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IRS Releases 2021 “Dirty Dozen” Tax Scam List

The IRS has released the 2021 “Dirty Dozen” tax scam list. This annual list helps taxpayers to be aware of potential ploys to steal money and personal information. This year’s list is divided into four categories: pandemic-related scams, personal information cons, ruses on unsuspecting victims and schemes that persuade taxpayers into unscrupulous actions. Continue reading below for scams to be aware of this tax year.

  • Economic Impact Payment theft

As a result of the CARES Act and the American Rescue Plan Act, many Americans received Economic Impact Payments (EIP), also known as stimulus checks. In general, these payments come straight from the IRS to eligible individuals. The IRS will not reach out asking for bank account information, Social Security numbers or personal information confirmation; ignore random calls, text messages and emails asking for this type of information. 

  • Unemployment fraud leading to inaccurate taxpayer 1099-Gs

The pandemic led to an increase of unemployed individuals applying for unemployment compensation from their respective states. Many of these individuals did not receive their compensation due to fraudulent claims from identity thieves. Taxpayers should look out for a Form 1099-G reporting unemployment compensation they did not receive. Individuals in this position should contact the appropriate state agency.

  • Fake charities

It is not uncommon for “new charities” to pop up all over the place when a disaster occurs. Most of these new charities are just scams, asking for donations for their cause but pocketing the money, or personal information, instead. Donating to charity sounds well and good, not to mention the tax deduction that comes with it, but donations must be made to a qualified charity. Taxpayers should always vet the charities before giving.

  • Immigrant/senior fraud

Just as the previous type of scammers prey on generosity during times of tragedy, they also prey on the most vulnerable of the population year-round. Immigrants should be aware that random phone calls threatening deportation, jail time or revocation of a driver’s license are not from the IRS. These scare tactics are not used by IRS agents, and phone calls are not typically the first attempt at contact from the IRS. Seniors and those that love them should also be aware of the persuasive and threatening techniques used by scammers.

  • Unscrupulous tax return preparers

Taxpayers should be wary of ghost tax preparers, preparers that refuse to sign and include their Preparer Tax Identification Number (PTIN) on tax returns. Having a tax return prepared by an unqualified and unlicensed preparer puts taxpayers at risk of getting into trouble with the IRS. Being picky is okay when it comes to choosing a tax preparer!

Other forms of tax scams that made the 2021 IRS “Dirty Dozen” list include unemployment insurance fraud, offer-in-compromise “mills,” syndicated conservation easements, abusive micro-captive arrangements, potentially abusive use of the US-Malta tax treaty, improper claims of business credits and improper monetized installment sales. For more on this year’s “Dirty Dozen,” visit https://www.irs.gov/newsroom/irs-announces-dirty-dozen-tax-scams-for-2021.

Our team is committed to keeping your information safe and secure, and we are always available to address concerns you may have about tax scams. Contact one of our tax experts to discuss these fraud attempts. If you are concerned about technological security, contact ATA Secure, ATA Family of Firms member.

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Recovering Tax Records After Natural Disasters

With the ongoing wildfires in the western United States, the recent flooding in Tennessee, and Hurricane Ida hitting the Gulf Coast on Sunday, the IRS has issued a tax tip on how victims of natural disasters can rebuild their tax records, financial statements and property records. After a natural disaster, taxpayers may need records to help them prove and recover disaster-related losses. This may be for tax purposes, receiving support from federal assistance programs or for insurance claims.

To get free copies of tax records, the IRS suggests visiting its “Get Transcripts” web page at https://bit.ly/3DjmEew or calling 800-908-9946 to order transcripts.

Read the full tax tip for additional information: https://bit.ly/2XNb0Iy

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Estimated Tax Payment Deadline Approaching

As a result of the COVID-19 pandemic and a gig economy, there is now a larger population of workers that do not qualify for tax withholding. Many of these individuals are likely going to make estimated tax payments for the first time this year.

Self-employed individuals, small business owners, and wage earners that do not qualify for tax withholding should consider making estimated tax payments to avoid having to pay in and face a possible penalty when filing next year. The next deadline for the estimated tax payment is September 15, 2021 and the final deadline is January 15, 2022.

Individuals who expect to owe $1,000 or more when filing their tax return should make estimated tax payments. To calculate your estimated tax payments, use Form 1040-ES.

Contact one of our tax experts with questions about making estimated tax payments.

More resources:
ATA Tax Resources
IRS Estimated Tax Payment Information

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News Tax

IRS ISSUES ADDITIONAL GUIDANCE ON THE EMPLOYEE RETENTION CREDIT

On August 4, 2021, the IRS issued Notice 2021-49, which provides long overdue guidance for employers that have taken or are considering taking the employee retention credit (ERC) as initially made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and modified and extended under the American Rescue Plan Act of 2021 (ARPA). Generally, the maximum ERC for 2020 is $5,000 per employee, while the maximum for 2021 is $28,000 per employee.

