Category: Tax Law

Taxpayers, Businesses & Tax Professionals Be Aware

IRS Commissioner Danny Werfel sums up the threat: “Scammers are coming up with new ways all the time to try to steal information from taxpayers. People should be wary and avoid sharing sensitive personal data over the phone, email or social media to avoid getting caught up in these scams. And people should always remember to be wary if a tax deal sounds too good to be true.”

It’s key to observe Werfel’s alert and watch out for these scams throughout the year. While many of these schemes peak as people prepare their tax returns during tax season, fraudsters remain active throughout the year seeking to steal money, personal information, data and more.

Each year, the IRS has been rolling out its list of the Dirty Dozen… a catalog of the most common tax scams, classic cons and sophisticated avoidance schemes to minimize taxes. Here’s the Dirty Dozen” summary for 2023. Click on the link for more detail on any of the following.

1. Employee Retention Credit claims
2. Phishing and smishing
3. Online account help from third-party scammers
4. False Fuel Tax Credit claims
5. Fake charities
6. Unscrupulous tax return preparers
7. Social media: Fraudulent form filing and bad advice
8. Spearphishing and cybersecurity for tax professionals
9. Offer in Compromise mills
10. Schemes aimed at high-income filers
11. Bogus tax avoidance strategies
12. Schemes with international elements

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The IRS Listened and Postponed Implementation

Let’s start with some history and definition of the issues. IRS Form 1099-K is an information form typically provided to freelancers or small business owners who receive payments of income from a client via a third-party payment system. Third-party settlement organizations generally include banks or other organizations (e.g., Venmo, PayPal, or Cash App) that process credit card transactions on behalf of a merchant and make an interbank transfer of funds to the merchant from a customer … often identified as self-employment income.

Prior to passage of the American Rescue Plan Act (ARPA) of 2021, third-party settlement organizations were not required to file Form 1099-K to payees with 200 or fewer transactions during the calendar year with aggregate payments of $20,000 or less. The ARPA amended the minimum payment amount to $600, for one or more transactions beginning in 2022.

Apparently, this revision was prompted by the convenience of Venmo, PayPal, or Cash App which resulted in many individuals paying personal expenses as well as payments associated with goods and services with these apps.

Unless the account or payment is designated as personal, it will trigger a reporting requirement if the annual amount exceeds $600. The person receiving the funds could receive a Form 1099-K, and the IRS will expect to see that income reported on his or her tax return. Payments incorrectly classified as business (goods or services) will trigger a Form 1099-K as well.

The new $600 minimum triggered widespread criticism. Lowering the threshold from $20,000 to $600 substantially increases the number of Forms 1099-K that will be issued. Additionally, the revision lacked clear guidance from the IRS which generated more taxpayer confusion. Those concerns coupled with the existing IRS backlog and impact on the upcoming filing season caused stakeholders to urge the IRS to postpone the implementation of the new reporting requirements.

Happily, The IRS responded in Notice 2023-10 to delay lowering the threshold for Form 1099-K reporting by a year. The $20,000 and 200 transactions thresholds remain in place through December 31, 2023.

The IRS emphasized the lower reporting threshold (any number of transactions totaling $600) remains in effect for calendar years starting after December 31, 2022. This one-year delay does not apply to any of the other Form 1099-K rules not modified by the ARPA.

Taxpayers should continue to track and report their taxable income from all sources electronic and others. When using electronic payment systems, such as PayPal, Venmo, and Cash App, make sure personal payments like gifts or reimbursements to friends are properly classified as an amount paid for something other than goods or services.

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Vehicles Used for Business Qualify for Tax Savings of 65.5 Cents Per Mile

Tax Break for taxpayers who drive an automobile, van, pickup or panel truck for business, charitable, medical or moving purposes. 

Effective January 1, 2023, taxpayer-drivers who fit the above profile enjoy a 3 cents bump in the mileage rate … up from the 62.5 cents midyear increase in 2022. The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile … clearly more expensive in recent months.

Here’s a quick summary of the expanded IRS provisions:

• 65.5 cents per mile driven for business use.
• 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the  Armed Forces.
• 14 cents per mile driven in service of charitable organizations … unchanged from 2022.

Notably, the new mileage rates apply to qualifying vehicles regardless of how they are powered … gasoline, diesel, electric and hybrid … all good-to-go.

Keep in mind that choosing the standard mileage rate is optional. Taxpayers retain the alternative to calculate the actual costs of operating their vehicle if it has been used for business more than 50% of the time. That said, the standard rate generally must be used in the first year the car is operated for business use as described above. In subsequent years, either the standard mileage rate or itemized expenses may be preferred.

Note: Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.

