12 top tax scams earlier this year.

Profile of Abuses

The IRS highlighted these schemes from promoters who have been blasting ads on radio and the internet touting refunds involving Employee Retention Credits. These promotions can be based on inaccurate information related to eligibility for and computation of the credit. Additionally, some of these advertisements exist solely to collect the taxpayer’s

personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.

These promoters “present wildly misleading claims about this credit,” reported IRS Commissioner Danny Werfel. “They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”

You have seen and possibly responded to ads like the following, rampant on TV, radio, print and social media. And the call-to-action is compelling … promise of no up-front fees … just a share of the credit your company receives from the IRS.

Claim Your Business Tax Credit From the IRS!
If you own a business that had employees during the COVID-19 pandemic, contact us today to see if you qualify for up to $26,000 in tax credits per employee. This is not a loan, so there is no need to pay it back. Plus, we don’t get paid unless you are eligible and receive your credit.

What is the ERC? You Need to Be Cautious.

In this piece, we offer a summary of the ERC requirements and benefits. Additionally, we’ll share some cautionary thoughts for those of you who are contemplating or have already enlisted the services of a third-party ERC adviser.

The ERC is a refundable payroll tax credit rewarding businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021.

The credit may be as much as $5,000 per employee in 2020 and up to $7,000 per employee per quarter (for the first three quarters) in 2021. That could add up to a maximum credit of $26,000 per employee. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates.

Employer Eligibility: An employer is eligible for the ERC if it:

Sustained a full or partial suspension of operations limiting commerce, travel or group meetings due to COVID-19 and orders from an appropriate governmental authority or,
Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 or,
Qualified in the third or fourth quarters of 2021 as a recovery startup business.

Click here for more detail on each of the above eligibility requirements.

Filing Deadlines: Employers have until April 15, 2024, to file Form 941-X for the eligible quarters in 2020; and until April 15, 2025, for eligible quarters in 2021.

Note: Wages reported as payroll costs for PPP loan forgiveness or certain other tax credits can’t be claimed for the ERC in any tax period.

Employers … You Need to Be Cautious! 

Third-party advisers are typically new operations put together to capitalize on the preparation of ERC applications for employers. Lack of experience along with aggressive marketing often results in improper advice regarding employer eligibility and computing the amount of credit claimed.

Employers must become aware of the risks associated with engaging third-party promoters. Here are four critical concerns to be addressed:

Often, third-party advisers do not make it clear to employers that they will need to amend their business’s federal income tax return for the corresponding period because any payroll taxes used in the computation of the credit are no longer deductible.
Receipt of the refund from the IRS does not preclude the agency from examining the employment tax return and disallowing the credit. Employers are always responsible for the accuracy of the information reported on their tax returns. Improperly claiming the ERC could result in repayment of the credit, plus penalties and interest.
Employers that have received the ERC may be an audit target given the anticipated expansion of new IRS agent hires.
In the event the IRS disallows the ERC claim, fees paid to third-party companies may not be refundable.

Employers Considering Engaging a Third-party Adviser

Here are performance criteria to help evaluate the value a prospective adviser brings to the strength of your company’s ERC qualifications, filing efforts and subsequent follow-up.

At your request, a legitimate capable adviser will:

Describe its history as tax advisers including whether the practice is exclusively devoted to ERC claims.
Detail their policy to provide audit defense plus refund fees if all or part of the ERC claim does not survive an IRS audit.
Not claim a high IRS audit success rate as the IRS audit program is so new that success claims are meaningless.
Demonstrate a solid understanding of the facts and circumstances of your business operations before the pandemic as well as during each quarter of the pandemic … with special attention to the wage limits during the first three quarters of 2021?
Prepare a written account of the specific state or local governmental orders your business was subject to and a description of the impact of each on your business operations.
Review with you any circumstances pertinent to your ERC claim where the IRS guidance regarding ERC eligibility is unclear and that the adviser’s interpretation may prompt scrutiny by the IRS.
Not present a sense of urgency for you to act by asserting the available funding for ERC claims is fast being depleted. Not so!  See above for filing claims deadlines.
Make it clear to you that qualified wages applied in ERC computations are no longer deductible on your business income tax return?

Employers Who Already Engaged a Third-party Adviser and Filed an ERC Claim 

If you now have second thoughts about the advice that led up to your ERC claim filing, your best next step is to seek counsel from an independent tax adviser to review the merits of your claim and the adequacy of your documentation.

If your independent review results in the recommendation to amend or withdraw your ERC filing (Form 941-X), you may be able to sidestep interest and penalties … along with the time, expense and stress of an IRS audit.

Alternatively, if your independent review delivers written opinion that your claim has a solid foundation based on relevant ERC tax law … at the very least you will be able to demonstrate your intent to honestly pursue support of your claim with appropriate facts.

The above presentation is meant as an overview only.
Give us a call and we’ll quickly help you with questions.

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