The ARPA extended the ERC for wages paid after June 30, 2021 and before January 1, 2022. The IRS previously issued nearly 100 frequently asked questions (FAQs) and two notices (Notice 2021-20 and 2021-23) in an attempt to provide guidance on the ERC. However, these FAQs and notices fail to address some important questions, such as whether cash tips received by employees and wages paid to an owner with more than 50% ownership of a company are qualified wages for the ERC. Notice 2021-49 addresses this issue and clarifies other issues related to the mechanics of the credit. The notice also clarifies and provides additional guidance for several other important provisions of the ERC as modified by the ARPA.

In addition, on August 10, 2021, the IRS issued Revenue Procedure 2021-33, which provides a safe harbor for employers to exclude (1) the amount of the forgiveness of a Paycheck Protection Program (PPP) loan under the Small Business Act, (2) a shuttered venue operator grant under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), and (3) a restaurant revitalization grant under the ARPA from “gross receipts” for purposes of determining eligibility to claim the ERC.

Background

The CARES Act provides for a refundable tax credit for eligible employers that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020 and before January 1, 2021.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) amended and made technical changes to the ERC for qualified wages paid after March 12, 2020 and before January 1, 2021, primarily expanding eligibility for certain employers to claim the credit. The Relief Act also extended the ERC to qualified wages paid after December 31, 2020 and before July 1, 2021 and modified the calculation of the credit amount for qualified wages paid during that time. The Relief Act permitted employers to qualify for the ERC if they experienced revenue declines of 20% (previously 50%), and it changed the definition of large employer from an employer that averaged 100 employees to one that averages 500 employees, enabling businesses with 500 or fewer employees to take the ERC for all wages paid, rather than only for wage payments for which no services were provided. The Relief Act also allowed employers that received PPP loans to also take the ERC, retroactive to March 2020.

The following summarizes Revenue Procedure 2021-33 and some of the most significant issues addressed in Notice 2021-49.

Safe Harbor for Gross Receipts – Revenue Procedure 2021-33

Under Internal Revenue Code Section 448(c) for for-profit entities and Section 6033 for tax-exempt organizations, PPP loan forgiveness, shuttered venue operator grants and restaurant revitalization grants are not included in employers’ gross income but are included in gross receipts. Revenue Procedure 2021-33 provides a safe harbor for employers to exclude those amounts from gross receipts solely for determining ERC eligibility. The IRS said that Congress intended for employers to be able to participate in these relief programs and also claim the ERC. Therefore, including amounts provided under those relief programs in gross receipts for determining eligibility for the ERC would be inconsistent with Congressional intent.

Under the revenue procedure, an employer is required to consistently apply the safe harbor by (1) excluding the amount of the forgiveness of any PPP loan and the amount of any shuttered venue operator grant and restaurant revitalization grant from its gross receipts for all relevant quarters in determining eligibility to claim the ERC, and (2) applying the safe harbor to all employers treated as a single employer under the ERC aggregation rules.

Employers elect to use the new safe harbor by excluding amounts under those relief programs when claiming the ERC on Form 941, Employer’s Quarterly Federal Payroll Tax Form (or 941-X if filing an amended return). In other words, a separate “election” form is not needed. If an employer revokes its safe harbor election, it must adjust all employment tax returns that are affected by the revocation. Employers must retain in their records support for claiming the ERC, including their use of this new safe harbor for determining gross receipts.

Clarifications to the ERC Under Notice 2021-49

Applicable Employment Taxes

Notice 2021-49 confirms that, for the third and fourth quarters of 2021, eligible employers can claim the ERC against the employer’s share of Medicare tax (or the portion of Tier 1 tax under the Railroad Retirement Tax Act) after these taxes are reduced by any credits allowed under the ARPA for qualified sick leave wages and qualified family leave wages, with any excess refunded.

Recovery Startup Business

An ERC of up to $50,000 per quarter is available to “recovery startup businesses.” A recovery startup business is an employer that began carrying on a trade or business after February 15, 2020. The notice clarifies that an employer is not considered to have begun carrying on a trade or business until such time as the business has begun to function as a going concern and performed those activities for which it was organized.

The notice also states that a not-for-profit organization can be treated as an eligible employer due to being a recovery startup business based on all of its operations and average annual gross receipts. For ERC purposes, a not-for-profit organization is deemed to be a “trade or business.”
Further, a recovery startup business that has 500 or fewer full-time employees may treat all wages paid with respect to an employee during the quarter as “qualified wages.”

Finally, the aggregation rules apply when determining whether an employer is a recovery startup business, as well as to the $50,000 limitation on the credit. Thus, a recovery startup business would need to apply IRC Sections 52(a) (for related corporations), 52(b) (for related non-corporate entities, such as partnerships, trusts, etc.) and 414(m) (affiliated service group rules).