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Learn About 4 Changes and 8 ‘To-Do’ Actions

Here we are in the closing days of December 2022. In addition to enjoying the Holiday Season, it’s also an excellent time to get ready to visit with your tax-preparer to make year-end, tax savings decisions. Your objectives: lower your tax bill and boost your retirement savings.

In this issue, we’ll start with a recap of changes in the tax code that may affect you, followed by a checklist to prepare for a smooth tax season.

4 Changes that Affect 2022 Federal Tax Returns

1. If you received third party payments in tax year 2022 for goods and services that exceeded $600, expect to receive your Form1099-K by January 31,2023.
2. The following tax credits will return to 2019 levels … reduced from tax year 2021 … Child Tax Credit; Earned Income Tax Credit and Child & Dependent Care Credit. Affected taxpayers will receive a significantly smaller refund.
3. If you file your taxes taking a standard deduction, you may not take an above-the-line deduction for charitable donations.
4. For tax year 2022, the American Rescue Plan Act of 2021 temporarily expanded eligibility for the Premium Tax Credit by eliminating the rule that a taxpayer with household income above 400% of the federal poverty line cannot qualify for a premium tax credit.

Tax-time 8-Item ‘To-Do’ List

1. Paycheck Checkup: Make sure the right amount of tax is withheld from your earnings. If not, you need to submit a new Form W-4, Employee’s Withholding Certificate to your employer. All taxpayers should check, but especially those who fit the following profiles:

• Are a two-income family or someone with multiple jobs
• Work a seasonal job or only work part of the year
• Claim the child tax credit
• Have dependents age 17 or older
• Itemized your deductions in previous tax years
• Have high income or a complex tax return
• Had a large tax refund last year
• Had a tax bill last year
• Received unemployment at any time during the year
• Experienced a significant life-changing event, e.g., marriage, childbirth, adoption, home purchase.

A quick way to make sure you are having the right amount of tax taken out of your pay is to use the IRS Tax Withholding Estimator. It will help you to lessen year-end tax bills or estimate your refund.

Important! If you have a substantial portion of income not subject to withholding, (e.g., self-employed, investors, retirees, those with interest, dividends, capital gains, alimony, and rental income), you may need to pay quarterly installments of estimated tax.

2. Unemployment Compensation: You may be one of millions of Americans currently receiving unemployment compensation … or did so earlier this year. If that’s the case, it’s important for you to know that the IRS considers unemployment benefits as taxable income.

Withholding is voluntary. That said, you may choose to have a flat 10 percent withheld from your benefits to cover all or part of your tax liability. To do that, fill out Form W-4V, Voluntary Withholding Request (PDF) and give it to the agency paying the benefits. Do not send it to the IRS. If the payor has its own withholding request form, use that form instead.

If you don’t choose voluntary withholding, or if the withholding isn’t enough, you can make quarterly estimated tax payments. Fourth quarter 2022 payments will be due on January 17, 2023.

As an unemployment benefit recipient, expect to receive a Form 1099-G, Certain Government Payments (PDF) from the agency paying the benefits. The form will show the amount of unemployment   compensation you received during 2022 as well as any federal income tax withheld. This information, along with your W-2 income, will be included in your 2022 federal tax return.

Note: Unlike some other states, the Commonwealth of Virginia does not tax unemployment earnings.

3. Other Types of Payments to Check for Withholding: The IRS urges taxpayer to check the following sources of payments to check for withholding:

• Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
• Railroad unemployment compensation benefits
• Disability benefits paid as a substitute for unemployment compensation

4. Investment Gains/Losses: If you own stocks, bonds, mutual funds or other investments … check with your investment advisor to determine any realized gains or losses that may affect your tax status.

5. Make your charitable contributions … before the end of the year to ensure your deduction.

6. Remember your RMDs if you are 72 years of age or older: Your required minimum distribution (RMD) must be withdrawn before December 31. Failure to do so may result in a 50% penalty. RMDs are applicable to the following retirement plans: Traditional IRAs, Simplified Employee Pension (SEP) IRAs, Rollover IRAs, most 401(k) and 403(b) plans, as well as most small business accounts.

7. Check if you have contributed to tax-advantaged accounts: Contributions to Health Savings Accounts, IRAs, 401(k)s and 529 Plans provide significant tax savings. Important: Be aware of deadlines to contribute as they vary depending on the plan.

8. You may want to consider a Roth conversion: You and your tax advisor/preparer may decide to convert your existing IRA to a Roth IRA. The deadline to do so is December 30, not December 31.

Have Immediate Questions or Concerns?

Pearson & Co stand ready to help as needed. A phone call or email is all it takes.
We’ll respond promptly.