Qualified Wages

Qualified wages generally are determined differently based on whether the employer is a small or large employer, in that qualified wages for large employers are limited to wages paid to an employee for time the employee is not providing services due to a full or partial suspension of business operations or a decline in the employer’s gross receipts.

The notice clarifies the rule for qualified wages for a “severely financially distressed employer” (SFDE). An SFDE is an employer that, in the third or fourth quarter of 2021, has gross receipts of less than 10% of its gross receipts for the same quarter in 2019. For SFDEs, qualified wages are any wages paid in the quarter, regardless of the size of the employer. This is different from the standard ERC rule, which limits qualified wages for large employers to wages paid while the employee is not performing services.

Full-Time Employees Versus Full-Time Equivalents

Confusion abounds about the definition of “full-time employee” and whether “full-time equivalents” are to be included when determining whether an employer eligible for the ERC is a large or small employer. Notice 2021-49 clarifies that eligible employers are not required to include full-time equivalents when determining the average number of full-time employees. The notice also confirms that wages paid to an employee who is not a full-time employee may be treated as qualified wages if all other requirements are met.

Treatment of Tips and FICA Tip Credit

Considerable confusion has arisen as to whether tips count as qualified wages for the ERC, since customers (not the employer) generally pay the employee the tips. Notice 2021-49 clarifies that cash tips are qualified wages if all other requirements to treat the amounts as qualified wages are met. The notice also confirms that eligible employers are not prevented from receiving both the ERC and the FICA tip tax credit on the same wages.

Timing of Qualified Wages Deduction Disallowance

The IRS has provided guidance on the timing of the disallowance for wage deductions on the employer’s federal tax return relating to qualified wages claimed for the ERC. The IRS previously confirmed that employers must reduce the deduction claimed for employee wages on their federal tax return by the amount of qualified wages claimed under the ERC. Notice 2021-49 confirms that this reduction in the deduction amount must occur in the same tax year the ERC is claimed. Accordingly, if an employer files a claim for the credit for a prior tax year, it must also file an amended federal tax return to reduce the amount of the wage deduction claimed in the corresponding period.

Related Individuals

The IRS previously stated that wages paid to related individuals, as defined by IRC Section 51(i)(1), are not taken into account for ERC purposes. Notice 2021-49 clarifies that, by applying the ownership attribution rules, the definition of a “related individual” includes a majority owner (i.e., a person with more than 50% ownership) of an entity if the majority owner has a brother or sister (whether by whole or half-blood), ancestor or lineal descendant. The spouse of a majority owner is also a related individual for purposes of the ERC if the majority owner has a family member who is a brother or sister (whether by whole or half-blood), ancestor or lineal descendant.

For the full article, visit https://www.bdo.com/insights/tax/business-incentives-tax-credits/irs-issues-additional-guidance-on-the-employee.

Contact one of our tax experts to find out how this new guidance affects you and your business.

 

Article by:
Paul Cheung, Managing Director, National Employment Tax Technical Leader (BDO)
Norma Sharara, Managing Director, National Tax Compensation & Benefits (BDO)

 

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Tax

Getting a new business off the ground: How start-up expenses are handled on your tax return

Despite the COVID-19 pandemic, government officials are seeing a large increase in the number of new businesses being launched. From June 2020 through June 2021, the U.S. Census Bureau reports that business applications are up 18.6%. The Bureau measures this by the number of businesses applying for an Employer Identification Number. Entrepreneurs often don’t know that many of the expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.

How to treat expenses for tax purposes
If you’re starting or planning to launch a new business, keep these rules in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one. Under the tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t go very far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000.

Any remaining costs must be amortized over 180 months on a straight-line basis. No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to start earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Eligible expenses
In general, start-up expenses are those you make to: investigate the creation or acquisition of a business, create a business, or engage in a for-profit activity in anticipation of that activity becoming an active business. To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service. To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Record-keeping is critical.

To see how ATA can help grow your emerging business, visit our website. © 2021

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Helpful Articles Tax

Child Tax Credit Update

Recently, there were changes made to the child tax credit that will benefit many taxpayers. As part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit:

  • Amount has increased for certain taxpayers
  • Is fully refundable (meaning you can receive it even if you don’t owe the IRS)
  • May be partially received in monthly payments

The new law also raised the age of qualifying children to 17 from 16, meaning some families will be able to take advantage of the credit longer.

The IRS will pay half the credit in the form of advance monthly payments beginning July 15. Taxpayers will then claim the other half when they file their 2021 income tax return.

Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cashflow and financial planning opportunities today. It is also important to note that the monthly advance of the child tax credit is a significant change. The credit is normally part of your income tax return and would reduce your tax liability. The choice to have the child tax credit advanced will affect your refund or amount due when you file your return. To avoid any surprises, please contact ATA.

Qualifications and how much to expect

The child tax credit and advance payments are based on several factors, including the age of your children and your income.

  • The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.
  • The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.

To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:

  • Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool
  • A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number
  • Income less than certain limits

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.

Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.

Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.

IRS’s child tax credit update portal

Using the IRS’s child tax credit and update portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to elect out of the advance payments or check on the status of payments.

The IRS also has a non-filer portal to use for certain situations.

Let us help you.

With any tax law change, it’s important to revisit your full financial roadmap. We can help you determine how much credit you may be entitled to and whether advance payments are appropriate. How you choose to receive the credit (partially advanced via monthly payments or solely on your next year’s return) could have many impacts to your financial plans.

Please contact one of our offices today to discuss your specific situation. As always, planning ahead can help you maximize your family’s financial situation and position you for greater success.

*Article from AICPA

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News Tax

2021 Q3 Tax Calendar: Key Deadlines for Businesses and Other Employers

Listed below are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. 

Monday, August 2

  • Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941) and pay any tax due. 
  • Employers file a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension. 

Tuesday, August 10 

  • Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941), if you deposited all associated taxes that were due in full and on time. 

Wednesday, September 15

  • Individuals pay the third installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
  •  If a calendar-year corporation, pay the third installment of 2021 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic extension: File a 2020 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due. 
  • Make contributions for 2020 to certain employer-sponsored retirement plans.

Contact your ATA representative to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. © 2021

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Tax

Inflation-Adjusted Health Savings Account Thresholds Announced

The inflation-adjusted Health Savings Account (HSA) thresholds for next year have been announced by the IRS. For calendar year 2022, a high deductible health plan is one with:

  1. an annual deductible of at least $1,400 for individual coverage (unchanged from 2021), or $2,800 for family coverage (unchanged from 2021)
  2. maximum out-of-pocket expenses of $7,050 for individual coverage (up from $7,000 in 2021), or $14,100 for family coverage (up from $14,000 in 2021). For 2022, the maximum annual contribution to an HSA is $3,650 for self-only coverage (up from $3,600 in 2021) and $7,300 for family coverage (up from $7,200 in 2021).

Talk with your CPA if you have tax-related questions regarding your HSA.

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Tax

The American Families Plan Fact Sheet

President Biden outlined some of his tax proposals in his address to Congress on April 28. The White House also released a fact sheet on The American Families Plan, which contains tax breaks for low-and-middle-income taxpayers and tax increases on those making over $400,000 per year.

The proposals include: extending the increased 2021 Child Tax Credit through 2025; permanently raising the Child and Dependent Care Credit; increasing the top individual tax rate from 37% to 39.6% (applying to those in the top 1%); and increasing the tax on capital gains for households making over $1 million to 39.6%.

The proposals would have to be passed by Congress. The fact sheet: https://bit.ly/3gPrF5Y

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Child Tax Credit

The American Rescue Plan Act (ARPA) expands the child tax credit amounts and eligibility requirements for tax year 2021. The credit is increased from $2,000 to $3,000 per qualifying child ($3,600 for children under age 6). The definition of a qualifying child is expanded to include a child who has not turned 18 by the end of 2021. The credit is fully refundable for a taxpayer with a principal place of abode in the U.S. for more than one-half the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year.

The additional $1,000 credit amount per qualifying child ($1,600 per qualifying child under age 6) begins to phase out at a rate of $50 for each $1,000 when a single filer’s modified adjusted gross income (MAGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). A single filer with one qualifying child over age 6 will phase out of the increased credit amount if the taxpayer’s MAGI exceeds $95,000. Similarly, situated joint filers will phase out of the increased credit amount if their MAGI exceeds $170,000.

After application of the phase-out rules for the temporarily increased credit amount, the remaining $2,000 of credit is subject to the phaseout rules under existing law ($400,000 for joint filers and $200,000 for all other filers). A single filer with one qualifying child will phase out of the remaining credit if his or her MAGI exceeds $240,000, while joint filers with one qualifying child will phase out of the remaining credit if their MAGI exceeds $440,000.

The ARPA directs the IRS to establish a program in which monthly advance payments equal to 1/12th of the estimated 2021 Child Tax Credit amount will be paid to the taxpayer during the period July 2021 through December 2021. The remaining 50% of the annual estimated amount will be claimed on the 2021 tax return. Initially, the advanced amount will be determined based on a taxpayer’s 2019 or 2020 tax filing. However, upon receipt of a more recent tax filing or other taxpayer-provided eligibility information, the IRS may modify the advance amount.

The IRS announced on March 12, 2021 that it is reviewing implementation plans for the ARPA and that it will be issuing guidance on relevant provisions. We will share more news with clients as further guidance is released about 2021 child tax credits. Contact your ATA representative for any questions.